People say investing in expensive cities cannot be done and especially house hacking. By saving money, making more money, and living below your means with a low down payment it is not out of the question that high cost of living areas are possible to invest in. The specific strategy you choose depends on your situation, goals, and temperament.
You’re correct that this sort of situation requires a different approach than normal. The people who say that it is “just too expensive” are wrong. It is of course true that it is expensive and that the rental yield is low, but there are actually benefits to this. First, let us put some context behind this idea.
House Hacking in High Cost of Living (HCOL) areas
There are tons of people already living in the Bay Area in California, Seattle, Washington, Manhatten NYC, and Denver, Colorado. Understandably there is student debt and other high expenses that make it extremely hard to save money. However, housing expenses are your highest monthly expenses by saving with house hacking you are one step to help you save about a large chunk of your net income (preferably 60% – 80%). By using real estate as a primary investment vehicle a $700,000 house is doable especially when earning an average salary with most corporate jobs in the area ($100,000 – $175,000). Furthermore, since there are a significant amount of savings being done there can be cash left over to buy another after a year (per mortgage rules).
Real Estate Investing With Low Income In a HCOL Area
Let us say you are living in a city like Manhatten or Denver and do not have a large salary or capital, if you are clever and play the game that won’t be true for long. For reiteration of importance minimizing your own living expenses early on is crucial. It is very easy to spend six figures in the Bay area, however, it is also easy to save with a budget by putting away a certain amount of your income. Anyone and literally anyone person can spend under $30k per year for the first 2 and a 1/2 years in a high cost of living area (and that can include buying new or used car cash, significant charitable giving, and other relatively big-ticket expenses). One does not penny pinch, instead, be sure to focus on optimizing the needle movers:
- Income
- Taxes
- Housing
- Transportation
Truth About Living in High Cost of Living Areas to House Hack (Tricks to Make Money and Save Money)
Though companies might not want to admit it Job hopping maximizes salary, expands your network, and grows your technical skills. Moving jobs every 2 or 3 years can get you $100,000 a year. Additionally, Playing the tax game can save you a good amount a year, and it isn’t that hard of a game to play (if you file 1099 rather than W2 it is a little more complicated). Housing costs and other expenses can have a significant amount of deductions (savings) when filing for taxes. Also, as far as a car expenses are concerned there is nothing wrong with buying an old cheap car with a lot of miles on it from a reputable used car lot to save money (since just know your next car will be the nicest one one the block).
When saving have the mentality a dollar today is a hundred dollars down a significant amount of years in your life time and you’ll have money for a payment in a few years. As you are saving Spend those years learning about real estate. There’s a lot of good information out there, such as the Bigger Pockets website and more here (of course besides this website). As you are learning constantly and saving money a good way to make more money with the money you are saving is by putting the money in an index fund like SPY, VOO, IVV, or other total market share ETF stocks. By putting it in a these types of ETFs you are having a higher yield than if you kept the money in a savings account.
Low Down Payment Real Estate Investing in High Cost of Living (HCOL) Area
Minimizing down payment is the same as maximizing returns, if your financing rate is below your rate of return, which is a safe bet on the long term with mortgage rates where they are now.
Usually with a low down payment the investment home the cashflow will be negative, but if you consider the mortgage is being paid for or a percentage of it and you are still living more reasonably building wealth with a long term mindset then in the grand scheme of the investment it is okay, especially if you plan on refinancing in a couple years.
