In this episode of Ask an Investor, Kevin Main talks to Chris and Jenny about how to take his investment strategy to the next level. Kevin has previously been on an episode of House Hack Master Minds. Now that he’s closed on his second house hack, he wants to know how to scale up and where to find the best deal on a pure investment property.
- Listen to the podcast “#324: From Denver House Hacker to Future Pueblo Investor” on the Denver Real Estate Investing Podcast
- Watch the YouTube video (at the bottom).
- Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast or video.
How can I build my portfolio quickly?
Kevin would like to purchase at least one investment property a year. If they start to snowball, he’d like to purchase two or three per year for the next five or six years. He feels that he’s at a fork in the road—he’d like to figure out if he should do more or pump the breaks and focus on his house hacking.
Chris says: I transitioned to real estate both as a business professional and an investor. My first plan was to do flips and generate cash to invest. I did a flip, made about $25K, and realized I didn’t enjoy it. At the end of the day, where I get my cash to invest is less important than the fact that I have cash to invest.
Consider looking at other ways to use your skillset or get into a profession within real estate. If you’re in the industry and you have cashflow, you’re in it.
How many of your clients invest in real estate on the side as opposed to full time?
Chris says: Lots of clients have jobs, businesses, and busy lives. They just want to invest capital in real estate as a medium-term value add to their portfolios. There is a lot of potential to get their capital working for them by focusing on our current market of high appreciation and smaller value add opportunities.
Jenny says: In the Springs, we don’t have a lot of house hackers like you, even though there’s a good opportunity for it down here. A lot of our clients are out of state or Denver-based investors who want to diversify their investments. We have some clients who want to make the move to be involved in real estate full time, whether as landlords or being more active in deals.
How can I take advantage of what the market is doing now?
Chris says: Look at what is working in the market and find a way to tap into it. I think about flips and BRRRRs as a full renovation of a house that’s in really rough shape, but there are a lot of other ways to add value to properties. Consider how you can add value to different types of properties that aren’t the most rundown ones you can find. Add a wet bar to a basement or create an extra bedroom.
Adjust your strategy as needed, too. Implement medium- and short-term rentals into your current properties to increase your cashflow. Use that extra cash to buy more properties. Find ways to optimize since you’re in that intermediate stage of investing.
Jenny says: Two key options are to re-leverage and buy something new, or sell it and buy something new and better. Having a little bit of patience and letting the market do its thing can be powerful. I have several properties that I BRRRR-ed years ago and thought I was done with the financing piece. But now I’m rethinking it because I have the opportunity to get cash to reinvest while interest rates are low. It’s amazing how fast it compounds.
How much of a risk is there in short-term rentals?
Chris says: There’s a pretty low risk. There’s the primary residence rule for Denver, so you should either go outside Denver or look at medium term rentals there. Other nearby counties, such as Arvada and Wheat Ridge, have favorable rules for short-term rentals. Just make sure you have a backup plan if things start to change. I’d rather make that play and take the risk than try to find an off-market BRRRR property.
Jenny says: Always make sure you can pivot as the market throws things at you.
What do I need to know about hard money lending?
Chris says: To understand the basics, you can Google, read some articles, and take some courses. Learn the basic terminology; talk to a bunch of different lenders. Hard money lenders have different terms and a lot more flexibility than lenders who work with conventional products.
Looking at deals without the financing in place is a waste of time. If you see a good deal but don’t have financing, you won’t be able to move on it in time. Spend almost no time looking at deals until you have financing set.
Jenny says: I used hard money lenders for the most part when I started investing, and then I used conventional financing after that. I see hard money lenders as somewhat of a safety net because they’re not going to lend to you if they think the deal is junk. They’ll tell you no if they think they aren’t going to get all their money back.
When I started with BRRRRs, I made the fatal error of not getting take out financing figured out at the same time I took out hard money loans. That ended up keeping my cash stuck in the deal, so make sure you have everything in place ahead of time.
