Should I start where I live?

Question

Hello BP community,I am 26 years old and recently moved to Denver. I am looking to purchase my first rental property. I am in Denver and would ideally purchase a property within driving distance so I can easily fix it up and manage it. I have around 60k saved (with an additional 100k in roth and 401k that I’d preferably like to leave alone). Is it feasible to purchase a property in the Denver metro area? I’d prefer something that cash flows, even if I have to do a bit of work on the property.Any advice is greatly appreciated!

Joe Villeneuve · Answer

Never invest where you live, just because you live there. The object is to make money. If where you live you can't make money, then don't invest there. If you can make money, then by all means you should invest there.Remember, the money you spend is gone once you spend it. Don't buy a property that will cost you more money as you own it. Buy a property whose cash flow and/or profit will allow you to buy more properties. That's how you grow. Buying properties that lose money, that cost you more money, is how you shrink.

Jeff White · Answer

@Adam Gusky Welcome to Denver!I think that is very impressive that you have 60k saved up to invest in a rental property. Congrats! If you just want to buy a investment property, with 60k saved up, you are probably looking at small condos since you need 20-25% down payment for a investment property, and best case, you are looking at cash flowing $200 per month with an 8% interest rate if you find the right investment property.Have you thought about house hacking? It is the easiest way to invest, lowest barrier to entry, lowest interest rate, and lowest down payment required. I'm a local investor and realtor here in Denver metro, and I've found success with house hacking here in Denver for myself along with my clients too. It is that powerful of strategy!Currently, there are a few ways to house hack in the Denver metro area and still live for free depending on your level of comfort.1) Rent by Room - personally, my favorite strategy, you buy a large house, live in one room, and rent out the other rooms. This strategy is very effective, especially on houses with lots of parking and houses with lots of bedrooms and bathrooms. Basically, you can get $700-800 per room that shares a bathroom, and $800-1000 per room that has a private bathroom. If you do the math, when you get to 6+ bedroom houses, the numbers work out better with living for free and also cash flowing while living there. 2) STR - Short-term rentals or Airbnb. This strategy is great, but it fluctuates depending on the time of year, you can still live for free, but it is more challenging since you are only Airbnbing a small space or basement unit. 3) MTR - this is a good in between style of creative strategies since you can furnish a place nicely that would rent out on Airbnb but you want a long-term high quality tenant like a travel nurse or corporate rental that stay for 2-3 months vs. under 30 days for most Airbnbs.Combining strategies is the best way to go, ideally, you would find a house with a separate entrance or walkout basement, live upstairs in the one of the bedrooms, rent out the other upstairs rooms and STR/MTR the bottom unit. You get the best of both worlds, and would easily live for free and probably cash flow, even with a 7% interest rate.What are your short-term and long-term goals? Do you want to buy a fixer upper? Do you want to add value? Do you want cash flow? Appreciation? A little bit of both?

Alecia Loveless · Answer

@Adam Gusky I live on the east coast so I can’t say if you can buy something in Denver for 60K but I do suggest if possible to start out in your local market. My “local local” market is two towns the one I live in which has about 2400 people and the next one over which has about 12000 people. Staying local and having the advantage of knowing my market as allowed me to purchase the duplex I live in that was originally listed at $249K for $105K because the floors slope a little and the foundation expert the original buyers called in said it needed a $75,000 new foundation. Staying local allowed me to by a two building two lot triplex also in my home town for $200K that was listed at $300K because of the renovations my expert contractor found following my inspection. So far most of them have been remedied for about $20,000. In the next town my local knowledge got me a cute 3/1 cottage for $99K that is now worth $319K 3 years later. And most recently staying local in another direction about 10 miles away I got assertive when a listing agent failed to list a property and made my offer anyway and bought a great 8 unit that will double in value to almost $1MM in 6 months. I highly recommend staying local and knowing your market and driving around if possible and following your MLS daily and networking at local REI events and coffees and tell everyone that it’s appropriate to tell that you’re an investor and you’re looking to buy houses or multis or whatever and eventually people will start telling you about deals and bringing them to you.

Joe Villeneuve · Answer

Your priority should be making money, not your living concerns. I'm not saying buy a junker. I'm just stating that you are buying because want to invest in RE. That's your number one priority.

Bruce Woodruff · Answer

If you choose to invest in Denver, just remember that most areas around there are not friendly to STRs...so that limits your options down the road. As has been said, do not invest there just because you live there....you are investing to make money not to have a comfortable drive to the property, right...?

Julien Jeannot · Answer

If one is young with a solid job, I generally recommend a build wealth strategy through equity, rather then cash flow. Its a math problem for me. Figure out how many units you need to your cash flow target and figure out how much downpayment you need. The math quickly points to far more cash is required for a cash flow strategy then folks have on hand or in the next 5 years, even on the midwest.House hacks are a great way to go to build equity which can then be turned into cash flow.Easier to take $50k of equity from a househack and to BRRRR into the next deal then it is to accumulate through a $200/mo cash flowing unit.

Jeff White · Answer

@Adam Gusky Have you thought about houses with ADUs/Carriage houses as well? It gives you the privacy you want while allowing you to house hack with only 3% conventional loans.Since you are paying a premium for rent, the other option is to wait to the fall/winter to purchase a better deal since you don't have much competition and can negotiate easier for a single family with ADU/Carriage house or a nice duplex. Also, you can easily use FHA financing with a duplex, and there are some nicer duplexes out there in Denver metro. If you are goal is to reduce your living costs from $2,850 per month rent to under $2k per month, you can definitely accomplish that.

Ben Einspahr · Answer

@Adam Gusky You are in a great financial position at your age! Excellent work! Yes, I would not recommend tapping into the roth + 401k. Great for diversification and rainy day fund. I agree with @Jeff White. It is 100% possible to purchase a property in Denver but $60k will be tough for an investment property. At the deals I am seeing, you would need to put 30% to cashflow. I would 100% recommend house hacking. 1.can get in for low down 2.hands on land lord experience 3.decreased living expenses 4. excellent ROI on the 5% down.5. Live and flip options ... to name a few Having a wife and wanting privacy (i can relate btw), I would aim for single family home with some form of separate income suite that you can rent out and still maintain your privacy. That is what my family has done a few times. Or, you could go the duplex route. Just keep in mind buying a owner occupied multi can get tricky with financing. Read this post I wrote last week covering the details. Earlier this year, @Jeff White and I put together a 6 part webinar series covering everything you need to know about house hacking in the denver metro with a few case studies. Happy to share if you want!Best of luck!

Nicholas L. · Answer

don't buy something random in the midwest just to have done a deal.house hacking lets you put way less down.

Jackson Kyhl · Answer

Hey Adam! I think investing close to home is beneficial especially when just starting out. You should be able to find something with that budget! Feel free to reach out, I'd love to answer any questions you have on investment properties in Colorado!