Tips for Starters that Haven’t Started

[Casey Helmick]

I want to educate myself before I invest.  There are an overwhelming number of avenues to do so, but deciphering which information to trust and implement has me baffled.  Advice from those with personal experience is always welcome, and in this instance, humbly requested.  Please note demographic influences, if applicable. Thank you!

[Steve K.]

I've been investing in the Denver market for a while and have had success with value add small multifamily. You can see more about my deals in my profile. From reading your comments, it sounds like you're young and still renting? If that's the case, for someone like you I'd recommend starting with a primary residence in an up and coming neighborhood, making improvements to add value, and living with housemates/a significant other to offset your mortgage payments. Sort of a "live in flip" combined with a "house hack", perhaps even combined with a "BRRRR" if you refinance out your down payment funds in a few years, to borrow the parlance of BP.

Here are some of the strategies that I see people executing successfully here in CO:

--Starting off with a condo. They are less expensive and thereby easier to find one that has positive cash flow due to the lower price point than a single family home. With condos it's important to verify that the association allows rentals and that the association is managed well and has reserves for Capex such as roofs and driveways, (in order to avoid getting hit with a big special assessment unexpectedly). Condos generally appreciate slower than other property types, and are the first sector to lose value in a downturn, but they offer the lowest barrier to entry and in Denver its easier to find a condo that cashflows as a rental than it is a single family home.

--House hacking/ renting by the room. It's more management intensive but you can get a lot more in rent by renting the rooms of a home out individually. People are making this work in this market. Covid-19 has probably made this strategy a little more challenging due to people being less inclined to live with a bunch of roommates right now, and occupancy limits for non-related residents is also something to consider with this strategy, but it can be a great way to maximize rent in a single family home that otherwise wouldn't provide much (or any) cash flow.

--Buying a fixer, fixing it, and renting it. Sort of like a fix and flip but holding it instead of flipping. This is an active strategy but I like it because you build in initial equity, and you can create positive cashflow (assuming you get enough of a discount on the property due to its condition). It can be harder to find financing on truly distressed properties, so many people use cash or hard money lenders to get started and then refinance into a conventional loan to access their equity when the project is completed (known as the BRRRR method, Buy, Rehab, Rent, Refinance, Repeat).

--Investing out of the metro area. I have friends and clients who are building their portfolios in areas about 45min to 1hr. outside the city, where prices are much lower and price to rent ratios are more favorable for rental properties. Some examples include Frederick, Firestone, Johnstown, Longmont, Loveland, or even areas closer to the metro that are less expensive but rapidly improving like Aurora (especially north Aurora), Cole, Barnum, East and West Colfax, Commerce City, etc. There are still pockets of affordable areas all over the city that are on the upswing.

--Long distance investing. I know several people here who have gone this direction. I also know several who got burned pretty badly so be careful. It can definitely be done but comes with additional challenges and risks over investing locally. If you consider this avenue, I would recommend looking at places where you have someone on the ground you can trust 110%.

--If you can afford to go straight into multifamily, the economies of scale in this category make it much easier to generate initial cash flow. However MF properties are hard to find and have a high barrier to entry (25% down on a ~$500k+ purchase is basically where MF properties start, and a $1M purchase price budget opens up a lot more options).

It all boils down to what your personal situation and goals are. Most people are looking for at least some initial cash flow and many are priced out of multifamily so they start with one of the other above strategies. Other people are just looking to park some money and are okay without much initial cashflow, so they might go for a small multifamily with a low cap rate, in a low risk sub-market, and bank on getting their return from rent increases over time, appreciation, principle pay-down and depreciation tax benefits.

Flipping I'd say is a risky strategy to get into as a beginner at this point in the market cycle especially considering the current economic uncertainty, but on the other hand demand is also super high and inventory super low, which supports being able to sell a flip fast, so maybe it is a good time to flip. I know a few people who are having continued success flipping so it can certainly be done. If you do go for a flip here, keep timing in mind as our market is very seasonal. Flippers usually buy in November/December when sellers are most motivated, fix the property in the winter when contractors are slow and available, and list in the spring when our "selling season" begins and buyers are most active. 

For me the strategy that makes the most sense is small multifamily, in areas that are improving, and I like to buy somewhat distressed properties where I can make improvements, increase rents over time, and add value.

It helps to consider what your personal strengths are and play to your strengths. For example if you are handy and know construction/have contacts in that realm, that opens a lot of doors for you in terms of the condition of the property you're comfortable with taking on. If you have connections here and are able to source off market deals through your personal network of friends and family, that could be a huge competitive advantage as finding deals may be the biggest challenge here. Maybe you're good at managing and the best strategy for you is finding a poorly managed property and turning it around. Consider what you can bring to the table and go with a strategy that fits you personally.

Good luck and let me know if I can help further. 

Steve