How to Invest in an Expensive Market ($500K+ Home Prices)

0:00You want to invest in real estate. You've done the research. You're bought in. But you live in an expensive market and no deals seem to make sense. Today, I'm here to tell you it is possible to invest in real estate even if you live in Denver, San Francisco, or one of these other cities where even buying one house to live in feels out of reach. I get it. I live in an expensive market myself, and it can be frustrating to hear about people rapidly building portfolios in places where houses only cost$100 ,000. So today, I'm going to explain the strategies you can use to invest successfully even when the properties around you feel unaffordable.

0:44Hey, everyone. Welcome to the BiggerPockets podcast. I'm Dave Meyer. Thank you all so much for being here. Everything is expensive right now. Coffee, steaks, cars, and yes, definitely houses. And I think everyone is feeling that strain, but for my friends who live on the coasts or in expensive cities, things feel even more out of reach. 600 grand for a single family residence, a million dollars for a duplex. It can be a little bit crazy making, but fear not. There are great ways to invest. Even if you live in an expensive market. And in today's episode, we're going to cover how you can build a portfolio and reach financial freedom no matter where you live.

1:23We're going to cover different strategies that work in expensive markets, whether or not you should consider investing out of state, and I'll even share real numbers and examples so you can decide which options are best for you. Let's do it. So first up, let's just define what an expensive market is because that is completely relative. But for the purposes of this episode, I'm going to just say it's anything above$500 ,000 for the median priced home. That's 15, 20 % above national average right now, which is somewhere near$420 ,000,$430 ,000, depending on who you ask. Now, I think instinctually, everyone knows that's a lot of money that feels expensive, but just want to call out the very real measurable challenges that there are investing in real estate when you live in an expensive market.

2:15And for me, there are primarily two of these. The first is affordability, right? Like how much capital you need to actually go out and buy just a single property is hard. But even if you can do that, it does lead to problem scaling just because real estate is capital intensive in the first place. But if you're in a place that is very expensive, you're going to need a lot of money upfront for down payments, for renovations, for closing costs, for cash reserves. So investing in an expensive market can lead to challenges when trying to scale up your portfolio. That's the first one. The second challenge in expensive markets is finding cash flow because these markets tend to appreciate in terms of property price, but proportionally rents don't really keep up with how expensive properties get.

3:07So you get in these situations where it's more and more expensive to buy a home, but the rents don't keep up and that makes the cash flow potential less in a lot of these markets. So all in, there is nothing wrong with investing in expensive markets. People make tons of money investing in these expensive places. Think about being in, I mean, pretty much any city in California or Seattle or Denver or Austin or Boston in recent decades. They have largely crushed it. So the question is, with prices high and with mortgage rates high, how do you get in? How do you invest in these expensive markets to take advantage of the benefits that are there, to mitigate the risks that exist in the current market, and to offset the challenges that come with scaling and with cash flow?

3:56Generally, there are two schools of thought here. One is you can find something that works locally and actually just figure out a way to make it work in an expensive market, or you could invest long distance and just choose another market. I'm going to talk about both, but since we talk a lot about investing out of state and long distance on this show, I'm going to focus less on that and talk more today about the strategies that work in expensive markets. So the first category of things that work in expensive market is value-add investing. Some people call this sweat equity or forced depreciation, but they're all the same thing.

4:34The general idea is you buy a property that's not up to its highest and best use. It's something that's a little bit run down, it's dated, it needs some work, and then you do the work to bring it up to modern standards and make it really nice. and in doing so, you can generate big chunks of equity that can really help fuel your investing portfolio, can build a lot of capital that you can reinvest into other deals or you could just leave it in those existing deals if you wanna do the burn. So there are two different strategies within value add that can work in expensive markets. The first is flipping.

5:14You've probably heard of this, but basically you buy a house, you fix it up and you sell it. And although flipping does come with risk, it does also come with huge potentials for return. It is not unheard of for flippers to get 30, 40, 50 % cash on cash returns, just total returns on a flip in six months. If you annualize that, sometimes you can double your money in just a year. And this definitely works in expensive markets. You see this in LA. You see this in Boston and New York. This is definitely a strategy that works, but it's not for everyone because flipping is time consuming. It can be stressful and there's definitely risk.

