House Hacking in San Diego

[Hunter Harmon]

Given my circumstances, I'm exploring the possibility of house hacking in San Diego for my first property. I've been searching for residential multi-families in the $1M - $1.3M range to offset my mortgage by renting out other units. However, despite several months of searching, I'm struggling to find properties that break even, especially with current interest rates. My goal is to at least match my current monthly expense of $3k (After all units are rented) while aiming for long-term appreciation. I have around $165k in savings, with an option to withdraw $16k from my 401k after taxes and fees. Additionally, I can receive $40k in gifts from my father and ability to access a $20-60k loan from family at 4% APY interest. I'm planning to pursue a conventional loan with 10% down payment. I've noticed slightly better prospects in the $1.4 M - $1.6 M range, but I'd need to co-sign with my father to qualify. However, he wants to be off the loan within two years of purchase. Given these circumstances, do you think house hacking in San Diego is still a wise investment for me? Are there any alternative strategies or adjustments I should consider? 

[Dan H.]

Quote from @Hunter Harmon:

Given my circumstances, I'm exploring the possibility of house hacking in San Diego for my first property. I've been searching for residential multi-families in the $1M - $1.3M range to offset my mortgage by renting out other units. However, despite several months of searching, I'm struggling to find properties that break even, especially with current interest rates. My goal is to at least match my current monthly expense of $3k (After all units are rented) while aiming for long-term appreciation. I have around $165k in savings, with an option to withdraw $16k from my 401k after taxes and fees. Additionally, I can receive $40k in gifts from my father and ability to access a $20-60k loan from family at 4% APY interest. I'm planning to pursue a conventional loan with 10% down payment. I've noticed slightly better prospects in the $1.4 M - $1.6 M range, but I'd need to co-sign with my father to qualify. However, he wants to be off the loan within two years of purchase. Given these circumstances, do you think house hacking in San Diego is still a wise investment for me? Are there any alternative strategies or adjustments I should consider? 

 If using accurate underwriting (something close to 50% expense estimate) your costs will be far in excess of your $3k current lodging expense.  This is true in San Diego and virtually every other large city in the US.  You can search the internet for stats on where it is initially cheaper to purchase than to rent.  I have seen 2 recent surveys on this subject.  One said only 2 of the largest 100 cities was it initially cheaper to purchase than to rent.  The other indicated it was 4 of the largest cities.  Regardless, it is a rare large city where it is initially cheaper to purchase.

However, most people use fixed financing so this will not increase. In CA, property tax is near fixed thanks to prop 13. This means a large percentage of your costs are fixed. Rents are not fixed. They go up virtually every year. Currently in San Diego, MF can go up CPI + 5%, capped at 10%. SFR has no rent control. This implies the cash flow will improve with time. On a long hold, you will definitely achieve your goal. It may be painful getting to this point, but once you get there you will be glad you did it.

I am in San Diego (north of hwy 8).  I am swamped for the next 8 days.   I am feeling like giving back.  If you hit me up just after that period, I will offer to treat you to a burrito and soda and discuss our RE purchases and the mind set.  You can see our purchases went from paying retail with little plan (no underwriting, just a feeling) to negotiating below market purchases with value adds.  In all cases I will show the benefit of time on local RE investments (even those purchased at full retail).  To give you a tease, my worse appreciating property has appreciated ~$2700/month over its hold (this was probably purchased at greater than retail due to lower finance interest rate).

Good luck