Reaching $10K in NOI through 10 Years of Investing
Having a goal when investing in real estate is vital. It’s hard to create an investment strategy without a goal to work toward, and for many of our clients, reaching $10K a month in net operating income (NOI) is their main goal. We’re not sure if it’s because they’ve heard that figure on the podcast or if it’s just a nice, round number, but it comes up frequently when we talk with our clients.

One of those clients, Travis Sperr, has been investing in real estate for 10 years and is now making $10K in NOI every month.  In addition to real estate investing, Travis is also a loan officer with Pine Financial Group.  Chris and I sat down with him to discuss how he’s grown his portfolio during his 10 years of investing.  He gave us some insights on how his goals shape his strategies and answered questions about how others can replicate his success. 

Three Learning Options!
  1. Listen to the podcast “#289: Reaching $10K in NOI through 10 Years of Investing” on the Denver Real Estate Investing Podcast
  2. Watch the YouTube video (at the bottom.)
  3. Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast or video.

From a Triplex to $10K 

Travis and his wife began investing in real estate in 2010 when they bought a triplex house hack in Aurora.  They used a HUD 203(k) loan to rehab the property and also put in about $30K of their own money toward improvements.  Travis did a lot of the work himself, having grown up around construction.  After living in one of the units for the requisite year, they bought and moved into another property closer to Boulder for his wife’s job.  At the time, it was easy to buy a HUD property off the MLS, and though the interest rate was in the 4’s, they were able to do a refinance and get it down to 3.625%.  They still own the property now, and it continues to cashflow well.  

Today, Travis and his wife own 13 properties with 15 doors in total.  They own the triplex and a mix of single family and townhomes throughout Denver and the metro area.  Their monthly cashflow is $10K, and their equity position is really strong, around $3M in total.  Even though the market has changed drastically over the past 10 years, Travis has been consistent in his home purchasing with no gaps of not acquiring new properties.  

When it comes to raising rents, Travis counts that as one of his weak points.  Over time, rents have risen dramatically in the Denver area, and many of his homes are under the market rate.  We generally recommend raising rents 3% every year with the expectation of a 2% increase in operating expenses.  For Travis, though, having long term tenants is more valuable than the expenses that come with turnovers, so he doesn’t generally push rents.  A handful of his houses have had the same tenant since day one with only minor increases.  However, these slight increases have strengthened his portfolio significantly and show that real estate investment benefits from having a long term plan.  

Is cap rate alone the best way to assess a property?

Looking at Travis’s portfolio, many of his properties have a cap rate in the 2-3% range.  Generally, when a home has a sub-4% cap rate, it makes the most sense to sell, refinance, or do a 1031 exchange on the property in order to replace it with one that has a higher cap rate.  Why is Travis still holding onto these properties? 

He says that he’s had conversations about this through the years, and when you plug the numbers into a spreadsheet, the answer will always be to sell and buy more properties.  However, what the spreadsheet says and what your gut says are different things.  Everyone has a certain level of debt they’re comfortable with, and that’s how he determines what to do with his properties.  He says that while on vacation one day, he started scribbling on a piece of paper what he and his wife would need to do to get to a point where they were passively making enough money to be comfortable.  As life has changed for them, their goals changed with it. Now, they’re targeting 20 properties by the time he’s 50, which is about 13 years away.  That goal would bring them $1K a day, or $30K a month.  

Using that goal as the main determinant in his strategy, Travis is comfortable with a lower cap rate.  He isn’t itching to sell the single family homes and trade up to an apartment building because single family homes are easier to liquidate and give him more flexibility.  While cap rate is a good way to measure returns, it isn’t the whole picture.  For his NOI goals, cashflow is the most important aspect, and selling a low cap rate property will increase the time it will take to get there.  A lot of real estate metrics these days don’t take cash flow into account, but as Travis says, “You can’t buy beer with equity; you can buy it with cashflow.”

For example, he purchased a home in the Montbello neighborhood for $95K and the loan balance is currently zero.  The home is being rented at $1650 a month, which is significantly under market.  He could sell the home or rehab it and push the rents to $2300, but he wants to keep his debt limited and ensure steady cashflow.  The best way to achieve this is by doing nothing.  This is why having clear goals is so important: figuring out the best way to reach them isn’t always going to follow the traditional advice.  

How do I decide to sell a “dog” property?

Most real estate investors have a “dog” property: a property that is a headache and doesn’t seem worth the effort it takes to own.  In today’s hot market, it seems like a good time to sell properties that aren’t working, but what’s the best way to determine if you should sell?  

Travis’s advice is to look at the numbers and take the emotion out of the decision.  Just because you’re getting the most phone calls for one property doesn’t necessarily mean it isn’t profitable.  Once you assess the numbers, weigh it against how much effort you’re putting into it, and then decide if it’s worth it to you.  Figure out how much it will cost to sell the property and what you would do with the money you would get from the sale.  It can be hard to find a good deal right now, so it’s important to determine ahead of time how your choices will get you closer to your goals. 

