Is Colorado's Multifamily Market Still a Good Bet for New Investors?

Question

Hey BP Community!

I’m currently on the hunt for my first investment property in Colorado, and I wanted to share my experience and hear from anyone who's been navigating the same market. Initially, my goal was to secure a multifamily property using my VA loan for leverage, focusing on long-term rentals. The idea was to find a property, 4-plex, that would allow me to break even, cover the mortgage, and hold onto it as a long-term investment.

However, analyzing the data and really coming to terms with Colorado's market, I’m rethinking my approach. While long-term rentals are still an option, I’m noticing that many investors are shifting towards STRs to boost their net profit.

Here’s where I stand:

• VA Loan for leverage: I’ve found some great properties that could allow me to house-hack or set up a traditional rental. The loan has been a game-changer, minimizing the upfront costs. The $0 down payment, while convenient, also does not set up a great profit margin in the beginning. I am also considering the "assumable" VA loan option to lock in a lower interest rate.
• Initial Plan: Use the property as a long-term rental, aiming for cash flow neutrality or slight positive cash flow. The idea was to lower my monthly mortgage payment to reinvest the difference into future projects. But with the rising costs, breaking even seems less ideal, and I’m questioning if it's the best strategy in this market.
• Current Consideration: After digging into the numbers, I’m seriously considering going the STR route instead. In certain Colorado markets, especially near popular tourist spots or cities like Colorado Springs & Old Colorado City, STRs have the potential to bring in higher monthly revenue, even if they require more management. Another idea is to use a STR/LT hybrid setup within the 4-plex.

Question for the community:

• For anyone who has made the switch from long-term rentals to short-term in Colorado, what has your experience been?
• Is the higher cash flow from short-term rentals worth the additional effort, or does it come with too much hassle in terms of turnover and regulations?
• Any tips for finding that sweet spot between profitability and sustainability?
• Should I consider moving out of Colorado (LOL)?

Looking forward to hearing your thoughts! I'm excited about making this investment work but want to explore all options to make the best decision. Thanks in advance!

James Carlson · Answer

Using ChatGPT-generated responses adds no value to a discussion of Colorado STRs but more importantly ... much of this is flat-out incorrect information.

First off, it's laughable that "Breckenridge" would be proposed as an option for a first-time investor. I'm gonna go out on a limb and say the first-time investor isn't looking to spend $2M and be in the black $1,000/mo or more.

Secondly, and most importantly, you can NOT get an STR in Breckenridge (or Keystone, another option in your response). There is a cap on short-term rental permits in Breck and in Summit County ... and both caps are well over the limit.

I'm not against AI, but these types of un-vetted responses can harm new investors.

Bill S. · Answer

@Meghan Begue - I have investigated moving to STR to increase cashflow. I cannot get over the hump with that, more time, more work and more costs for me and I can't convince myself that the juice is worth the squeeze. My suggestion is to focus on loan paydown, property appreciation, and tax benefits rather than the cash flow or lack there of from the investment. There are still several powerful wealth generators from a long term rental and cash flow is not the only one.

Also, I have heard that after you have built enough equity, you can refi out of the VA loan into conventional financing and then use your VA benefit again. Check this out with your lender but that might be the best way to approach the acquisition of future properties vs using cashflow to save up for another down payment.

Gino Barbaro · Answer

@Meghan Begue

When you're investing in real estate, most of us do not consider the exit strategy enough. To me, there is a danger in buying a short term rental only because it cash flow better. There is risk in the model, if they decide to change laws, for example.

If you buy with short term, will you be able to refinance or sell with the same income stream. I know most people say they're gonna buy real estate and hold for the long term, which I advocate, and I do also, but at times, you need to pivot and sell, and can you sell at a price that will make you whole.

Now, if you're going to short term rental model, then I would find a coach/mentor to help. There are some nuances and intricacies that a pro can help you with, and help you save time and money

Gino

Koren Lavi · Answer

@Meghan Begue

You had a really good question, is the higher cash flow worth the additional effort for STRs?

I’m sure you will get different answers from different people based on their expenses/revenues and their tolerance to hospitality work.

In my own personal experience, self-managing an STR can be quite a hassle at times, and not so bad at other times. 2 years ago my answer would have been that the juice is absolutely worth the squeeze for me. Today my position is a little more unclear. After recent significant increases in property taxes, homeowners insurance, utility costs, supply costs, maintenance costs, and construction costs the margins are thinner to a significant degree. There are still ways to make STRs work (good deal on a home, buying down to a lower interest rate, etc.) but make sure your profits are worth the hassle that you will encounter, because there WILL be some hassle with STRs.

If you do move forward, make sure you have some other exit strategies. I would not buy a house that works as a STR but not as a LTR. Also I would make sure to buy in a neighborhood with good or better appreciation potential, so that you are not only benefitting from the cash flow.

Hope this helps!

Meghan Begue · Answer

This made me giggle. Thanks for looking out for new investors @James Carlson

I appreciate the real insight on STRs in Colorado. You're totally correct regarding the more realistic goals for first-time investors. I've actually considered moving to other markets in order to open more possibilities. The VA loan is an amazing option and is opening a door for me to invest in a multifamily. I want to be thoughtful and strategic about this. Like I mentioned in my last comment to Erik, after re-reading my post, I think I need to focus on finding the right deal, instead of forcing a deal to appear. I'm no longer considering STRs at the moment. Thanks again for your input!

Erik Browning · Answer

State and local municipalities have an ever-growing demand by non-landlord homeowners to reduce or eradicate STR's in their neighborhoods. The reason for this is chocked up to 2 reasons:

1. Short term rentals create rowdy and sometimes unsafe conditions in otherwise quiet and safe neighborhoods.

2. Short term rental homes/units drive up the price of homes faster than primary residences and long term rentals.

Shifting from long to short in some locations is perfectly reasonable, however I highly recommend you check out your local city's ordnances discussing the requirements for short term rentals. Additionally, you are likely subject to the TPT tax, transaction privilege tax, or a similarly named license/tax. Ensure you work that into your expenses when underwriting.

Answering your questions:

Experience - Location is really your main driver here. If your location is good, then the place will rent for both long and short. If your property sucks, people won't rent it out as a STR either. Don't listen to your agent at all, go on rentometer, airDNA, and other websites to help you make an educated decision on how your property will rent. Your agent is NOT doing this for you and is only concerned about making their commission, no matter how many cookies they send you or white their teeth are.

Cash flow - you are not guaranteed cash flow. Yes, you might have some stellar months as a STR during the year, but you might have long stretches where the property is vacant. With your research that I mentioned above, make the choice where you feel the most confident with supporting evidence. It's not a one size fits all situation. Your property must be desirable - and that desire is different for different reasons when comparing STR vs LTR.

Tips - find a good property that lies inside of a good location and has a high demand for either STR or LTR. Again, research and underwriting your deal. Again, do not listen to your RE agent's opinion on the matter. They do not care.

Moving - Sure, find an affordable place that you like and start there. You will have the exact same questions wherever you go though. If you keep waiting, you will keep finding reasons to not do it.

Meghan Begue · Answer

Thank you @Bill S.! I appreciate the insight. I found a great lender for my VA loan and will ask about the refi option. I need to study all the options. One cool thing that I recently discovered is the VA will allow you to use any remaining entitlement on the loan for a second purchase.

Meghan Begue · Answer

Yes, this is very helpful! Thank you for leaving a post @Koren Lavi I appreciate the comment on not buying a house that works as a STR but not as a LTR.

Is Colorado's Multifamily Market Still a Good Bet for New Investors?

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