On Episode 1 of the More You NoCo podcast, brought to you by the Weinland Team with RE/MAX Alliance, we spoke with Matt Weaver, a lender with Excel Financial Group, a local Northern Colorado small business, about investing in real estate and “nomading” to get into investing. Getting into real estate investing is tricky for most people, but there are tips and tricks that can help you get into a home even easier than you may have thought. Matt is an expert in “nomading”, one of the tricks, because he is doing it himself. Matt has not only been a lender in Northern Colorado for several years, but has been a resident for over 20 years.
Before we can get into why real estate over other investment options, you need to think about your reasoning for getting into investing. Of course, there are going to be different needs for different investors; some may be looking for a “loss” for tax purposes, some may be looking for cash flow, and some may be looking for rentals that will become their retirement plan. It is important to identify your unique reasoning for getting into real estate investing since all of the above situations are going to be looking for different types of houses. A great real estate professional, lender, and financial planning team can help you identify a goal that is right for you. Having a personal “why” for wanting to get into real estate investing is key, just like any other goal, so that when you experience the hiccups that are along the way to purchasing your first real estate investment, you can have a strong reason for keeping you going.
Now that you have a personal reason for wanting to invest, let’s see why real estate may be a better option than others. Matt assures listeners that real estate may be a safer option, especially in Northern Colorado. The market is consistent in the Northern Colorado area, usually going up or staying steady. With stocks and such there is much more fluctuation according to Matt. “A lot of the benefits you get from real estate is your appreciation, you have your loan “pay down” and your debt “pay down” when you have an investment property. Then you have rental income and cash flow coming in on top of that.” Here at the Weinland Team have always love the fact that real estate is an investment you can live in. That is a unique benefit that few investments have! However, there is a drawback to a market that is consistently going up, the cost of housing or finding good investment properties can be hard to find. While this can be a hindrance for some people or may make Northern Colorado feel like a worse option than other places around the country where houses are cheaper, but rents are still just as high, this is usually a better market to invest in purely due to appreciation rates. Northern Colorado’s appreciation rates beat most places around the country meaning the sooner you get into a home here, the better off you are. Cash flow can oftentimes trip up investors when you are first looking at properties in Northern Colorado because that number looks lower than other places, but appreciation makes up for this lower cash flow. To over simplify this Matt gives the following example. With a house, you are buying an investment property. You are putting renters in there. They are paying your mortgage for you and then the longer you own it… in 20 or 30 years [it is worth double].
Now let’s talk about depreciation, which is claiming it on your taxes. You have 27 years to claim it, but if you don’t claim it then you lose it. This means that your house is helping reduce your taxable income a little each of those 27 years. So you definitely want to talk to your CPA and make sure that you get this on your taxes.
This does have to get paid back, but when you go to sell the home so hopefully a long time after it has made you lots of money through rent and it has appreciated in value tons! But this is where 1031 Exchanges, inheritances, trusts, and so many more options come into play and talking to a financial planner and a CPA are key!
Nomading is an investment strategy that many people use unintentionally by saving up 5% down in order to purchase a home as a primary residence and then use that year or two to save up another 5% in order to buy another home once that year is up and move into the new home. You have to live in the property for a year in order to get primary residence lending. If you don’t live in the property for the full twelve months, this is mortgage fraud and the fines are very heavy! Best to plan on staying there for a full year. This process continues until you have the number of properties that you wish to own. The previous homes become rentals and becomes an effective strategy for anyone who is ok with moving every few years. This is especially helpful for the younger generation who may have been moving on a regular basis due to renting. Also, this is a great option for those that can’t save up 20 to 25% down for their first home. It is also important to note that you will want to work your way up in the condition of the properties that you own. The bank will throw up red flags if you purchase a 5 bedroom property and then go to a duplex condo with half the square footage. It shows that you are buying it as an investment property, not a primary residence so be careful when selecting a property to purchase.
While this strategy is a great option, know that it comes with some downsides as well. Emotional attachment to the property is the biggest obstacle that you have to overcome. This place will become your home for a year. It will be hard to leave, especially the first time. This will become easier the more properties that you accumulate this way, but try to prevent personalization of the property while you are there for the year or two that you will spend there. Prevent yourself from planting landscaping that you can’t take with you or painting rooms your favorite color; these things will only make it harder to leave or you may take it personally when your new renter messes it up. This can also come up when purchasing new construction, choosing items that will make good rental materials opposed to choosing items on personal preference. For example, choosing marble countertops because they are your favorite, instead of quartz which is more durable and harder for renters to break. This is all personal choice however and you want to make sure that you are happy with the place you will be living for the next year or so!