How do I decide which properties to pay off?

Travis recently paid off 2 properties in addition to buying 2 new ones.  While there are a lot of factors that can determine which properties to pay off, he was guided by his long term plans.  His wife currently owns her own business and they split their property ownership evenly.  She is considering selling her business, which would mean she wouldn’t have an income.  By paying off houses in her name, they are lowering her debt to income ratio, which will give her more flexibility if and when she sells the business.  By paying off a property, cashflow is increased immediately, which helps them with their overall goals.    

One rule of thumb is to pay off new debt vs old debt, but Travis says that doesn’t always hold true.  He thinks paying off the lowest loan balance or the highest interest rate is generally a better strategy, but it also depends on how much of the loan balance is left on the higher interest rate loan and what fees and taxes would be assessed.  There are a lot of different options for paying off loans, all involving a lot of math.  There isn’t necessarily a bad decision to be made, but there is a best one that is determined by your goals and where you are in your investment career.  

How can I use Airbnb to help achieve my goals?

This year, Travis purchased 2 properties that he set up as Airbnb’s.  He was skeptical at first about being an Airbnb host because it’s a lot more labor intensive than traditional long term rentals.  However, he learned more about how to set systems in place so it runs smoothly, and he and his wife are splitting the responsibilities.  While they are still new to Airbnb, the houses are consistently booked and are netting well over what they would have made as traditional rentals.

Even though they are getting so much cashflow from these houses, Travis isn’t counting on them for his long term retirement plans.  The regulations regarding Airbnb could always change, so he doesn’t want to rely on the income they generate.  He plans on squeezing as much money as he can out of them now, and then deciding what to do with them later.  

What’s the best way to utilize a 1031 exchange?

One way to defer capital gains taxes on a property is to use a 1031 exchange.  There are 2 types of 1031 exchanges: traditional or reverse.  In a traditional 1031, you sell a property first and then need to identify a replacement property within 45 days and close on it in 180 days.  In today’s tight market, meeting these deadlines can be stressful, so Travis prefers a reverse 1031.  The reverse 1031 exchange allows you to buy the replacement property first, and then sell the original property within 6 months.  

While reverse 1031s are much less stressful, it requires having the capital to buy a property without first selling the old one.  There are several different ways this can be achieved, including getting a line of credit on the relinquished property or using a bridge loan.  Always talk to a lender first to determine your options.  

There is also a higher fee when doing a reverse 1031 exchange: $4K as opposed to $1k for a traditional 1031.  For Travis, he’s far enough along in his investment career that he can afford the fee and it’s more worth it to him to pay it than have the headache of tight deadlines.  He also knows that by doing a reverse 1031, he’ll have a 6 month period in which he’s collecting rent from both properties and the fee will cover itself in the long run.  

Conclusion 

With the two new properties Travis purchased this year, his NOI is about $240K a year.  This is 2/3 of this overall goal of $360K, so he is well on his way of reaching that goal by age 50.  Looking back on his 10 years of real estate investing, he says that the only properties he’s regretted are the ones he didn’t buy.  Between 2010 and now, property values have increased significantly and he sees now how much those specific homes would have appreciated.  He likens real estate investing to crockpot cooking: it’s slow and low.  

Most people will buy 1-5 homes in their lifetime, but for Travis, buying a property feels commonplace now.  When he looks at his parents or grandparents, he thinks about how their lives could have been changed by owning a home outright.  He sees firsthand how family outcomes can be changed through real estate. 

Connect with Travis 

If you’d like to get in touch with Travis, you can reach out to him via email or phone. He loves to help people and have conversations about growing rental portfolios because if it weren’t for people having those conversations with him, he wouldn’t be where he is now.  

You can also reach out to me for help finding investment properties or running a portfolio analysis on the ones already have.  I can help you figure out where you are now, and how to make a plan for where you’d like to be.

Rental Property Portfolio Analysis

Do you have questions about how to optimize your own rental property?

  • Should I pay off, sell, or refinance my properties?
  • Should I utilize a 1031 exchange or take cash off the table?
  • The market is hot. Should I sell my properties?
  • Should I sell my residential to buy commercial properties?
  • Am I on track to achieve my retirement cashflow goals?

We created our Portfolio Analysis service to help investors answer these questions. We are offering complimentary introductory Portfolio Analysis sessions to better understand your investment goals and find a way to get you there. There are a limited number of sessions available for non-Envision Advisor clients, so sign up today!

Want to Get Started Building Your Own Rental Portfolio?

For information on how to get started investing in Denver, check out our 2021 Denver Real Estate Investing Guide. You can also sign up for our free Real Estate Investing Newsletter and download free real estate spreadsheets and toolkits.

YouTube Video: Reaching $10K in NOI through 10 Years of Investing

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Chelsea Scott
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