Denver, CO · Member since 2015 · 31 posts · 0 votes
Hello BP!
I am currently running some numbers for my first deal, a house hack, in Denver, Colorado. I've found some great duplexes is areas that I want to live in as a young professional. The problem that I am running into is that with 3.5% down payment, I'm getting a great deal while living there but after I move out in a year or two, I could be dealing with negative cash flow.
With some forced appreciation and a 20-25% down payment, this property would definitely meet my investing goals but this is my first home and I want to take advantage of the low down payment mortgage options.
Any thoughts or input is much appreciated!
Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
10y
@Mitch Ottoson I'm a little confused about your statement that it's a great deal while you are living there but not so when you move out. Would you mind sharing some numbers?
That statement seems backwards unless while living there you are planning on "paying" more than market rent.
Ideally your analysis would have you paying rent to yourself and so when you move out and someone really pays rent then nothing changes.
I realize Denver is a mad house right now but there are deals out there... The belief that the market is to hot to find any good deals is a limiting one. Keep looking and you will find one that will be cash flow positive after you move out.
Aurora, CO · Member since 2012 · 2k+ posts · 1k+ votes
10y
So much of that depends on where it is and what's happening in that neighborhood, and the type of property (is it a zoned duplex or a "mother in law unit" - that sort of thing). If you are looking at areas that are currently trendy, it's going to be tougher, for sure. The low downpayment is an important consideration but depending on your financial situation might not be the most important one. The mortgage insurance can be a real killer of an extra expense on those, too - make sure you've talked with your possible lenders about that so you can factor it into your calculations.
I agree that analyzing at a LOT of properties that are not such great deals will help you to be confident that you recognize that good opportunity when you find it!
Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
10y
@Mitch Ottoson I'm a little confused about your statement that it's a great deal while you are living there but not so when you move out. Would you mind sharing some numbers?
That statement seems backwards unless while living there you are planning on "paying" more than market rent.
Ideally your analysis would have you paying rent to yourself and so when you move out and someone really pays rent then nothing changes.
Denver, CO · Member since 2015 · 31 posts · 0 votes
10y
Sorry in advance for the long post, want to make sure to take the time to write everyone back.
@Joshua D. like that 100:10:1 rule of thumb, I've never heard that before. Denver is a hot market and on top of that, I am being picky in choosing an area that I want to live based on crime rate, good school, and the opportunity for forced appreciation. It looks like the search will have to continue!
@Jean Bolger the home is zoned to be a legal duplex and the area is definitely a trendy one! It seems as though the up in coming neighborhoods are in north west Denver which is tough for me because I work in Lone Tree so I was very excited to find something south of downtown. The location is great but the cash flow is more important!
@Bill S. I would be happy to share some numbers and elaborate. My fiancé I and I are first time home buyers who have been pre approved for $350k. The duplex is listed for 450k so when I say it's a great deal, that is compared to SFHs in the area that are listed for anywhere from 275-315k for the same square footage. The mortgage on the duplex (based on the Zillow estimate) would be $2k with market rents of 1200 per unit (each is 1bed/1ba). The rent would cover the mortgage but using the 50% rule of estimating expenses, the property would cash flow a negative 300-400 a month after moving out. Granted, that is included PM expenses on a building that I plan to self manage while that is reasonable.
Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
10y
@Mitch Ottoson it is very unlikely you will get a property listed at $450K for $350K especially when you have to get a loan on the property. Perhaps the fact that it's a duplex and has income will allow you to push your price point. It's not clear to me from what you have said.
Now to your financial analysis. If the property negative cash flows after moving out, it does the same when you are living there. In your example you are really paying rent of $1,200 per month plus the negative cashflow since you will have to dig into your pockets for the needed funds whether you are living there or not. So really your "rent" is $1,600 per month which is about the same as what your payment would be if you purchased a regular SFH in the price point you mentioned. The advantage of the duplex is the higher leverage amount and greater potential for increased value. Of course that knife cuts both ways. If prices go down, you are further in the hole and duplexes sell harder.
BTW it blows my mind that people are paying $450,000 for $2,400 per month in rent. I know the market but it is really really hard to even break even with those numbers. You are completely gambling on appreciation and rent growth. I'm a big fan of Denver RE but those numbers really make me cringe. In your shoes I would take a hard look at a house hack or a different neighborhood.
Denver, CO · Member since 2015 · 31 posts · 0 votes
10y
@Andy Robison the PMI was around $175/month but I heard in a podcast how that can be avoided by paying them upfront (possibly with seller credits if negotiated correctly)
@Bill S. I appreciate you taking the time to look at my numbers, this thread has really helped me to confirm my initial gut reaction to plugging these numbers into the BP calculator. After reading the post on using the rental property calculator, the recommendation was to not give up on a property but to find out what my price would be to make the deal work. When entering the numbers, the result was that the GRM was 13.33. In your experience, does this sound reasonable for a duplex in the Speer neighborhood?
Aurora, CO · Member since 2012 · 2k+ posts · 1k+ votes
10y
450k for a place that will gross $2400 is really unlikely to work out for you as a future cash flow proposition, IMO.
