From Renter to Investor: House Hacking in High-Cost Cities

I bought my first rentals while still being a renter myself.

Living in a low-cost-of-living city, like Pittsburgh, this seems inconceivable now.

But, at the time, I lived in Los Angeles. We had two professional incomes, yet it was still difficult to save enough for a down payment in LA.

When I first moved to LA (mid-90s), the housing market had recently had a real estate ‘correction’ of 21%. So, lenders had tightened their requirements. I was required to have a 20% down payment.

Prices were relatively low. It was the perfect time to buy. But, 20% in an expensive market is a huge amount of money, especially for someone recently out of college.

The required deposit back then would be equal to $300-$400K today for those same houses.

That’s a lot of money.

Granted most of those houses have been replaced by less-expensive condos. So, your down payment is lower. But I’m sure it’s still a lot of money.

Looking back now, and knowing what I know now, I would have done things differently.

For those living in an expensive city, like Los Angeles, who want to get started investing, consider two things.

FHA loans and house hacking.

FHA loans have a low down-payment requirement (3-3.5%). That may not be necessary when money is free-flowing. But, it’s very helpful when credit markets are tight and down payment percentages are higher.

House hacking is simply buying a primary residence and having renters help cover the mortgage.

You can buy a single-family house, a duplex, or even a 4-unit building. If you get an FHA loan, your down payment will be much lower, making it more feasible.

Then, you can rent rooms to roommates in a single family house. Or, you can rent the other units in a 2-4 unit building.

The rents will cover most, if not all, of your mortgage costs.

That reduces your housing costs dramatically, possibly putting money in your pocket every month. House hacking allows you to buy a primary residence and save for bigger real estate purchases at the same time.

I realize having roommates may not be ideal. It’s a sacrifice for certain.

But, you don’t grow wealthy without sacrifices.

This is one option to stop paying rent and start growing a rental portfolio.

Don’t get me wrong. I love renters and I thank them the first of every month.

But, if you want to start a portfolio, and you live in an expensive city, know that you have options.

You can house hack in any part of the country. But, in expensive cities, it may be the only realistic option to buying a real estate portfolio quickly.

Happy Investing!