New Investor - Which route to go??

Question

Looking for thoughts on which option to explore given my current situation. Here's the lowdown:

- Primary residence has about 200k of equity in it.
- Currently own one rental property (previous primary residence). We owe about 450k on it, it's valued at roughly 780-800k. Rented at $3200, lease coming up.
- We are in the Denver suburb market (it's wild here!)

I'm looking to use any strategy to MAXIMIZE cash flow. My family needs me to be released from the 9-5! I'm open to any/all options. Things I'm tossing around right now include:

- HELOC the rental to get a couple duplexes in other markets
- Sell the rental and use $$ to purchase duplexes
- Do either of the above but aim for Airbnbs

Long-term gain will be phase 2 of the investment strategy, but for now, the primary focus is cash flow! The Denver market makes me nervous as it's very high right now, which makes me instinctively want to sell the rental, but perhaps another way is best.

What's your 2 cents?!?!

James Carlson · Answer

@Katie LyonI've been looking in Arvada with a few Denver-based clients wanting STRs this year. For them, it's all about most number of bedrooms, and for the 5+br properties in a condition that will do well on Airbnb, they're going for mid-$700s and early $800s. With Airbnb investments, it's not just price, but a mix of price, number of bedrooms and condition. Basically, you want the nicest, most modern short-term rental with as many bedrooms as possible for hopefully the lowest price. If cash flow is your main goal, then price matters less than # of bedrooms and "niceness."What do I mean? A quick example:Property A currently on market3br/2ba$565,000 (it likely goes for 10% over ask, minimum, but for our example, let's stick with asking prices)$2,764/mo principle, interest, taxes and insurance (assuming 20% down and a 5% interest rate)$4,665/mo gross revenue (according to AirDNA, the STR rent estimate tool)-----------$1,901 cash flow (we're not accounting for any costs, obviously, but this is just illustrating the importance of bedrooms)Same Property (just two more bedrooms and one bathroom)5br/3ba$750,000 (again, it likely doesn't stay at this price)$3,669/mo all-in payment$7,671/mo gross revenue (according to AirDNA)----------$4,002 cash flow (again, no expenses)Basically, for an extra $900 in monthly payment you get an extra $2,100 in cash flow. This is not to say you can't do well with a solid 3br. That client above bought a new build in Arvada that's a 3br and he's cash flowing nicely. But for those with money who want to maximize their cash flow, bigger is better.And gosh, I haven't even mentioned the importance of style. Two of the same 5br units ... one is filled with your '90s overstuffed black leather couches. The other is filled with clean, mid-century chic furniture. The latter will outperform the former by a lot. But that's another post.And yes, there's location. Does being closer to Denver, all other things being equal, matter? Sure, but again, I actually think more bedrooms is more important that proximity to Denver when it comes to Airbnb and STRs.