“House hacking” is often coupled with nomading to make it easier on younger homebuyers. In this strategy, you get a roommate or two in order to subsidize the amount that you are paying towards your mortgage. With this technique you could cover most or all of your mortgage making it easier to save up that 5% down for the next property that you plan to purchase. In some areas, you may be able to have as many roommates as you have for bedrooms, but in other cases city ordinances may prevent you from having “too many” people living in one house. Always check your city laws first.
These strategies aren’t just for the younger generation though! Matt provides an example of a woman that he started working with 2 years ago that has successfully implemented this strategy. She works at the post office so she wasn’t making a ton of money. She had just gotten out of a marriage and decided that investment properties through nomading was the right choice for her. She managed to purchase a duplex in Greeley as her first property and it set her up perfectly for combo nomading with house hacking. She found someone to live on the other side of the duplex whose rent from them paid 75% of her mortgage. This allowed her to save up enough money to buy another property the following year, another duplex! She had to hold the second property for two years this time before she had saved up enough to buy her third property. This has led her to have 5 units (2 duplexes and a single family property) in less than ten years while working at the post office as a recently divorced, middle aged woman. Now that’s impressive!
Traditionally, with investment properties you need to have 20 to 25% down for investment interest rates. This is usually a huge hurdle for most people, especially when you are looking in the Northern Colorado real estate market. If you want a better interest rate the more money you have to have down or the bigger percent. But 25% of a $400,000 home means that you would need $100,000 PLUS additional money for closing costs. However, with primary residence (meaning that you are the one living in the home) you may only need 5%. For first time homebuyers this may even be as low as 3% down! For the same $400,000 home, by purchasing it as a primary residence and turning it into an investment home through nomading, you would only need $20,000. This is a much more manageable way to get into real estate investing. In the podcast Matt talks about all of the benefits of using an FHA loan for your next two purchases, where you will only need 3.5% down. So first home 3% down utilizing Colorado’s first time homebuyer programs, then the next two using FHA loans (you can only have two FHA loans at a time), and subsequentle properties with a 5% conventional loan. Matt confidential stated, “You’d be surprised by how much you can buy with how little you need.”
Lots of people get nervous using FHA loans since they are government backed, but Matt explains why this can be used to your benefit. Matt also goes on to talk about conventional loans and mortgage insurance (an insurance that is tacked onto the loan if you are putting less than 20% down, that way the bank has “protection” for lending you the money). While all these details are important, they can be a bit challenging and confusing. It is best to talk to a professional in person to know which options are right for your situation. If you would like to know all of the details, listen to the full length podcast here. Or give Matt Weaver or ourselves a call, we would be happy to walk you through the process in detail.
Property managers can be expensive, about 10% of your property’s rent, but they also offer a hands off approach to rentals. They can provide you with a better pool of renters to choose from, they deal with the renters’ needs when they are in the property, and they can help alleviate difficult to remove renters. This boils down to money and your personality type. You may be the best landlord in the world or you may let people walk all over you. Knowing yourself is key here. Using a property manager may make things much more black and white for everyone involved. A manager helps you enforce the rules that you have set forward so that you don’t let your emotions get swayed. Of course there are always exceptions. Matt suggests property managers for new investors because it is safer for you as the owner as well. There are many legal aspects that you may know nothing about, but a property manager will know the details of. “Yes it is 10%” Matt points out, “but it is 10% for your sanity.” Sometimes that cash flow isn’t going to work out with a property manager and will have to end up managing it yourself. Looking at all these different aspects can help you decide if a property manager is right for you.
Overall, we discussed why it is important to have a strong goal for starting investing and why real estate may be a better option than other investment options. We covered the two strategies that can be tied together for help you get into real estate investing; “nomading” and “house hacking”. Matt then dove into how much you need to put down in order to get started and the different lending options that may be available to help you. Lastly, we discussed whether a property manager was the right choice for helping you manage your rental properties and the pros and cons of using them. We hope that you found this information valuable and you will consider Matt Weaver with Excel Financial Group LLC, if you are looking for a mortgage professional in Northern Colorado or if you have more questions about getting into nomading for real estate. If you loved learning about nomading and house hacking, head over to the More You NoCo podcast where you’ll find even more on the topic! Click here for a direct link or check the bottom of this article for links to all the places that you get your podcasts.
The Weinland Team is glad to provide this information to you through our More You NoCo podcast which allows us to bring local Northern Colorado businesses and information to you. If you are looking for local NoCo small business professionals, then visit NathansDirectory.com for a list of amazing professionals that we highly recommend. As always, if you are looking for real estate professionals in Northern Colorado, then give the Weinland Team with RE/MAX Alliance a call. We are ever to busy to help!