First Rental Property Opportunity

9 Replies

Hello everyone!

I’m new to BP but excited to be a part of the community. My wife and I have been kicking around the idea of getting into real estate investing for the last year or so. We have been considering flips but we were recently presented with a potential opportunity to purchase our neighbor’s home with the hopes of renting it out. I would love some input and feedback on the opportunity. Thank you in advance for all of your insight!

We are located just south of Denver in Highlands Ranch. Our neighbor is selling their home in a new community in the homes are barely a year old. We would like to present a cash offer using a family member as the capital for the purchase. The problem is we are unsure of what we could get for rent in this particular neighborhood. We are right next to two different hospitals and we are in the middle of the Highlands Ranch master plan community that is fully developed at this point. Location is fantastic, however, comparable rents that we see in the area would not cover the mortgage and monthly expenses.

Obviously this sounds like a bad deal, however, being new to the real estate investing game I found a service online through Nomad that is offering guaranteed rent for two years of $3000 a month which would make this a deal that we would be willing to take. It is a single-family home and we are just uncertain of how services like Nomad work and whether or not there is a catch to be aware of. Any insight on services like this would be greatly appreciated.

As a secondary option, if rental is not a viable investment choice here, we have considered a cash offer to the seller with a month or two hold period and in the Denver market we could see a meaningful appreciation going into spring and summer. If we could get a cash offer excepted at a discount, would this be a good strategy to dip our toe in the water with real estate investing?

This is all happening very fast but we feel it is a great opportunity and don’t want to miss out because of fear or uncertainty.

Thank you all for the advice!

@Cole Leonida you should absolutely pursue this. If you can buy a desirable property below the fair market value then you should always consider. How much is the property worth and what are they willing to sell at? No idea what Nomad is but how can you maximize rents? Student rentals by the room? Corporate furnished housing? Short term rental? Think creatively. If the property is in great shape and in a desirable area you are very likely to see appreciation over time. The key is figuring out how to cash flow so you reap the benefit of long term ownership.

@Brian G. thank you for the input! The property is worth $610k right now but we could likely get it for $580 or $590. Not much of a discount but properties have appreciated about 10% in the last year. Obviously that is not a realistic ongoing expectation but we believe going into spring value should pop again if we want to turn around and sell for a decent profit.

As for rentals, we believe furnished corporate rentals might be a great fit with the hospitals nearby. I am not sure where to look for help with placing tenants or corporate rentals. Any advice would be fantastic!

Thank you!

@Cole Leonida I’m not sure what nomad is but if $3000 per month is your best case rental scenario, just run your worst case too to make sure you are OK with it. If you can live with the worst case, maybe it makes sense to pursue.

Regarding the flip strategy, I wouldn’t recommend buying a house expecting it to appreciate so you can turn around in spring to sell. The market is hot right now, but that is how a lot of investors lost their shirt in the last real estate crash. People buying houses to sit on them and sell later...only for values to dip and be underwater on their loans.

@Cole Leonida Do you know why they're moving? In addition to having the opportunity to buy off-market at a reduced price, you also have an opportunity to gain some additional insight.

If you can get the home under contract for an under-market rate and the rental numbers work out, it sounds like a solid play. As you mentioned, in SFH's we've seen a 6.7% price increase in just the last month and ~20% in the last year in the Denver metro area. Denver is definitely an appreciation market, so anytime the rents cover the mortgage, I tend to think it's a good deal. Of course, there is always the possibility that this investment will appreciate and never cash flow, so just be prepared for that possibility. And, with appreciation, you don't realize that return until you sell. Especially if it's a new build, there likely won't be many avenues to add value and push rents higher. I like to use rentometer as a way to gauge market rents.

It could be a good move. Just consider your exit strategy and the use of capital that you'll be tying up in the home. You may be able to use a HELOC down the road, but that's down the road. @Matt Leber makes a great point about the dangers of trying to time the market. Even now, I am seeing listings that were overbought less than 2 years ago and are back on the market now. When you sell, you'll need to take into account 7% costs of realtor commissions and closing costs. I prefer the long-play or value-add that emphasizes time in the market; there's a significant more risk trying to time the market.

@Cole Leonida google Furnished Finder for corporate rentals. Keep in mind it’s expensive to sell a property, ie approx 8% of the purchase price. You need to be able to cash flow imo to purchase. If you can figure out how to do that then I would proceed. Can you house hack it? ie buy it and live in the property while renting out several rooms to room mates and/or on Airbnb? You need to know what strategy will bring the most revenue. Once you know the answer to that then you will know if/how you can buy the property and operate it profitably. Good luck!

@Cole Leonida We are looking to move to Highlands Ranch/Littleton area and there is not a lot of rental inventory available, so demand should be high for available properties. The $3k rental price seems like a good deal (for you as it is a bit high), although it depends on the size of the home. I am a newbie to investing as well so please do not take my advice but I do know we are having an issue locating a property we like and would be willing to pay more to get something which could bode well for a newer home in a great area like Highlands Ranch.

@Brian G. we cannot house hack and can't list on AirBnb (HOA rules). It seems like the best bet would be corporate rentals or long term rentals. As we dive further into this, it seems like an unlikely fit because the numbers are just too tight. I'm not sure how people purchase properties for rentals in a market like Denver if they have any financing involved. Rent rates are just not high enough to cover the expenses associated with properties that have appreciated this much.

.

@Chris Freeburg you’re absolutely right, timing the market is risky business and that’s not our primary strategy. We would love to be able to get a discount but in talking to them a little more, it sounds like the wife is excited about the impending bidding war to drive the price up.

Is there any strategy to add value on an off market deal? I know it would save them the hassle of staging and cleaning and getting out the house for showing, but is there any way I can communicate and provide actual financial value with them selling to us off market instead of listing?

@Cole Leonida People sell off-market for various reasons: a relationship built over time, sellers trust the buyer will close (that actually means something, especially in this market where buyers are bidding beyond their means and can't get make the financing work), sellers have specific needs like moving, or problems they need solved immediately, etc.

What can you do to add value?: the biggest thing is whatever built that relationship in the first place. They know you, they like you, they trust you. The things you mention to make the transaction easier for them certainly help. Money certainly smooths over a lot of problems, but it's not everything that people are looking for. How do you find out what they are looking for and communicate this? This is a skill great realtors have: ask the right open-ended questions to find out what they're looking for.

At the same time, continue to be honest and up front with them. Know your terms: Will you have an inspection contingency or buy as-is? I never advise no inspection, but if it's new build, there may not be many issues, so you could have just an inspection termination deadline: You can terminate if there is a red flag, but they won't do additional repairs. (I often frame inspections as delayed maintenance.)

You may not get a "discount," but a fair market price in this fast-appreciating market may actually be less than the house would sell for if it were to go to market. Prices increase quickly in bidding wars.

You mention rent rates: have you looked at the market for mid-term rates (1-6 months), i.e. travel nurses, etc.? We're seeing an influx of remote workers who want to live in a cool place like Colorado and now have the work freedom to do so.