Cash flow = NEGATIVE $2,000 per month

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Cash flow = NEGATIVE $2,000 per month

Adam Knickelbein
Member since 2019 路 11 posts 路 7 votes

Hi everyone,

I'm looking for my first deal here in my hometown of Boulder, CO. What I've found is that price-to-rent ratios are high - ranging from 24-30 depending on zip code. The median home sold price is $800,000, and average rents for a 3-4 bedroom home are around $2500. A very quick screen (20% down payment, 30 years, 4.5% interest, 50% operating expenses) tells me that cash flow would be negative $2,000 per month. So to break even with these assumptions at $2,500 rent, I would need to buy for approximately $300,000. To get a 10% COC return I would need to buy for $220,000. And none of this analysis considers rehab or closing costs. In other words, I need a seller to accept an offer 70% less than list price for me to make a return. Even if I somehow got operating expenses down to 30%, I would need to buy for $400,000 to make a tiny return.

So my questions are:

1. Do I even bother looking for deals in Boulder? Or should I just look elsewhere?

2. If elsewhere, how do you decide where to look? Is this type of analysis useful in determining where to look?

Thanks!

Adam

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Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients 路 Member since 2014 路 3k+ posts 路 4k+ votes
6y

You may need to look for creative or off market deals there. 

Or look in another market. 

Or look at short term rentals. 


Very rarely can you buy at market MLS prices and have it be a good cash flowing property.

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  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients 路 Member since 2014 路 3k+ posts 路 4k+ votes
    6y

    You may need to look for creative or off market deals there. 

    Or look in another market. 

    Or look at short term rentals. 


    Very rarely can you buy at market MLS prices and have it be a good cash flowing property.

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  • Kenneth Mooney
    Rental Property Investor 路 Augusta, GA 路 Member since 2016 路 348 posts 路 171 votes
    6y

    Adam, I am not past the third sentence and can tell this deal does not work. $2,500 a month on an $800,000 purchase provides a groww yield of 3.75%. Minimum that I will really look at is about 15% gross yield and I usually want a pretty hefty chunk of equity at that point. To give you an example, I am looking at a deal right now that is at a gross yield of 15.38% but would have equity of roughly $70,000 if we can purchase for the price we would like (might have to go higher in offer price which I am willing to do since there is so much equity). 

    Now, to actually answer the questions of your post. 

    (1) Of course, its your market that you are probably most familiar with. Just understand that the strategy there is not single family home rentals. Have you done any analysis on multifamily deals there? P.S. You should look elsewhere if your capital does not meet with the market strategy for the market you are in. 

    (2) Ask around. Look for solid employers with low entry points. Feel free to reach out, I would be happy to discuss multiple markets that I am looking at and  one market that I am currently investing in. 

    1Reply
  • Adam Knickelbein
    OP
    Member since 2019 路 11 posts 路 7 votes
    6y

    @Natalie Kolodij - thanks! I suspicion is that even creative and off-market deals are out of reach, because MLS prices aren't even close to working. 20% off list price doesn't even get me close. 40% off doesn't work either.

    @Kenneth Mooney - thanks for the responses. I have not yet looked into MF deals, but I know there aren't many available in the 2-4 unit range. 

    0Reply
  • Kenneth Mooney
    Rental Property Investor 路 Augusta, GA 路 Member since 2016 路 348 posts 路 171 votes
    6y

    @Adam Knickelbein yeah, thats how it is sometimes. There are not many 2-4 unit deals in my city either. We are large, large majority SFH.

    0Reply
  • Matt M.
    Realtor 路 Denver, CO 路 Member since 2013 路 2k+ posts 路 1k+ votes
    6y

    The Republic has ALWAYS been expensive. My Aunt moved there 40 years ago, and it was expensive then, relatively speaking. I've been looking at deals here in the Denver Metro for 10+ years. I've seen exactly ONE in Boulder. It was a HUD foreclosure open to owner occupants. The home was a ranch on an acre of land, backing to open space, and surrounded by $1mln+ estates. I really tried to get that home, but I was beat out. Purchase price was mid $300s!!

    5 years ago I wouldn't have said this, but what about Longmont? Further down the 36 corridor you can find deals too.

    1Reply
  • Dan MackinBusiness Member
    Real Estate Agent 路 Erie, CO 路 Member since 2014 路 1k+ posts 路 512 votes
    6y

    Boulder is not a cashflow market, just an appreciation one. The landlords who do better down there rent by the room since the average room rent can usually be $1000+ for students, but in almost all areas you are legally limited to 3 unrelated tenants. Of course there are plenty of owners who don't follow that rule and try to fly under the radar. As Matt said, if you want to be close to that area you need to go a bit east. The surrounding areas can have numbers that will work. Plus they are a lot less restrictive on unrelated tenants and landlord restrictions.

