Welcome to the first of our three-part State of the Market series.  In this episode, we’re looking at house hacking in the Denver metro area. 

The market has shifted in the past 100 days, thanks in large part to the fastest increase in interest rates in history.  Higher interest rates are affecting cash flow and other returns on properties, and people are starting to feel like they missed the boat with rising prices. 

But instead of focusing on negatives, a successful investor looks at where the new opportunities are.  To find them, we’re going to look at whether or not we’re in a bubble, discuss how interest rates affect cash flow, talk about some new financing options, and do three deal analyses that show what buying a property today looks like.

Want to know everything you can about House Hacking?  Fill out the form below to download all of the data we’re talking about today.  We’ll provide you with a slide deck, all of the spreadsheets we used, the Your Castle Trends packet, and will put you on a special emailing list for House Hacking topics and strategies we’re using in today’s market.

Are We in a Real Estate Bubble?

We could spend hours talking about this, but it boils down to supply and demand.  This is an Econ 101 concept, but it has a powerful impact.  In Denver, we have really low supply here and along the Front Range. 

Developers have been underbuilding houses since the crash in 2007, which drives up prices.  Businesses and people are continuing to move here, further increasing demand.  New build supply isn’t likely to increase any time soon because of supply chain issues and increased costs. This is true not just for Denver, but all over the country, as well. 

We’re seeing similar conditions in the rental market.  Rents increase when we have low vacancy.  Vacancy has been low for the last 10 years, but it’s gotten even lower after the pandemic.  We’ve seen double digit rent growth in the past year, and while we don’t expect it to keep growing at that pace, it isn’t likely to stop increasing. 

Rent growth is one of the main reasons investors can still cash flow in today’s market.  Renters don’t have enough inventory, which drives up demand and rental prices. 

While we may be heading toward a recession, there is no sign that housing prices will go down.  

How Do Interest Rates Affect Long Term Wealth Building?

We’re seeing the fastest interest rate increase in history right now, thanks to rising inflation.  Inflation causes monthly expenses to go up, which is why cash flow is going down.

Luckily, cash flow isn’t everything when it comes to successful real estate investing.  We look at long term horizons of 5, 10, and 20 years.  During that time, debt paydown, appreciation, and tax benefits all contribute to overall wealth creation.  To see a detailed breakdown of all the ways you can make money in real estate, click here.

If you want to get cash fast, we can’t help you.  But if you’re interested in building wealth and delayed gratification, then investing in real estate makes sense now. 

How Can I Cash Flow in Today’s Real Estate Market?

Although cash flow isn’t everything, it is still an important aspect.  The great thing about real estate is that it isn’t as black and white as the stock market, where investors have zero impact or influence on their investments.  In real estate, you have the option to adjust your down payment amount, self-manage your property, and structure your portfolio how you want. 

Increased interest rates are the biggest factor for constricting cash flow, but there are financing options to help offset that.  We’ve traditionally advised a 30-year fixed rate mortgage because interest rates have been so low.  Now that they’re increasing, we are focusing on different types of financing options.

One option is an Adjustable-Rate Mortgage (ARM).  ARM products give you a loan that’s amortized over 30 years, but after years 5 or 7, the rate adjusts.  We’ll go more in-depth on ARMs in the future.  For now, understand that this is one option for lower rates, but it comes with risk after the fixed rate period ends. 

Another program we learned about from Joe Massey, is a 30-year fixed rate program, but in year 1, your interest rate is 2% lower, then 1% lower in the second year, and then goes up the next year.  We plan on talking with him about this program in a future episode, but you can reach out to Joe directly with questions.

How Can Different Rental Strategies Help Me Cash Flow?

Long term rentals are harder to cash flow from today, but increased rental rates are helping some clients see good returns.  There are also other rental strategies investors can use to pump cash flow, such as short and medium term rentals or room by room rentals.  There are always options as long as you’re willing to look at them and adjust your mindset.  You can find an option that will fit your goals, lifestyle, and time and effort you have to give.

Want to learn everything you need to know about short and medium term and room by room rentals?  Enroll today in our Step by Step Short Term Rentals class, and be on the lookout for our upcoming self-management course.  These courses are $300 each, but Envision Advisors clients get them for free!

Analyzing Rental Strategies

To see how different financing and rental strategies can affect returns in today’s market, we’re looking at three local properties.  To play around with the numbers yourself, fill out the form and download our spreadsheets.

Case Study 1: Single Family Home in Lakewood

This is a 5 bedroom/3 bathroom house in Lakewood that is active on the MLS and listed at $575K.  With a 5% down payment and interest rate of 5.5%, there’s a great opportunity to use an owner-occupied room by room strategy to boost returns. 

Going to the cash flow tab, we can see an annual cash flow of negative $9300 while you’re living there.  That averages out to paying $775 a month to live in a home you own.  Plus, as Jeff White says, you’re paying $775 to learn about property management, how to deal with vacancies, handling contractors and repairs as needed all while getting the long term benefits of real estate investing. 

If we rerun the numbers using an ARM, the cash flow goes to negative $3000 a year, or about $250 a month to live there.  If you prepay mortgage insurance, you might break even.  This is why it’s so important to play around with the numbers and explore all of your options. 

Case Study 2: House Hack in Arvada

This property actually belongs to Ben Einspahr, but we’re running the numbers with today’s prices and interest rates.  This home has a main house with 3 bedrooms/2 bathrooms and a 1 bedroom/1bathroom mother-in-law suite above the garage.

With a $700K purchase price, 5.5% interest rate, and a plan to self-manage the mother-in-law suite as a short term rental, cash flow would be negative $23K a year, or $2K a month to live in the main house.  It’s nothing great as a pure rental property, but living in a 3/2 house for less than $2K a month is a huge savings.

Looking at it with an ARM of 3.875%, the monthly cost goes down to $1300 a month. 

Case Study 3: New Build in Wheat Ridge

This is the property that Ben lives in currently.  It’s a townhouse with 3 bedrooms/2 bathrooms on 2 floors, and a 1 bedroom/1 bathroom guest suite with private entrance in the basement that can be used as a short or medium term rental.  Today, it would cost $700K. 

It would cost $2500 a month while living there, which is a big chunk of money, but less than without the Airbnb income.  Using different financing options can alter that number significantly.  And once they move out, they’re able to rent out both spaces separately. 

So, Should I Buy Now or Wait?

As always, it depends!  I can’t say definitively without knowing your specific situation: goals, financial stability, job or business.  But setting all that aside, we know that prices and rates will likely continue going up.

If you purchased your home at the worst time, in 2007 when the prices tumbled, its value would have increased $10K if you held it for 5 years and $100K if you held it for 8 years.  Looking at historic trends, we see that holding real estate long term pays off. 

We can’t predict exactly what will happen, but history is on our side.  If you buy something now and rates drop, you can always refinance into the lower rate.  If prices drop, which they probably won’t, hold onto the property and it’ll bounce back eventually.

Play around with different scenarios and outcomes and figure out where you feel comfortable. 

Connect with Us

The properties we looked at today aren’t unicorns—they’re routine properties our agents find for our clients.  They navigate today’s market and find great properties that match our clients’ needs and goals. 

We want to give our clients the best value that other teams and brokers can’t compete with.  That’s why our closing gifts are actual leases you can use, and we offer clients services like our courses, portfolio review, and Property Llama software to help you throughout your investing career. 

Reach out to us and we’ll help you figure out the right move for you. 

Don’t forget to fill out our form so you can download all of the charts and data we talked about today!

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State of the Market: Should I Still House Hack in Denver?

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