Comprehensive San Diego House Hacking Guide

Your comprehensive guide to house hacking in San Diego.

So what is house hacking? The term house hacking is quite literally being a landlord with roommates, where you live in one part of the property and rent out the other parts, thus reducing your housing expenses. This is great for San Diego, since housing costs are sky-high.

You can do this in really any kind of property, but for the sake of beginners, I'm going to touch on the most popular ways to house hack, and the things you need to know while going into it. Most common are with traditional, residential real estate, but what does that mean? Residential real estate is anything from a single family home, up to a quadplex (4 unit building).

There are a variety of loans available to help you finance this purchase, such as VA, FHA, conventional loans, etc. Which one you get depends on your strategy, your situation, and where you are financially. 

Painting a clearer picture, for the correct mindset.

Let's take a moment to paint a mindset. One of the most obvious benefits is reducing your monthly housing costs in San Diego. San Diego is an appreciative market, meaning that the value of your property will go up over time, as will rent-rates. This means that although you may not be getting immediate cash flow, it does mean your net-worth increases the more you pay off that loan, as well as the value of the property going up.

Dispelling a financial misconception about house hacking. 

As you begin diving into your journey of becoming a real estate investor  (yes, house-hacking makes you a real estate investor), you may be coming across a lot of people who actually get paid to live in their property, thinking you will be able to do the same. The truth to this is... It depends, on a few factors. The most important one being your market. San Diego is one of those markets where housing is expensive and mortgage payments are sky-high. Turning this into an income stream will require some careful planning, and hopefully the reduced housing-costs will give you enough gratification while you wait for rent prices to increase, alongside building equity.

Initial Investment and Mortgage Details

If the property you want is $900,000. With a downpayment of 20% at $180,000. With a 6.5% interest rate, the monthly mortgage payment would be close to $5,000. This represents a significant upfront and ongoing financial commitment.

Appreciation and Net Worth Growth

It’s time to factor in the potential property value increase. Assuming that average annual home values go up by 7.5% (as per historical data from Redfin), and considering an inflation rate of 2.7%, you're looking at a net increase in your wealth of about 4.8% per year. Redfin notes a rise in the median home price from $600,000 in 2019 to approximately $900,000 currently – a $300,000 gain, functioning as a sort of 'hidden savings account.' By owning your property, the mortgage is effectively covered by your tenants, allowing for future financial maneuvers like Home Equity Lines of Credit (HELOC) or refinancing.

Rental Income Impact

By renting out the additional spaces in your property, you could generate an estimated $3,000 to $4,000 monthly. This income significantly reduces your net out-of-pocket expense to $1,000 to $2,000 per month, down from $5,000. This cost reduction is the essence of house hacking.

Long-term Financial Strategy

Over time, there's an option to refinance the loan, potentially further lowering your monthly payments. You might choose to either retain the built-up equity for better loan terms or utilize it for investing in additional properties. This approach aligns with the BRRRR strategy (Buy, Rehab, Rent, Refinance, Repeat), popular among real estate investors for portfolio expansion.

Multi-Family units or Single-Family house?

Lenders

The first factor to consider is what can you work out with a lender? With Multi-Family (2-4 units), you can actually use the rent potential from the units you'd rent to tenants, to qualify you for a larger loan than you would with a single-family, as well as allow you to qualify for a larger loan down the road.

Comfortability

The second factor pertains to your strategy, and what you're comfortable with. Some people prefer units over houses, simply because they don't want to live with roommates. This is a consideration to account for, especially if you have a family. Other people may use this as a gateway to own their dream home. You'll have to decide if you want to share walls, or if you're okay sharing living space as well.

But what if you want to house hack your dream home, but you dislike the idea of having roommates that you share common space with too often? You can be 100% intense, renting out all of the extra space in your home (bedrooms, garage, ADU, etc), and sleeping on the couch in the living room, so you can save as much money as situationally possible, and then there's the other side of the spectrum. What if you dislike roommates, but still want your house, and would rather do this than a duplex, triplex or quadplex. Depending on zoning laws, you may be able to build an ADU (accessory dwelling unit) on your property, that acts as a studio or even a 1-2 bedroom space. You could possibly put an RV Camper on your property and rent that out. This would eliminate your need to share the common space.

Understanding your role as a landlord

You'll be responsible for this property, all the legal considerations as well as ensuring your tenants have a habitable space. You'll be managing the property, which entails the maintenance as well as screening tenants and so-on. 

  • Finding and Screening Tenants: Use reliable methods to advertise your rental space. It’s essential to conduct thorough background checks to ensure you are renting to trustworthy tenants. This process includes verifying their employment, checking credit scores, and speaking to previous landlords.
  • Setting and Collecting Rent: Determine a fair rent price by researching similar properties in your area. Be clear about payment terms and methods. 
  • Maintenance and Repairs: Regular maintenance is key to keeping the property in good shape and your tenants happy. Be proactive in dealing with repair requests, and establish a network of reliable contractors for various maintenance needs.
  • Legal Compliance: Familiarize yourself with California’s landlord-tenant laws to ensure you adhere to legal requirements, including safety regulations, eviction procedures, and tenant rights.

