House Hacking in LA - do my numbers & ideas add up?

[Mayank Saxena]

Hi my fellow BP community!

I originally joined BP, thinking that my strategy would be to invest in out-of-state MFU for cash flow (i.e. Ohio market) as entry-level in my market of Los Angeles was too unattainable without me being "house poor". But since I joined, I've learned a lot - thanks to @Justin Gottuso in Ohio (who has a cool podcast "A Day in the Life of a Real Estate Investor", and comes from a Real Estate investor family in LA). Another thanks to @Jon Schwartz (great guy, I highly recommend connecting with Jon and his extremely informative YouTube channel). Thank you guys!

So here's my goal;

I want to enter a "partnership" with my mother, my boyfriend, and myself to purchase an MFU in LA to house-hack.

1. My mother - she resides in NYC, owns a SFU outright worth today at around $950k. She is in her early 70's, is in wonderful health, has a W2 job that shows income of $350k/yr before deductions. She has $200k liquid to invest, and her desire is to get cash flow (thus my initial thought of out-of-state investing would be nice to maximize that). She would want to remain in NYC but wants her money to give her cash flow.

2. Myself - actor living in Los Angeles. Currently on unemployment (thanks Rona) but living in a huge, well-maintained rent-controlled 2-bed / 1.5-bath apartment paying $1,700/mo. Despite this, I would be able to invest a max of $100k liquid. I'm stuck between allowing my pot of money to sustain me vs. parting with it in order to eliminate/subsidize my monthly living expense. My desire is to live "rent free", or at least, pay far less monthly than I am paying now (I was paying about $600-$700s for years until my roommate recently moved out due to COVID). So now the entire rent is on me. But I also don't want to keep taking money from that $100k - I want it to work for me.

3. My boyfriend - actor lives in another part of LA paying about $800/mo, and currently living with a roommate. He'd have less to invest (about $50k), but he wants to throw his hat into the ring. His desire is the same as mine - to live as "rent free", or, as close to his current monthly rent as possible.

Instead of being forced to choose Cash-Flow (Ohio) over Appreciation (LA), I thought - why can't we have both? I would like to house-hack with my boyfriend, while helping my mom's investment (and ours) - by potentially living in a triplex (or fourplex), with us being the PM (saving on that expense), and have my mother enjoy enough of a cash-flow for it to be worth it, while my boyfriend and I can ideally live for "free" (or at least "pay" $2k/month living together in one unit). My boyfriend and I wanted to buy a place, with my mom co-signing the loan, and be able to afford a monthly total living expense of $2,500/month, but I thought this idea would be best for all parties.

Creative Financing

All three of us could join forces to make this a truly win-win for everyone. With about $350k in liquid, I am presuming my mother would be an excellent candidate for a mortgage (or HELOC at bare minimum) due to her having zero debts, owning her home outright, and having a well paying W2 job.

So an equity partnership - based on initial investment/down payment would mean ownership would look like:

57% My mother ($200k)
28.5% Myself ($100k)
14.5% My boyfriend ($50k)

Again, I'm trying to mix two objectives; First is monthly cash-flow for my mom. Second is low monthly rent / building wealth for me and my boyfriend (and one day spouse).

The Strategy

I know the coastal cities will always be a desirable place to live. Due to COVID’s effect on the economy, I understand there is a migration from CA & NY towards inner states (source - United Van Lines migration study). But long-term, a place like Los Angeles and New York City will prevail as more sought after as the younger population grows and seeks the city-life, as has been evident in long-term real estate appreciation in those markets throughout decades. And I want in!

I think concentrating on the (i) student housing, or (ii) early-mid 20's professional housing - is what I'd like to pursue, due to being able to readjust monthly rent every time a student graduates / moves out, or the younger professional moves on to their next phase in life. I like the ability for the rent to grow with the market - and overtime, having the higher cash flow offset the initial cost of purchase. Yes a stable family with kids in school can stay for a decade, but I’d like to capitalize on capturing close-to-market prices more frequently (understanding vacancy expense).

While I want more central LA (WeHo, Larchmont, nicer Hollywood, Silverlake or Echo Park) - I think the prices there for a triplex/fourplex would be too much. (I chose triplex because living in a duplex doesn't make much economic sense for cash-flow and the mortgage – mainly my mom wouldn't enjoy any cash flow despite being a majority stakeholder - so I thought economy of scales to have a triplex or fourplex).

So I think that leaves the USC area. There are international students who need housing, and of course, if they can afford to attend, they will afford to stay. Until they graduate. To live in one unit and rent out the others to students (or even rent out rooms to students in the other units - thanks Todd Baldwin BP podcast 392) - would be great. And after a year or two, when my boyfriend and my ability to earn more improves - we can move out and retain the MFU for higher cash flow - and look onto other options.

Based on our liquidity for down payment and my mother's W2 plus lender's seeing her home's equity could put us at a budget of around $1m for an MFU.

I would love a SLIGHT fixer upper, and after repairs, with forced appreciation - I think it might garner better monthly rental.

Deal Analysis (actual listing on Redfin - 1289 W 24th St, Los Angeles, CA 90007)

This is a hypothetical to ensure my "math" is on point, so when we have a lender approve the loan amount, we can act fast. We don’t plan to purchase this – but I hope in the coming months, my ability to be sharper will find us the best option.

I like this because it's a corner lot, literally blocks away from USC. I have lived here for a few months, and know the area - while slightly sketchy - USC has their DPS (Dep't of Public Safety) to patrol to ensure students' safety. There is a huge, ginormous Ralph's (grocery store) to make student's eating and living lives easier, plus within and around campus are tons of eateries and student dining options. I have seen a lot of international students - who I know want a place to live.