Nathan Lose · Answer

@Drew Sygit @Katie Lyon That's a great question, and It has some nuances. The whole situation comes down to cost of capital, marginal utility of rental income vs jailed equity, and opportunity cost. Yes interest rates are rising, however, rates are rising from a historical low to (as of right now) ~5%. Historically 5% is still a great rate. If you look back 10 or 20 years ago rates were over 8%. When you compare todays rates to the ~3% rates of the past it's easy to get lost in the sauce of these all time low rates. The big caveat to this all is the opportunity cost of the equity stuck in a property relative to the marginal utility of the rental income the property can produce. You can get into some crazy math with this but ill spare everyone the details and just stay conceptual for sake of simplicity. Say you have a rental property such as @Katie Lyon with 350k of equity on a 800k valuation, and her 200k of equity in her primary (I'm going to assume her primary is also has a 800k valuation for simplicity). This would mean she has roughly 190k of equity to play around with. If her interest rate on 190k averages 3.125% but she can cash-out refi at lets say 5.375% average over both properties because she has phenomenal credit, the cost of the pulling the 190k out becomes (-2.25%) over the new loan value (not exactly how it works but we're keeping it simple so please stay with me here). I'm not going to speculate what her returns are as I'm not familiar with Colorado markets whatsoever but lets figuratively say Katie is getting a 5% return on the property. This means her return on the 190k of equity is 5%. The big question though is does anyone know of any investments that exist where that 190k could generate a great enough return to offset the (-2.25%) incurred on the new debt and still bring in a return greater than 5%? I'm sure quite a few realtors or investors on BP from many other markets would love to answer this question for you. It would not surprise me at all if you could use that 190k to acquire 3 units each giving you a 10% return (which means your 190k bought a 30% worth of ROI in super rough terms.... I say again this isn't exactly how it works but this works perfectly to get the point across). This paradigm illustrates the opportunity cost of equity and the marginal utility of your interest rate increase in this particular example. Add to this the ability to buy down your rates and the cost of capital math gets really crazy. If your in this game of figuring this out you can really put yourself ahead of the curve. Eventually you can start diving down the rabbit hole of DSCR loans and borrowing with an LLC. However, this is where you separate the rich from the wealthy. All in all, the answer to this question has quite a bit of nuance and individual perspective/tolerance to it. If you leave with one thing from all of this I want everyone to take a deep breath. This is not 2008. The housing market now is much different than it was in 2008. The housing supply is much different than it was in 2008. The economy is even more so different than it was in 2008. 5% interest rates are not high. Math is fun.... at least to me... maybe... sometimes... and a rising interest rate environment is not a good reason to keep yourself from expanding your wealth and looking for opportunity. However, It's up to you to be the final judge of whether or not wealth creation is worth it to you or not. Hope you all have fun with this. If you have any more questions or simply want to poke holes in this ask away. I love a good discussion. Cheers!

James Carlson · Answer

@Katie LyonSounds like you're in an enviable position.You can definitely go out of state and get decent cash flow on a long-term rental. If you're interested in sticking around the Colorado market, I'd consider an Airbnb/short-term rental in one of the areas that allow for it. Most mountain areas just outside of Denver (Evergreen, Conifer, etc.) and outside of Colorado Springs (Woodland Park, Divide, etc.) allow for vacation rentals in investment properties. In the Denver metro, Wheat Ridge allows STRs and Airbnb investment properties. So does Arvada, and unincorporated Adams County (which is near Arvada and just north of Sunnyside in Denver) is about to allow for them. If you self-manage, you can cash flow a couple thousand a month. (See this client of our's who's doing Airbnb in Wheat Ridge or hear another of our client talk about about his Arvada Airbnb on our podcast.)I'm all about keeping everything I have for the long-run, especially in Denver where I think the low unemployment, the diverse economy and quality of life will continue to make this an attractive place for people to move to for the long-term. So I'd keep your current rental and pull the money in a HELOC, as long as the PITI on that place + the HELOC payment still allows you to cash flow. Whatever you decide, I wish you the best!

James Wachob · Answer

@Michael Rodriguez I agree that Memphis is not saturated with investors. It's all about finding a need a filling that need. We recently rented a duplex in one of Memphis hottest neighborhoods for $2500 per unit. Most investors or property managers would have thought we were crazy asking for this amount but BOTH units rented in less than 7 days! On the opposite of the rental market there is a HIGH demand for safe, clean, and functional $800-$1900 SFRs. The majority of rentals in the Memphis area are mediocre at best. I look at 20+ homes per week to purchase. Many of them are rentals that are being sold by the "weary landlord". I see mold, leaking roofs, broken ACs, and other deferred maintenance regularly. IF you have a home available for lease that is safe, clean, and functional the DEMAND from potential residents is overwhelming. Therefore the DATA shows that there is a NEED for quality rental homes in a market like Memphis, TN.

Brian G. · Answer

@Katie Lyon if cashflow is your primary goal in the near future, you are willing to learn an active biz,you have time freedom to engage issues occasionally, you like hospitality, you are motivated enough to learn how to self manage remotely if needed, then I would encourage you to consider the STR biz. 3-5 well selected and performing properties can retire most people from their W2 job. Search the Short Term Rental forum. Everything you need to know is there. Good luck on your journey.