Financial Management

Effective financial management is key to maximizing the benefits of house hacking. This includes:

  • Budgeting for Expenses: Apart from the mortgage, factor in costs such as insurance, property taxes, maintenance, and emergency repairs.
  • Reserve Fund: Always maintain a reserve fund for unexpected expenses. This fund can be a lifesaver in emergencies and help avoid dipping into personal savings.
  • Record Keeping: Keep meticulous records of all income and expenses related to your property. These records are essential for tax purposes and for tracking the financial performance of your investment.

Legal considerations

Squatters

California may have some of the highest priced homes for sale and rent, but it is also home to laws that have a strong favor towards tenants. Squatters have rights as well. These can be some of the most difficult situations, since you're responsible for evicting them. Squatters go into an unoccupied/abandoned space, and they claim it as theirs. This is different if someone is already living there, that would be considered trespassing. You can try to sue them in small-claims, but the reality is that if they have no money chances are you will spend time and money with no compensation. This might be a scary thought for many of you, but the reality is the probability of this happening is quite low, and there are measures you can take to prevent things like this from happening. Some things include:

  • Putting "No trespassing" signs.
  • Installing security cameras.
  • Documenting everything you can.

Follow your contract

There's more things to consider than squatters though, such as making sure you stay in compliance with your contracts. It's important to follow your contract thoroughly, such as collecting rent on time, every time. An example - if you own multiple units, and one person is late on their rent, and you don't charge them, you could find yourself in some trouble. Even if you aren't giving your other tenants leniency out of discrimination, they could try to claim discrimination in court if they so decided. They might not win, but you will have spent time and not received your payments. If you still decide to give someone a break, it’s important to make sure there is a valid reason (such as a temporary medical condition preventing work), as well as to document your reasons as thoroughly as possible. 

Fair Housing Act Considerations: While the Fair Housing Act focuses on preventing discrimination based on protected classes, inconsistent application of policies can sometimes inadvertently lead to claims of unfair treatment. It's not just about discrimination but also about the perception of equitable treatment among all tenants.

Maintenance

Another consideration has to do with making sure your rental space is habitable, meaning that you're on the hook for repairs. If something does break, and you refuse to fix it, your tenant can take measures to get it fixed as well, such as legally withholding rent. 

These are a few examples to consider, and I urge everyone to brush up on their landlord-tenant laws before you purchase a home to house hack. All things considered, at the end of the day, your space will be filled with other human beings, and it's important to treat them as such. This doesn't mean you shouldn't treat this as a business, but it does mean to remember; they have feelings and stories just the same way you do.

Loans - some financing options.

For a successful house hack, you're going to need to know some options available to you. Some of the most common loans include:

  • FHA
  • 203(k) FHA renovation loan.
  • VA
  • USDA
  • Conventional
  • Home-ready 

This is where you'll want to do research on what fits best for your scenario, as these are all different loans with different circumstances. Higher down-payment loans will typically result in lower monthly costs, since you'll technically be borrowing less money, as well as reducing the risk for your lender. Lower down-payment loans typically mean higher monthly cost, as well as having PMI (Private Mortgage Insurance). To remove PMI payments, you typically need 20% equity into the property, but being able to remove it depends on your loan and how you entered into it. To read more on this, check out Rocket Mortgage's article on this: "FHA Mortgage Insurance Removal"

One consideration for your loan goes back to whether you should get a multi-family or single-family property. If you get a multi-family property, many lenders will allow you to use the projected rental income to qualify you for a larger loan you wouldn't qualify for otherwise. You can't typically do this with single-family homes. Allowing the rent to offset your income is a great way to qualify for a property where you can gain equity faster than you would with a lower priced property.

A common strategy that you'll hear about, is getting a lower down-payment loan, then when possible, refinancing out to a conventional loan with better terms. You'll need to meet the requirements to be eligible for this, so the time that you are in your first loan is the time you would want to start working on meeting those requirements. Creating a financial strategy is important to increase your income, while at the same time, removing as much money going out.

Final thoughts

While house-hacking might not cover the entire monthly mortgage payment, many homebuyers who want to reduce their monthly housing expenses should seriously consider this. This is a great way to get started in real estate investing, since there are a ton of cost-benefits. Make sure you run an analysis on whichever property you want to purchase, and make sure it makes financial sense for you. Being a first-time landlord is not necessarily an easy task, but it is very rewarding. San Diego House hacking might be one of the best strategies for affordability in a city that is otherwise known as one of the most expensive places to live in the United States. 

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