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  • Caleb Brown
    Real Estate Agent 路 Kansas City 路 Member since 2018 路 4k+ posts 路 3k+ votes
    6y

    Look off market or venture 1-2 hours outside of Boulder. If you look in OOS markets Midwest will usually be ideal. The rent ratio is far better but you need to establish a local team in the areas you choose. 

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  • Mindy JensenPro Member
    BiggerPockets Money Podcast Host 路 Longmont, CO 路 Member since 2014 路 7k+ posts 路 10k+ votes
    6y

    Loveland is a better choice than Longmont. Once we got rid of the turkey processing plant smack in the middle of downtown, prices skyrocketed. Still way more affordable than Boulder, but the price-to-rent ratio is crap. You can find deals, but your eyes have to be peeled.

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  • Adam Knickelbein
    OP
    Member since 2019 路 11 posts 路 7 votes
    6y

    Hey @Matt M. and @Dan Mackin - thanks for the comments, guys. As I was researching Boulder earlier today, I found those restrictions on unrelated tenants. Plus a bunch of other restrictions and regulations. It just doesn't seem like a very friendly place for landlords.

    Then I spent a couple hours checking out Longmont, Arvada, Thornton, Denver. Still tough but MUCH closer to working. Maybe some creativity and luck could make it work.

    1Reply
  • Adam Knickelbein
    OP
    Member since 2019 路 11 posts 路 7 votes
    6y

    Thanks @Caleb Brown. My sister and her husband own 3 units in NE Wisconsin, all of which they manage, and all of which cashflow. One backup plan is to look there, since I know people I trust.

    @Mindy Jensen - thanks for the comment! Could you expand on why Loveland would be better than Longmont? Price-to-rents are similar. I love that area as a place to live, but not sure as an investment.

    1Reply
  • Ian I LeinwandPro Member
    Property Manager 路 Fort Collins, CO 路 Member since 2018 路 89 posts 路 42 votes
    6y

    In Loveland you can still get a 3 bed 2 bath single family for low 300s and they rent for $1750 to $1900 depending on condition. Longmont hard to find anything sub 400k. I'm a property manager in Fort Collins and Loveland. Loveland there is good demand for rentals but they lease a bit slower compared to Fort Collins. Loveland has a better value per square foot that Fort Collins, Boulder, Longmont. I've also seen several small multi-family units in Loveland for sale in the last month or so but they are all asking around 700k with roughly a gross rental income of around $4800. 

    1Reply
  • Darius Ogloza
    Investor 路 Marin County California 路 Member since 2018 路 1k+ posts 路 2k+ votes
    6y

    Depending on your means and needs, I would consider a slightly different strategy - house hack in your hometown.  Not to disparage any other fine Colorado town, but you can trust that Boulder real estate will maintain value like few other places in the U.S.  You can rent out one or two additional bedrooms to help pay down your mortgage and in a matter of years - assuming a reasonable rate of appreciation (no guarantee but reasonably likely there) - you will own a prime real estate asset that will cash flow and that, after a couple of decades you will own free and clear.  This has been my strategy in another prime market (Marin County CA) and it has served me very well.  

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  • Landon Reigelman
    Rental Property Investor 路 Lee county, FL 路 Member since 2020 路 8 posts 路 4 votes
    6y

    @Adam Knickelbein

    Hey Adam,

    I'm not the most experienced, but I'd say that's definitely a long shot. Just a simple 1% rule or 50% rule would show that the metrics just aren't profitable, but likely just a nice home for someone rather wealthy. Would suggest looking for off market deals but those are likely far and few if that is your median listing price. Maybe somewhere outside of town would prove to be a better location.

    0Reply
  • Jeremy WilliamsPro Member
    Investor 路 Novato, CA 路 Member since 2016 路 15 posts 路 7 votes
    6y

    @Adam Knickelbein

    In desireable and rapidly appreciating markets

    1) house hack

    2) add value vs expecting the house to fit the model as is

    3) Research rent appreciation. It doesn't fix the cash flow now, but if you don't want to house hack forever it helps to project when the rent could offset costs. Are you willing to house hack until that time?

    4) Taking on appreciation buys before acquiring cash flowing properties is high risk. Is this the right first purchase for you?

    1Reply
  • Michael A DeAngelo
    Columbus, GA 路 Member since 2020 路 51 posts 路 31 votes
    6y

    @Adam Knickelbein I鈥檓 planning to move to CO in about 18-24 months. Looks like I may have to get creative to use real estate to continue my path to financial freedom if I move to one of the larger cities. 馃槵

    1Reply
  • Steve K.
    Realtor 路 Boulder, CO 路 Member since 2016 路 3k+ posts 路 5k+ votes
    6y

    If you're looking for cashflow, Boulder will be tough (although not impossible depending on the strategy). I jumped straight into multifamily in order to have an easier time finding a positive cash flowing property. I'd look in the "up and coming"/path of progress areas in Denver/Denver metro. I like Longmont too but not many multifamily properties come up for sale there, and in the past few years cap rates have really compressed to the point where it's hard to spin off positive cash flow unless you buy a fixer and employ a value-add strategy (which is what I've been doing), or can afford a larger building (which are even harder to find as they rarely change hands). 

