How to get started when living in luxury/niche market?

Question

I am just getting started and would love some advice or success stories from people whe live in a unique market like I do. I live in Aspen, CO. Prices range from $2000+ psf in the city core to $300-$400 psf down valley about 45 minutes away. Foreclosures seem to be non-existent and a robust affordable housing program seems to have eliminated the middle class market. It is also a small market, even when you consider the entire valley, and is comprised of a mix of full-time residents, second home owners, rental investors and unoccupied homes owned by the uber-wealthy. Free market rental rates are high (think NYC and SanFran) and certainly bounce around from luxury to upper-middle-class working folk prices. When I try to run the numbers on any investment they just don't seem to add up for normal investing. For instance, buying a cheaper 3bd 1bth home/condo in Aspen may cost $1.5M. This price is low end, so assume a low end rent of $4,500 per month. Unless you make a huge down payment, your rent isn't covering your mortgage, and if you make a huge down payment your cash on cash return is garbage. If you try to do a fix and flip instead of buy and hold the options are extremely limited and there is so much money here you are not going to get a great deal on the buy side.  I love living here and know the market, but I'm wondering if I need to explore a different or larger market to get started. Thoughts?....

Allen Maris · Answer

@Mike Timme , like @Allyson Edwards , I'm in the Santa Barbara area too. But it's the same as any high priced market. The math doesn't lie. It's just nearly impossible to make an average deal work in these cities at this time. So my solution was to invest outside the immediate area. Sometimes an hour or two drive can mean finding deals that make sense all of sudden. So it's probably worth expanding out your circle wider and see what you can find. A couple hours of research will give you an idea of housing prices and rental rates.

I underlined those two key points above. You may be able to find a deal right now, but chances are it's not listed on the market and it has to come to you from a referral. And just starting out means it's highly unlikely that a broker will bring you a great deal first. They go out to their usual group of existing clients and then whatever is left over they'll take wider.

Also, timing is key. I was able to buy a SFR in a nice part of LA during the crash that has positive cash flow. If I tried to buy that same property today, impossible. The rents just can't support it at current market values. We'll have another correction, we just don't know when or how much.

Buy for cash flow and let the appreciation be a bonus. If you buy a house for appreciation, you'll over-pay and you'll be paying out of pocket each month to support it. That's how many investors got wiped out during the 08 crash. They couldn't keep up with all the debt.

Good luck to you. Use this opportunity to learn the market further and then properties will start to show up for you.

Justin Koehn · Answer

@Mike Timme I moved away from Colorado two years ago, to the also-expensive West coast. I agree with everything @Allen Maris said above. The average deal in many (if not most) markets today is not a great deal, especially in high priced areas like Aspen. That is a very specialized market that makes money for very specialized types of investing - think new developments of condos, etc, but these require massive capital and experience, if they are even possible. I do have friends who are investing in mountain towns in Colorado, but they are looking at more "secondary" mountain towns, those without ski resorts in them, like Grand Lake. They are looking for tourism but not a crazy ski industry and they are not doing normal long-term rentals. They are making it work with AirBnB and other short-term vacation rental strategies. One thing that those ski towns have going for them is a pretty established maid/cleaning industry so nightly turn-overs might not be too bad to get done. However, the number still have to work and with short-term vacation rentals, there is always a chance that the city will pass a new code that prohibits it. There is definitely risk there as well.

If I were going to invest in the mountains of CO, I'd be looking for smaller, non-ski resort towns that have a lot of summer traffic and are within 1 hour of a ski resort. Grand Lake is good for this because you can get to Winter Park and there is a lot of traffic from Rocky Mountain National Park through there. I'd look at places like Salida, Buena Vista, Leadville, Grand Lake, etc. Good Luck!

Bill S. · Answer

@Mike Timme I'm a bit late to this post. I can see your pain. During my w2 job days the company I worked for did work in Aspen. It is a different world. I would agree it's probably easier to go out of state and back to your roots where you have some familiarity. That said, there would be opportunity where you are. Money can mean people don't have to sell but sometimes when they do sell, money isn't the most important thing. In your shoes I would do some very targeted marketing to properties that you could buy if the price was right. Learn the City codes and see if there are opportunities to split lots or combine lots for greater density. Not saying it's possible because I am aware of the City's voluminous zoning code.

Find the right piece of land and get it under contract at the right price and I'm sure you know enough money to make yourself something out of it. You wouldn't be the first to start out that way. Start putting deals together and make sure that some of each sticks to you. Before long you will be the one signing the front of the checks.

Jay Helms · Answer

@Mike Timme - - sounds like you’re not clear on WHY you want to invest.

Discover your WHY, your passion for wanting to invest, and this will help produce your goals. Once your goals are defined, it’s easier to establish your investing criteria. Your criteria act as a guide to quickly evaluating properties and keeping you on YOUR course.

Spend some time discovering your WHY, it’lll point you to the market/asset class you want to invest and essentially make everything else easier and more clear.

Allen Maris · Answer

@Mike Timme - "what high school did you go to?" - Anyone from STL will understand that joke! I'm from there as well (Parkway South) and moved west a bit over 20 years ago.

If you have family or friends still there, that's a huge leg up. Even just to do a simple drive by every few months or if there's something going on, they can help out before you get a flight back.

Having invested close to home and far from home, I'll never invest in a small deal where I didn't have someone I know and trust that could check in.

Mike Timme · Answer

Thanks Erin.  Full disclosure, I work for a real estate developer and have access to capital and expertise in that arena. We typically do larger projects but our principals have indicate that if I can find lucrative single family development opportunities they would abosolutely be interested in allowing me to run it as a side project. I am very comfortable running the financial modeling on these deals but the current environment is extremely slim on opportunities. The absence of buy side deals, makes everything highly speculative.

Like most people on this forum I am just looking for the best and most interesting way to invest my own money and control my own future, so I appreciate all of the creative feedback.

Janelle Groenhout · Answer

I get where you are coming from @Mike Timme I live in an oil boom town and so it isn't feasible or wise for me to invest in my current location so my husband and I decided to invest out of state right from the beginning. We do buy and hold and so far don't find its that hard to invest out of state as long as you have a good property manager and team in place.

Erin Carpenter · Answer

@Mike Timme I feel your pain as well in Denver. We've decided to buy out-of-state and are just beginning our journey (and our learning). I think you being from Saint Louis would give you an excellent entry into that market and knowing what a good deal looks like out there.

We've also looked at other types of deals in Colorado to get creative. We bought some land along the front range for a long-term hold, and are looking into a Hotel syndication deal outside Telluride. So maybe looking at other avenues of investing in Colorado may work well for you.

Mike Timme · Answer

Thanks Justin, great advice. I'll look at some of the towns you recommended. Just out of curiosity did you keep any rental properties that you are now managing from CA?

How to get started when living in luxury/niche market?

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