Investing in Denver? or out of state? How to invest $400K?

Question

Hello all,

My partner and I are interested in real estate investments (we have some experience, not a lot...). I live in Denver. My partner lives in NJ. We have about $400K in cash (so assuming a 25% DP, we are talking about a $1.6M investment/s).

We thought of investing either in the Denver Metro area or Out of State or both. And as far as Denver, we are thinking of multifamily properties. We'll be happy to get you perspective and advice:

1.  Does it make sense to get into the Denver RE market these days?

2. Does the very high level strategy mentioned above makes sense?

3. And generally - how would you invest the $$ mentioned above?

Thank you all in advance!

Bill S. · Answer

@Barak Hamdani clarity always helps. To your questions.

1) IMO Multifamily properties generally provide several advantages over SFRs but you should do some reading here on BP you can learn the pros and cons of each and decide for yourself.

2) For Denver with the funds you have, you can get probably about 8 units (right now unit price is around $200K on a very broad generalized basis). You can slice that up in several properties or use it all for one. Keep in mind that if the property has 5 or more units you are using a commercial loan which may or may not be more to you liking.

3) You have to pick the metric for yourself. What I have seen people using in Denver is IRR (internal rate of return - accounts for cash flow and appreciation) but those folks are generally buying condos in the roughest part of town. Cap rate can be used as well. Denver generally has low cap rates now. Keep in mind, when you use only numbers, no matter which ones, you usually end up with the most management intensive properties in the toughest areas. The advise I got early on which has served me well is, figure out what kind of tenants you want to deal with and only buy properties those people will rent. This starts with area and then trickles down to the buildings and the finishes.

4) Owner carry means that the current owner becomes the bank for the loan on the property. I bought a house for $192,000 and worked out an amortization schedule which I pay owner the principal and interest on a 30 yr mortgage each month. No appraisal, no bank fees, no waiting for approval and no red tape.

5) With regards to area, I would refer back to the idea of buying the property for the tenants you want. The largest driver of tenants is area. Picking your target tenant is a balancing act because the more desirable the tenant, the pickier they are, the fewer there are and more they move. Everyone wants the tenant with a great job, money in the bank, keeps their living space nice and always pays their bills on time. They are also the ones likely to live in your property a year then buy their own home. They require nice finishes and nice neighbors (relatively expensive properties). On the other end of the spectrum, you have the properties in the areas with gang shootings, drug raids, low performing schools, and the neighbors with 5 aggressive dogs that attack the fence anytime someone walks within sight of them. Your tenants would live paycheck to paycheck, don't call you to fix water leaks because they don't want you to see the mess they live in, might stay for years and after they move the property might need complete rehab. Personally, I have never been able to "afford" a property in Wash Park. I would say my target tenant is a step below (lower income, less money wise, less picky) those wanting Wash Park. My properties are cheaper and rent ratios (gross rents/purchase price) a bit higher then you find in Wash Park. Figure out what you want and go for it.

Bill S. · Answer

@Barak Hamdani without being too crass. Your question is a bit like, what car should I buy?  I will answer your questions for myself but that means nothing for you and there are probably a millions others who would have a million other takes on your questions.

1) Yes, for the right deal

2) yes and I would put some of your capital into marketing for off market properties

3) I would go for  value add off-market properties with more than 4 units and would try and get some form of owner carry with your down payment. If I found a good deal (would pay for itself with rental income at a debt service coverage ratio of at least 1.25 and I would donate my self management to the property) that was not owner carry I would buy that. I would focus on quality of area vs returns (cash flow).

Now if you can't or don't want to market then this wouldn't work for your. If you can't or don't want to self manage it wouldn't work for you. If you want cashflow, it wouldn't work for you.

Logan Freeman · Answer

@Barak Hamdani I would start with the end in mind: how involved do you want to be, what risk level are you looking for? Do you wants to personally guarantee 1.25MM in debt? There are so many questions to start with that will help guide your decision

Matt M. · Answer

You can find what you are looking for here in Denver, but it will be at a premium. Each deal will be different, and you just have to run the numbers. I see maybe 4 on the market right now.