This is the problem that comes up so often with house hacking in Denver. You may have to weigh the desire for future financial security against your more immediate interest in living somewhere fun and/or trendy. If you really want the financial advantage, look towards areas that are more transitional and put on your patience cap.
A lot can happen in 5-10 years. When I bought my first owner occupied duplex I had to make a lot of compromises. First, I was told "No one lives on the west side unless they have to", and also: "Highlands is OK, but just don't buy on the east side of Federal" but that was where I could afford.
Nobody has a crystal ball, but try to look ahead if possible
Realtor · Denver, CO · Member since 2013 · 2k+ posts · 1k+ votes
10y
Originally posted by :
the PMI was around $175/month but I heard in a podcast how that can be avoided by paying them upfront (possibly with seller credits if negotiated correctly)
The lender can pay your PMI through the interest rate, but then you are just financing it. It can be done as I just got $3k back for my clients, but don't expect seller's to offer concessions on a good property. The market is already heating up here....in January...
Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
10y
@Mitch Ottoson not to pick on you. You used the term GRM which I took to mean Gross Rent Multiplier. My understanding is that it is calculated by the purchase price divided by gross rents. In your example $450,000/$2,400=187.5. Not sure if 13.33 is a typo or if I'm using a different parameter.
Denver, CO · Member since 2015 · 31 posts · 0 votes
10y
@Jean Bolger I really appreciate your insight on the Denver market. It is very possible that a house hack is not the best strategy for what I am looking for. Given the market, it could make more sense to use the BRRRR (buy, rehab, rent, refi, repeat) strategy. As first time home buyers, my fiancé and I want a home for ourselves as well as an investment for the future in the same property.
@Matt M. Thank you for the additional context on financing the PMI. It was a concept that I heard in passing that I'd like to learn more about.
@Bill S.You have been incredibly helpful and would not misinterpret your help as being picked on :) my understanding of GRM is the rents are annualized so based on the current rents, 2,400x12x13.33= 383,904. There is definitely some room for forced appreciation in the home so if I could get 1,400 per unit, the list price makes more sense (2,800x12x13.33= 447,888). 1200 seemed to be low with 1400 as more of the average but I would rather invest on what is currently happening than what could be.
Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
10y
@Mitch Ottoson ok after some research some annual rents for GRM and some use monthly. It's not really something people use to evaluate a property until you get to something 5 units or more. Financing changes at that point.
Realtor · Denver, CO · Member since 2013 · 2k+ posts · 1k+ votes
10y
@Mitch Ottoson You also might consider going the route my wife and I did. We bought a HUD home during the "owner occupant" timeframe. So we had an advantage over other investors. Our idea was to move in, fix it up, and sell it in 2 years to avoid cap gains tax(we were moving from another home where we had $50k+ in gains). I guess you would call it a slow flip.
Although we decided to stay, our home has increased in value over $125k in 2 years. We did just get a heloc up to 90%, which will help us with flips, etc. I will admit that we rode the wave of appreciation in Denver, but I have spent time improving and updating the home as well to increase the value.
Our original goal was to keep doing this every 2 years until we could buy a home outright, but my wife fell in love with this home, so we are here. For my situation, this route was more agreeable to my wife than renting by the room, etc. We went down that road, and it was something we personally prefer not to do.
Although foreclosures, etc have declined dramatically, you can still find stuff from time to time on hudhomestore.com, homepath.com, & homesteps.com. They all offer a buyer only period. If you want help or have questions, feel free to reach out.
Investor · Denver, CO · Member since 2015 · 61 posts · 23 votes
10y
@Bill S. with a 450K purchase price, what monthly rent would you expect if you were to feel comfortable paying that much? Just curious about your opinion
@Jean Bolger why is east of federal a bad area in the highlands? Was that in the past or would you still call it true today?
Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
10y
@George Wines IMO it needs to at least be close to the 1% rule (sum of the monthly rents is around 1% of the purchase price. For this example the rents either needs to be $4,500 per month or the purchase price $240,000 or some combination there of. I know it's a tall order but it can happen. For the right property (low operating costs-separate utilities private yards and washers and dryers for each unit) in the right area (near the urban core) I might go purchase price of $400,000 for $3,500 rents. I'm a bit spoiled as I don't shop with the rest of the folks on the MLS.
@Bill S. with a 450K purchase price, what monthly rent would you expect if you were to feel comfortable paying that much? Just curious about your opinion
@Jean Bolger why is east of federal a bad area in the highlands? Was that in the past or would you still call it true today?
George, I was referring to quite a while ago and was just using that to point out that fashionable areas change. If you can predict (guess??) the path of fashion you can do very well on investments. Right now that area is one of the priciest in the city. But it was downright scary at one point
Investor · Denver, CO · Member since 2015 · 61 posts · 23 votes
10y
@Jean Bolger Thank you for the response. I am looking at a 3plex in that area and saw Trulia's reported crime map that there is still a pocket of red on the blocks surrounding Federal from 26th to 27th and that was making me feel wary of the area despite driving around and thinking it looked okay.