How to House Hack in SoCal

People talk about cashflow day one. Well, that is not exactly always true for the Southern California market. There are ways to cashflow outside of California; however, these days getting cashflow moving these days in SoCal is very tough. What is the next bet if you live in the local market of Southern California? It’s a house hack, we are not taking anything new from the manuscript of house hacking. We are just putting some ground work in for us to give good numbers on where you should be looking and where you should be on your search for a house hack in SoCal.

What is a house hack?

Most of us have heard the phrase of house hacking, this one is the way a lot of people get ahead of the cost of living. A buyer buys a home, usually an SFR and then packs it full of tenants that are friends looking to rent rooms for cheaper cost of living. This reduces the cost for both the buyer and the renters. Instead of renting an apartment for 2x the cost of renting a room, they just rent a room. That is what most younger people in life and younger investors want to do for the savings and building equity.

This can also be done on a duplex or small multifamily. You can get a place that is 2bed 1 bath and 2bed 1bath for each unit on the duplex. The one side can be rented out fully with one family or one renter; the other side can be rented out with the buyer of the property in it, just rent one room out and the buyer stays in the other room. That means 3 out of the 4 rooms are rented out which is getting those expenses significantly reduced. This could allow a buyer to be paying $1000 a month instead of the average $1500.00 or more for a one bedroom in SoCal. The beach cities are closer to $2,000 a month for one bedroom.

What to buy in SoCal?

Now that we recalibrated what a house hack is and what it means in SoCal to get into a house hack, let’s talk about what to buy out of those two options. There are many things you want to buy as a buyer, but what will get you the best ROI or reduced costs for your expense each month for living. In the nice sunny state there are a lot of challenges you can have as a homeowner, price is the biggest challenge for everyone in the market.

What about price and why is it so high in Southern California. Well, for some it’s the weather, some it’s the coastal cities that they want to be in and some it’s the lifestyle. This all comes at a cost, so let’s talk a little bit about the areas you can buy and what to buy.

If you are looking in SoCal you can break it down to four areas. One area is San Diego, one is Orange County, one is La County, and the last one is the I.E. These are the four areas people are talking about when looking for deals at a general view.

We can talk about the best spots, however, let’s focus on just what area and what are the rents and purchase price. Orange County, we can purchase a duplex for an average of $791,817 and the rents let’s look at just 2/1 and 2/1 for each unit. For this example, we are seeing the prices be at $2300-$2500 each on average. The purchase amount as it looks at the mortgage is $5,442.86 with 10% down that includes PMI too. The house hack would look like this as a buyer. Buy it with the mortgage at $5,442.86 (this includes taxes and insurance) then rent out one unit for $2400,00 which would drop the expense of the mortgage down $3,000 and then rent one room out for $900.00 which would be the average rate of renting a room out in Orange County. This would put a buyer at a mortgage of $2,100. The median SFR home sale price in February 2023 as I write this is $1,000,000 and that means a mortgage in OC is $6,849.79 which is higher than a duplex. Let’s play devil’s advocate and say that the mortgage and price can be found at the duplex price of $5,442.86, that means your 3bed 2 bath house is still costing you $5,442.86. If you even rent the two rooms out for $900 each then you would be $1800-$5,442.86= $3,442.86 on a SFR.

As all those costs and numbers are higher than a property in the Midwest, the reduction in cost of living by renting out a property there will give you positive cashflow potential. In California, this type of purchase will not give you positive cashflow right away; however, it will significantly reduce the amount of expenses over the course of living at the property along with giving tax savings and writing off a large portion of the property expenses for instance property taxes, repairs, and interest on the home loan. That is another benefit along with renter paying down your amortization of the home loan.

Where to buy:

This is up to the buyer, and I think that there is a lot of value in the duplex model in SoCal. The places I would be looking for are dependent on your price range. If you want something a little cheaper in cost and can drive a bit, Inland Empire with pricing being about $600,000-$700,000 for a duplex. Rents in this area are less for the 2/1 you are looking at about $1750-$2100 and this is relative to your purchase price.

The Orange County market for duplexes as you see the numbers are bolster from the inland empire; however, still a good play! There are great properties with a great runway just like the inland empire you will just have more appreciation on the Orange County properties.

The last area is LA County which has a little higher appreciation than the inland parts; however, this is a situation that resembles more of the Orange County way of rent and property value for these properties. There are many different areas in LA County that will be a higher price and rents will follow verse a lower price on the property and the appreciation will be different.

Conclusion:

It is a what the prices will be on rent and will they cashflow? These properties will not cashflow however they will for sure continue to build over time and continue to invest in the property to either multiple that money when it sells are give you the ability to save so much income that you can use it when you go buy something else and keep this one in the portfolio.