Before you go too far down this path, have you both figured out the loan situation?

Chris Lopez · Answer

@Barak Hamdani I started responding to this thread the other day, but realized we have a phone call scheduled on Wednesday. I'm waiting until then to give you my two cents. I can talk way faster than I type. Plus, there are a lot of details to figure out... much easier to ask questions in real time.

Barak Hamdani · Answer

Thank you @Joe Massey

I just started watching your videos on Chris Lopez's website about a week ago, so thank you very much for that as well!

Joe Massey · Answer

Barak,

Multifamily investment properties still make sense in the Denver Metro area.  Denver isn’t seeing the jump in median home prices that took place from 2011 to 2013.  This would show that there is opportunity in the Denver market.  There are many possibilities for you two at the price point mentioned above. @Chris Lopez has many years of experience in the Denver area as a Real-estate Agent and he is the perfect person to help you two find the perfect property that suits the both of you!

Steve K. · Answer

@Barak Hamdani

Some great advice coming from @Bill S. and @Matt M. here. I like the Denver market long term and you definitely have a budget that can get you in although with $400k to invest I would think your max purchase price should be closer to $1.4M based on my experience. Keep in mind you will likely want to have some left over for cap-ex/deferred maintenance/ rehab type expenses but that will depend on a lot of factors so as Matt M. said, your first call should be to some lenders.

With $400k your options will range from an 8-24 unit "value-ad" in a "transitioning" area (higher cap rate, higher risk, more active management, more broken bottles and needles in the parking lot, gang bangers, etc.), to a 3-5 unit in a nicer area (lower cap rate, better tenants, less risk). I would lean towards the latter personally and if you don't mind being a little more hands-on you could probably find the best return from something like a fixer-upper in Baker, Barnum West, maybe even Wash Park West or similar area. I like the close-in neighborhoods that were run down during the 80's-90's into the early 2000's but are now becoming nice. I know other investors that really like the north side of Aurora and East Colfax/West Colfax (Lakewood) zones. In general it seems like the grungy pockets surrounded by fancy developments have the most upside potential, and there are many such areas in Denver.

Much easier to base your strategy around the property once you find it rather than setting unrealistic criteria that nets 0 search results or wasting your time on hypotheticals in my experience. There aren't that many properties to choose from so just learn the neighborhoods, get familiar with developments (such as the $20M being invested in East Colfax, infill projects breaking ground in neighborhoods surrounding RiNo, Sloan Lake, Golden Triangle etc.), and look at a bunch of properties until you find one that meets more of your criteria than the others.

5 years is a bit of a gamble; if your timeframe was closer to 10 I'd feel more comfortable but that's going to be the case no matter where you choose to invest IMO.

Barak Hamdani · Answer

@Bill S.

Thank you Bill. You are probably right, my questions  were to general. On the other hand, your comments are helping me refine it and focus on the right things, so it's very helpful in any case...

to your comments (and some follow up questions):

1. We are looking at rentals, with positive cash flow (willing to live with no cash flow, but not with a negative one).

2. You've mentioned 4 units - so this was our thought as well. To go for one or two multifamily properties rather than a few smaller ones. Do you think it's the right strategy? for Denver?

3. Knowing the situation in the market currently, we are not sure that COC is the the right KPI, maybe cap rate?

4. Can you explain what owner carry means? not familiar with this term...

5. You've mentioned quality of area. In your view, which areas are attractive? I live quite close to the Wash Park area, lots of old bungalows turn into townhomes or triplexes. Would you go for one of these renovated properties?

Thanks a lot.

Barak Hamdani · Answer

@Michael Glist

thank you.

We are looking at rental properties, not F&F.

We think that with the cash we have a multifamily would be a better investment than a few apartments or houses, actually this is one of the questions we have. Would you go for one (more expensive) multifamily, rather than a few separate smaller properties?

Also - why do you think Colorado  is the right market? could you share your thoughts?

Investing in Denver? or out of state? How to invest $400K?

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