House Hack in Bay Area/San Jose?

Question

Should I house-hack or continue to rent? I always heard of the house-hacking idea and never thought it possible for someone like me, since I live in the very expensive San Jose, CA and always thought the numbers would never get to positive cash-flow since real estate prices are so high here. But, I gladly stand corrected. Thanks to @ScottTrench and his book Set For Life, where he clearly and concisely outlines the numerous benefits to house-hacking and created a spreadsheet to analyze Renting vs. Buying a SFR vs. House-Hacking. I have used the spreadsheet he created to analyze a potential 4-plex purchase for $1,100,000, and found that with a 20% downpayment of $220,000, and a conservative estimate of collecting $6,050 per month in rent ($2,016 x 3 units, while living in the 4th), one could not only live for free, but have a positive cash flow of $8,382 per year while living for free. Not too shabby. I'm considering this strategy, and I'm interested in your thoughts. Just so you know our rent situation, we rent a 2 bed/1 bath condo for $1,650 per month. We have very kind, generous, God-fearing landlords that like us since we take good care of their place and pay rent on time. The condo is enough room for us for the next few years since my wife is just pregnant with our first child.

I will post the spreadsheets with the numbers below.

Logan Allec · Answer

Hi @Justin Madison. House hack if you can. It's a great strategy. My first investment was a 4-unit house hack here in the LA area.

Of course this was a few years ago and prices are not as high down here as they are up there.

I will say though that I had to definitely look off the beaten bath for a deal. For example, 4-unit properties in the city of LA itself were selling like hotcakes...all cash offers well above asking, etc.

I'd imagine it's similar if not worse in the Bay Area.

So I had to look kind of in the outskirts of LA to find a property without competition from the deep pockets.

Anyway feel free to reach out with any questions. Good luck and grace to you.

Justin Madison · Answer

Hi Account Closed.  Thanks for your comment on property taxes.  I think you are right that I had them figured a bit low.  So I adjusted them to be 1.2% of the property value, or approximately $13,200.00 per year.  Regarding the mortgage, on a 30 yr fixed mortgage of $880,000.00 (80% of $1.1M) at 3.75% interest rate, the monthly payment is $4,075.42/month, or $48,905.04/yr.  For insurance, I adjusted that to $1,100 per year, I'm not sure what the actual insurance premium would be.  Do you think $1,100/yr. is too high?

Account Closed · Answer

How does your PITI come out so low? The mortgage calculator puts P&I alone at over $5K per month. And taxes are atleast 1.2% in the Bay Area. And Insurance on a 4 plex another several hundred per month.

Justin Madison · Answer

Hi @Logan Allec, thank you very much for the feedback and I'm glad to hear that you and your wife found a 4-unit house hack yourselves!  I would love to hear more about how you guys found it.  Also, I checked out your website and it's nice!  Good job!  Keep up the great work!  God bless you!

Justin Madison · Answer

Hi @Chad Hale, thanks a lot for the feedback.  Yes, you're right, I need to factor some rehab money in the deal too.  Thanks for the insight on 4-plex insurance rates, that's helpful.  And thank you for your insight on raising the taxes .5%.  That certainly matters.  Thanks Chad!

Chad Hale · Answer

@Justin Madisonundefined

$1100/year insurance for a 4plex is not too low.  Based on some 4plex insurance rates I know, you might want to consider increasing it a little, perhaps $1500-1600/year.

Do you know the condition of the off-market $1.1M 4plexes?  I think they would have been needing some rehab.  Make sure to account for some rehab costs.  Also, many of those deals require all cash.

I would increase your property tax rate from 1.2 to 1.25%.  Doesn't seem like much but translates into $600/year at $1.2M price.  San Jose has lots of "add on" property taxes and other fees (business, rent control, etc).

Best of success

Chad

Justin Madison · Answer

Here are the updated results, with increases to property taxes and insurance.

Justin Madison · Answer

Hi @ChadHale, thanks for the encouragement.  I'm slowly getting there, by the grace of God. =)I actually haven't been looking much in the last few months, but about 6 months ago, I ran across a couple 4-plexes near downtown San Jose that were off-market and selling for $1,000,000.  I wasn't interested at the time, so I didn't inquire.  I'm sure they've been swept up long ago by now.

Chad Hale · Answer

Sounds like you are on the right track to figuring out the RE puzzle.

Where are you finding a 4plex at 1.1M in San Jose?  Which zipcode(s)?

House Hack in Bay Area/San Jose?

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