Going off of Bigger Pocket's "Introduction to Real Estate Investment Analyst" article, I have made the following calculations for the 1289 W 24th Street triplex;

COST ASSUMPTIONS

Purchase Price: $997,000
Down payment: $199,400 (20%)
Improvements: $30,000 (update the small kitchen, based on Redfin pix)
Closing Costs: $19,940 (2%)
TOTAL COST: $1,046,940
CASH OUTLAY: $169,340

FINANCING ASSUMPTIONS

Down Payment: $199,400
Finance: $797,600
Interest Rate: 2.75%
Mortgage: 30 Years
Mortgage Payment: $3,256

ASSESSING PROPERTY INCOME

Units: Three total
- One 3-bed/1-bath unit, renting for $3,383.50
- Two 1-bed/1-bath units (one vacant, plus one renting for $1,700)

Note – Rentometer.com estimates the 3/1 to bring $2,600/month and the 1/1 to bring $1,493/month, so ideally I’d have to ask the seller or current PM for their statement report to verify the above rental income. But for now, let’s assume these assumptions are true. I am assuming there is a single meter instead of a meter for each unit, perhaps that’s why it’s rolled into a higher rent? Also, it is near USC so demand is higher.

                                    MONTHLY                                           YEAR 1
Rental Income:            $5,083.50                                            $61,002
Vacancy Rate:             ($1,700) if we live in this unit              ($20,400)
GROSS INCOME:           $3,383.50                                            $40,602

ASSESSING YEARLY EXPENSES

Property taxes: $1,055 x 12 = $12,660
Insurance: $166 x 12 = $1,992
Maintenance & CapEx: $338.35 (at 10%) from occupied units? x 12 = $4,060.20
Repairs: $338.35 (at 10% from occupied units), did I do this right? x 12 = $4,060.20
Management: $0 (I will PM with my boyfriend while living there) x 12 = $0
Utilities: $180 (averaging $60 per unit, just to run numbers) x 12 = $2,160
TOTAL EXPENSES: $24,932.40

CALCULATING NOI (w/ vacancy)

GROSS INCOME – TOTAL EXPENSES = NOI
$40,602 - $24,932.40 = $15,669.60

CALCULATING NOI (w/ full occupancy)

$81,402 - $24,932.40 = $56,469.60

ASSESSING CASH FLOW

Due to NOI leaving out mortgage, I see our monthly mortgage would be $4,494 while monthly income is $3,383.50. This obviously leaves me, my mom, and my boyfriend in the red. If my boyfriend and I did not live there, and there was no vacancy then our monthly income would go up to $6,783.50 which is $81,402 per year. Maybe he could move in with me in my current rent-controlled apartment, and we use the cash flow to subsidize that rent? Idk?

Only if the vacancy is filled by a paying tenant (whether a student, or me and my boyfriend) – then it would make sense for cash flow. Basically, I will tweak the NOI numbers to reflect zero vacancy and add a $1,700 paying tenant, plus including the mortgage in the monthly calculations;

Taxes: $1,055
Insurance: $166
Vacancy: $0
Repairs: $338.35 (at 10%) unsure if this is right?
CapEx: $338.35 (at 10%) unsure if this is right?
Utilities: $160 (assuming I “pay” for electricity, gas, water)
Sewer: $0 (isn’t this included in my taxes?)
Garbage: $0 (isn’t this also included in my taxes?)
Lawn care: $100 (not much lawn to care for, so maybe other expenses)
Property management: $0 (I will PM with my boyfriend)
Mortgage: $3,256

Total Monthly Expenses: $5,413.70                        Annual Expenses: $64,964.40

So for Cash Flow:

Gross Income (w/ no vacancy) – Total Expenses = Cash Flow
$6,783.50 - $5,413.70 = $1,369.80 monthly cash flow

And remembering our partnership arrangement, monthly payouts should be;

57% My mother = $780.78
28.5% Myself = $280.81
14.5% My boyfriend = $198.62

ASSESSING CAP RATE / COC (assuming no vacancy)

NOI / Property Price = Cap Rate
$56,469.60 / $997,000 = 5.66% Cap Rate

Cash Flow / Investment Basis = COC
$16,437.60 / $199,400 = 8.24% COC (is Investment Basis = Down payment?)

I’ve asked questions next to some above calculations, but I have more questions;

1. 1. Does it make sense for my boyfriend and I to live in a $1,700/month rent controlled apartment while having an investment property? I thought the numbers would work out if we house hacked, but it doesn’t if we stay there for “free”. Any advice on how to make this work?
2. 2. Does this make sense for my mother? She is entering her Golden Years after working the grind all her life. I am the one who wants to introduce her to passive income, but a measly $780 per month doesn’t seem like a lot, especially after parting with her $200k. Any thoughts on this? Is my boyfriend and my "cut" preventing her reaping more cash flow? Should she put more down to increase cash flow, does that make financial sense? I've read people can put as little as 5% down, but that would erode cash flow (while my boyfriend and I would be fine with that for ourselves).
3. 3. Are my calculations off for this market? Is there another strategy that could increase our cash flow? I am open to creative financing options, but am simply starting from scratch. Any ideas welcome.

While I am a “newbie”, and don’t have a W2 job – I do have my brains and wits, and want to employ that to build wealth and cash flow for those I love (and I love myself too of course! Duh!). I welcome the counsel from my BP community, from Lenders to Real Estate agents, attorneys, to investors who can help me with this “crazy idea” I had. I believe in marrying due diligence and homework, with pulling the trigger and going for it when the right opportunity presents itself.

Thank you, and looking forward to reading your thoughts and advice!