House hacking scenario in west Denver neighborhood

[David Chen]

First time homebuyer and new to the real estate investing world. Thanks for all your advice in advance!

I am a newly graduated dentist looking to house hack in the area just west of Denver proper. I am currently looking at a property in Lakewood, close to Edgewater, with a purchase price of $432k. The property is a 3 bed, 2.5 bath townhome "row house" in a newly built complex. The immediate neighborhood leaves something to be desired at the moment (think liquor stores, pawn shops, industrial businesses) but surrounding neighborhoods (West Colfax, Edgewater) have seen significant growth in the last few years, and the property is near a light rail station and is a 15 minute drive from downtown Denver. I am considering jumping into a house hacking situation here.

I will only be able to afford a down payment of about 3% at the moment, and am looking at a loan package with an interest rate of about 5%. According to some estimates I have done with my real estate agent, my monthly mortgage along with other expenses (taxes and insurance) will come to about $3000 per month. I am planning on renting to a family member at a slight discount as well as another roommate. Based on similar listings in the area, I would conservatively estimate that I could rent my other two rooms for a total of $1600-$1800, leaving myself with a monthly expense of $1200-1400 per month. My short term goal is to move out of my parents' basement while paying a mortgage (after rental income) that comes out to what I would pay for a comparable rental situation. My long term goal is to build a portfolio of buy-and-hold rental properties that will hopefully segue into a comfortable and hopefully early retirement.

My concern is that this property, as the numbers stand now, will not be able to generate a monthly cash flow (even if I factor myself in as a renter). It seems like most (non-distressed) properties in the greater Denver area are in this same boat. It just seems all the "Rules of Thumb" i.e. 50% rule or 1% rule found in the Bigger Pockets books are nearly impossible to find in a market like Denver. I will not be able to dedicate a significant amount of time or financial resources toward rehabbing a property due to my job. Although it is generally advised against, I will be hoping for appreciation to make this a better long term investment.

In a situation like mine, would you consider this a viable investment for my long term goals? Would it be more prudent for me to save up more capital for a rehab or look harder for a better deal? Is it ever ok to consider a negative cash flow situation by betting on above average appreciation? THANK YOU!

[Scott Hibbert]

@David Chen As someone who is also looking to purchase a single family house hack in West Denver, I'll give you my perspective.

First of all.  The 50% and 1% rules of thumb are no longer relevant in Denver in my opinion.  I'm guessing they were accurate in 2013-14 but price appreciation and minimum rent appreciation has changed everything.

I currently rent a room in Wheat Ridge for $900/month plus utilities. Do you currently pay rent? The reason I ask is because I think if you can buy a property and reduce your effective "rent". Then the property might make sense. For example if I buy a 3 bedroom 3 bathroom house and rent out 2 rooms for $900 each plus utilities and my mortgage (PITI) is $2600. Then my effective rent is $700 a month which is cheaper than my rent. It gets more complicated when you include the value of your downpayment, closing costs, any unforeseen repairs, vacancies, etc. but it is something I look at for a quick analysis.

About the specific location.  I agree it is still turning over but I have a positive long term outlook.  I'm sure your real estate agent knows more about this than I do, but one of my concerns in that area is there is so much construction of very similar properties that your potential tenants/roommates will have plenty to choose from over the next 2 years as more buildings are completed closer to sloan's lake and the amenities that surround it.  Will that reduce your potential rents and not increase them over the next couple years?

I agree with @James Carlson about finding less expensive options a little further out if that is something you would consider.  It's definitely a trade-off that I battle with every time I see a potential property pop up.  I want to live with close proximity to my job and going out with friends and am willing to pay more for it.

If you only have a 3% downpayment, will you be able to cover vacancies and repairs(still happen with brand new buildings).  Assuming the negative cash flow, how will you build your reserves month over month and your next downpayment for your next property.

I personal won't buy a property that will be cash flow negative when I no longer live there. I don't bank on appreciation, especially with all talk about a recession at some point in the future. It's a nice to have but if you are long term buy and hold, appreciation won't help until it removes PMI which will be years.

Best of luck in your search and maybe I'll see you at a meetup.