How can I gain relevant knowledge and experience to do a successful BRRRR or flip outside of books and podcasts?
Chris says: Keep in mind that there’s a big difference to go from house hacking to flipping. House hacking is essentially just investing, whereas flipping is a self-employed job that you should approach as a business.
Go out and find a mentor, work for someone, or become a partner. If you can add value, either through a paid or unpaid position, people will want to share their knowledge with you. Focus on how you can help that person and not just what information you can get from them. That creates a win-win situation for you both.
Jenny says: If I were new in this space, I would do what Chris suggests. As you start to prove yourself, you can link up with more experienced investors.
What does the Denver market allow for in terms of BRRRRs?
Kevin is interested in rehabbing a property, though his main interest is in BRRRRs because he wants to buy and hold the properties for a long time. Ideally, he’d like to get a good deal on a property and watch it appreciate.
Chris says: It’s difficult because it’s a seller’s market right now, but it’s still feasible. BRRRRs are harder to find than flips, and I’m not actively doing BRRRRs at the moment because of how competitive it is. It comes down to understanding the market and determining how much time you want to spend.
Jenny says: First and foremost, it’s really hard to budget for rehabs this year. I generally prefer the BRRRR strategy because it’s more forgiving if you make mistakes since you’re holding it for a period of time.
However, I agree with Chris that the current market is not conducive to BRRRRs unless you’re pounding the pavement every day to find a property. A key component of a BRRRR is being able to buy in at a lower acquisition cost, which is hard to find these days.
What are the margins on flips in Denver?
Chris says: The margins on flips are getting more and more compressed. It’s a supply and demand issue. At the same time, though, the strength of the market can save you from a lot of self-inflicted issues and act as a buffer.
Jenny says: I’ve assessed the risks of doing BRRRRs and flips right now as higher than when I started doing them. There’s a bigger potential for pitfalls. The market is growing at a fast enough rate that it’s bailing us out of our mistakes. It’s going to plateau at some point, though. Depending on when that happens, it might not bail you out of a mistake you’re making with a flip.
Should I look into investing in Pueblo?
With Denver being so expensive and the fast-paced growth of the Springs, Kevin wonders how far he should look to find a lower price point. He has about $30-40K in capital he can use.
Chris says: Look at Pueblo for the lower price points. Get your capital working for you now because the sooner your money is in the market the better. Buy a place and ride the wave—Denver, the Springs, and Pueblo will all allow it.
Jenny says: Properties in Pueblo have a lower price point and it’s easier to find deals on the MLS down there. Keep in mind that the lower price point doesn’t necessarily reduce your risk. But, if you’re just learning how to BRRRR, you have less to lose at a lower price point.
Should I be concerned about investing out of town?
Jenny says: I started investing in the Springs after I moved to Parker, which is about an hour away. I like being close enough to drive to my properties if there’s an emergency. In the grand scheme of things, a few hours’ drive may be a lot of time, but it allows you have eyes on your property. I think that’s more valuable.
I’ve invested out of state before and didn’t have a good experience. My properties weren’t being managed the way I wanted, and the profits weren’t as good as they looked on paper. Even though Colorado is more expensive than where I was investing, the economy is strong enough to put me at ease.
Formulating a Plan
After discussing all of his options, Kevin has an action plan for the next 90 days. First, he’s going to talk to some hard money lenders to get a full understanding of his financing options and costs. Then, he’s going to look at some deals out of the Denver area that have the potential for a medium-term strategy. He’s going see if he can make the numbers work on a property that can use some work but doesn’t require a full rehab.
His goal for next September is to own one true investment property that he’s never lived in before.
Connect with Kevin
If you would like to talk to Kevin about flips and BRRRRs, especially if you’ve done one before, Kevin would love to sit down with you. He’s happy to buy a coffee for anyone who is willing to share their time and knowledge. The best way to reach out to him is via email: [email protected].
Connect with Us
If you want help forming your investment strategy, reach out to us. We can help you figure out the right kind of property and location that will work for you.