    Since this is your hometown, I would leverage your personal connections to find properties off market/pre market. Think about who you/your family and friends know who are in real estate (many folks who have been in this area for a while have rentals), and find out if they're willing to sell or know of anyone who is. Being a native and having some connections like that could be your biggest competitive advantage. 

    0Reply
  • Adam Knickelbein
    OP
    Member since 2019 路 11 posts 路 7 votes
    6y

    Hey everyone, thanks for all the replies. Some more info on us... we bought our primary residence here in 2008, which we still live in. We now have about $500k in equity because of that wonderful appreciation. We also have two kids in the single digit age range. I wish I had known about house hacking in my 20's - that would have made a great strategy. In our current situation it's not something we're looking for.

    In my ideal world, I would be buying rentals within a 30 min drive. We're not afraid of some work, so a fixer is in play if it's the right one. Small multifamily is certainly intriguing. 

    Thanks for all the thoughts, I truly appreciate it.

    1Reply
  • Steve K.
    Realtor 路 Boulder, CO 路 Member since 2016 路 3k+ posts 路 5k+ votes
    6y
    Originally posted by @Adam Knickelbein:

    Hey everyone, thanks for all the replies. Some more info on us... we bought our primary residence here in 2008, which we still live in. We now have about $500k in equity because of that wonderful appreciation. We also have two kids in the single digit age range. I wish I had known about house hacking in my 20's - that would have made a great strategy. In our current situation it's not something we're looking for.

    In my ideal world, I would be buying rentals within a 30 min drive. We're not afraid of some work, so a fixer is in play if it's the right one. Small multifamily is certainly intriguing. 

    Thanks for all the thoughts, I truly appreciate it.

    Sounds like we have some strong synergies. If you look at my profile you can see my deals, and you might consider taking a similar path. I would look to unlock that equity and put it into a small multifamily like a quad in the northern Denver or Longmont area personally, which is what I have done a few times now and plan to continue doing (although possibly moving my primary or putting a big addition on this year for baby #3 so not actively buying another investment until that happens). It鈥檚 definitely not easy finding deals here in the multifamily space, but once you find a good one, it鈥檚 worth it. Just have to look hard, make connections, and be ready to jump on an opportunity quickly. I鈥檝e actually seen more quads than usual coming up for sale here in the $550-800k range lately. I鈥檝e had success in that category. A lot of those buildings are older so it鈥檚 important to budget for capex and consider those expenses in your analysis up front, and helps to have some construction knowledge and a good PM or ability to do some work on your own. If you buy right (decent condition, property in a good location), it鈥檚 possible to achieve both cash flow and appreciation here, with appreciation being the bigger reward in my experience.  

    1Reply
  • Dave Katz
    Real Estate Broker 路 Fort Collins, CO 路 Member since 2013 路 20 posts 路 4 votes
    6y

    @Adam Knickelbein I think @Steve K. is steering you on the right path. I am a commercial broker focusing on MF property in Northern Colorado. I currently have a client under contract on an off market 6-unit building in Greeley. It's a legitimate 7%+ Cap and will produce 10% COC with current rents, not proforma. But please note this performance is extremely rare. Instead of chasing a specific yield, I would examine your long term goals, and evaluate how much you want to invest into you first MF deal. Most investors want to dip their toes into a 4-unit which is a great pace to start. However I feel in MF, the bigger the deal (#of units,) the less risk. My 2-cents. Hope this helps.

    1Reply
  • Bobby Shell
    Investor 路 Fort Collins, CO 路 Member since 2018 路 165 posts 路 127 votes
    6y

    Right now SFH deals are way overpriced. I agree this will not work, and Boulder is not likely to work.

    For perspective we just sold a SFH in Fort Collins and we got tons of offers from investors that were 50-75k UNDER current selling prices. You are going to have to lowball a ton of people or buy offmarket deals from desperate sellers.

    I would try to find a duplex that you can repair and fix up outside boulder or look out of state.

    0Reply
  • Craig CurelopBusiness Member
    Real Estate Agent 路 Post Falls, ID 路 Member since 2016 路 1k+ posts 路 1k+ votes
    6y

    @Adam Knickelbein - The market is the all powerful! You need to TAKE what the market gives you. In Boulder, prices are extraordinarily high, but appreciate pretty well and you will almost always have someone to fill your vacancies. Money aside, it is an "easy" place to invest because you can fill the vacancies and will get good appreciation. That being said, you PAY for having this luxury. 

    I would recommend looking outside of Boulder. There are plenty of properties in Longmont, Erie, Louisville, Superiors, Loveland, Greeley, Westminster, Arvada, Thornton, and areas like this where you can easily find single family homes, rent them by the room and cash flow to the tune of $1,000 per month. 

    Other options, of course, are to invest out of state. However, that's a lot more risk and effort if you don't already have connections with a team. 

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