Ben Rhodin · Answer

Hey @Katie Lyon! You definitely have a strong position to be able to scale pretty quickly!I'm going to echo what James said up above, if Cash flow is what you are after then STRs are definitely the best best for you. It will create some more work than a typical LTR however, so just be aware of that if you are going to self manage. It can be very systematized and almost hands off, however, it is being in the hospitality business. I would also recommend Medium Term rentals for you, they create decent cash flow if set up properly and are less turnover and moving parts than an STR. THe other benefit is that you won't be stuck with the STR regulations, so you can be more location independent. It is a more untapped market than STRs and one that I have been pushing and exploring with a lot of clients.Arvada is definitely my favorite Denver metro city, personally located here, and have a rental and my house hack here. As well as loads of clients with traditional rentals and STRs within town. As far as price goes, beds equal money in the STR space, so you are wanting to find properties where you can get a good amount of guests, but there is a sweet spot, as the larger properties will have a higher vacancy but higher rental rates. One thing Arvada won't let you do is operate multiple STRs within one property, unlike unincorporated Adams county. So if you got an SFR with a basement apartment in Adams county you could rent it as two separate listings. If you are looking in Arvada, you should be shooting for around 600k at least, unincorporated Adams county will be cheaper at around 500k or so, and wheat ridge will typically be the most expensive.If I were looking to capitalize on that equity in your rental (or your primary) to leverage as a downpayment for a new property, I would look into a Cash out refi instead of the HELOC. The reason is the HELOC will be more expensive over the long term than a cash out. I typically like to use a Cash out if I am using it for long-term financing, and a HELOC if I am doing Short term financing and plan to pay it back quickly... Think of a BRRRR or Flip.Wish you the best, you have a strong foundation and the right direction!

Michael Rodriguez · Answer

Howdy @Katie Lyon, just to chime in from a non-realtor (no offense).My STR is in my basement home in Thornton and does about $15-25 k a year (deductions on the business, but no deprecitation thou)Out of stateI also have a LTR rental Thornton and two in Memphis. I like them all. For out of state I've had the same problems I have here so I don't think it matters IF IF IF you get a vetted Realtor, PM and do your due diligence for out of state. Memphis saturated with investors?I don't think so. It could have been said that when I bought them in 2021 in Memphis that I was too late, but I wasn't. As long as the #s cash flow it was an easy decision. 90k price (my realtor flips this house to me, so mostly new interior and HVAC. He bought it around $40k)25k down, 950 mo-$450 in expenses,-$100 PM, -$100 monthly reserves. I net about $300 a monthI go back and forth on whether I would want another LTR or STR. But my EGO wants another STR. I think I can do better than most to make it special (I'm a contractor) and keep it booked (I know my ego is big).Hit me up if you want to discuss. Interesed in partnering also like @Robuilt does.MRod

Michael Rodriguez · Answer

Hey @Ben Rhodin Thank you for your info on Wheat Ridge and Arvada. Question please: How do I search Unincorporated Adams county? Can't figure it out on the Adams count website or Zillow.Happy SpringMRod

Michael Glunk · Answer

@Katie Lyon I understand where you are coming from as I was once tied to a 9-5, but reached financial freedom through cash flowing real estate. There are many ways to go about it. I'm an opportunist and chose whatever option(s) looked most appealing at any given time. Meaning I purchased both long term and STRs, but I stuck to a few markets as time is a scarce resource. (Built and BRRRR some properties along the way as well.) @James Carlson is right and I would second his comment about STR opportunities in the front range. In my opinion STRs will provide the most cashflow and they really aren't as difficult to manage as some think. There are many tools and resources out there to automate everything from messaging, to pricing, etc. I use a few tools and my time commitment to my STRs is minimal. While I agree that you can go out of state for decent cash flow (this is what I have done in the past from a LTR perspective), you can also find some decent cash flow in Colorado. Not quite as good as say the midwest, but these properties tends to be in Western Colorado. So a reasonable driving distance, but not in you backyard. It really comes down to what you want. Are comfortable managing a LTR or STR by yourself? If so go for it! And as previously mentioned, an STR will produce more cash flow. If you aren't, then a good LTR in the midwest with a 10-15% cash on cash return, inclusive of property management fees, is still doable in this market. Set a goal to buy 1+ a year and you will be where you want to be before you know it.Good Luck!

Katie Lyon · Answer

SO great. Thank you Brian!