5:55So if you're thinking about flipping, I think you should ask yourself a couple of questions about whether this is right for you. First, do you have any experience with renovations? It doesn't need to be a crazy gut job renovation, although those do have higher returns. Are you good at managing projects or do you have a good network of contractors? out there? Do you have the temperament for it? Because I just literally just an hour ago listed my first flip for sale and I can tell you things are going to go wrong. You need to have the right temperament where you just can kind of go with the flow, understand that even though you need a plan, it's probably not going to go exactly as you expect it to and you're going to have to be willing to work with it.

6:36So you need to understand, are you good at this? Do you have the temperament And are you willing to take the risk? Because even good flippers lose money sometimes. And so although you're taking a big swing, this is just how investing works, right? The higher risk things have the higher reward. And so you can make a lot of money, but you just have to be willing to know that there are risks both in construction and in the market right now. You do need to accept that things are taking longer to sell. You're not going to be able to flip something, put it on the market. It's going to sell in the first weekend.

7:06I mean, maybe, but on average, you know, the time on market right now is going up 30, 45, 60 days in some places, and there are significant holding costs. And so you just need to be prepared for that. But again, the opportunity to double your money is really appealing. And although there are some adverse parts of the market right now that are going to impact flipping, mostly, like I said, days on market and longer hold periods, that's probably number one. You also have tariffs are increasing the cost of materials in a lot of places and in some places the cost of labor as well. But you are also getting one benefit for value add investing right now, which can work particularly well in expensive markets.

7:48There's this thing that happens when you enter a real estate correction like I think we're in across most of the country right now, where the price of fixed up really nice stabilized assets, they might go down a little bit. but proportionally, they're not going to go down that much. Meanwhile, properties that need a lot of work are going to fall in price faster. That increases your margin potential. Now, you have to balance that with increased labor costs and supply costs, time on market, all that other stuff. But there are some things that do benefit flipping in this kind of market. And I really recommend knowing your market really well because flipping is very block by block, house by house kind of thing, but it can definitely work in expensive markets.

8:33Now, I know that flipping is not for everyone, but this idea of value add investing can also work for rental property investing in the form of the BRRRR. If you haven't heard of the BRRRR method, it stands for buy, rehab, rent, refinance, and repeat. And basically what it is, is using the benefits of a flip with a rental property, which in my opinion, offsets a lot of the risk and also gives you additional benefits. Because think about this. What I just said was that the market is giving us cheaper properties to buy that need work. So that means that you can buy these BRRRR properties potentially lower right now than you could in the last couple of years.

9:15And I also said that the biggest risk in flipping right now is when you go to sell it, right? It could sit on the market for a while. We could have some crazy news or mortgage rates could fluctuate and it could sit for a little bit longer than you're hoping for. But with the BERT, you're not necessarily selling it. So you can buy things at a pretty good discount right now, do the renovation, and then refinance it and hold on to it. And maybe you sell it one day, but you have the option then to wait to sell it during a better time to sell than it might be at the time that you actually finish that renovation.

9:48So that's one really big benefit is that you can build equity just like flipping, but you don't have that pressure to sell the property immediately. The second thing about a BRRRR that can work really well in expensive markets is that BRRRRs, sure, they build equity, they get you that forced depreciation, but oftentimes they can help you increase rents, right? Because if you buy something that's not in great shape, people aren't going to rent that as is for a lot of money. But if you make a really great product that's going to have demand from a lot of tenants, then you can raise rents and you can potentially generate cash flow, even in expensive markets.

10:26I've been underwriting deals in Denver and you can actually make the burr work for growing appreciation and generating cash flow in a market like Denver that is definitely considered an expensive market. So this can absolutely work. I've talked on the show too about really liking something these days, what I'm calling the slow October which is just buying a let's call it a duplex with tenants and it might not cash flow right away but when the tenant moves out that's when you renovate the property you bring up your rents then and just do that opportunistically that takes a lot of the pressure off of you to do things quickly which personally I like I work full-time and a lot of people do so that takes some time pressure off and it also means that you don't have to invest the full amount of capital into the project right away.

11:16You can put your down payment down, you cover your closing costs, you have your cash reserves, and then maybe six months down the road, you put in some money, 15 grand to renovate a unit, but you have some time to recover that capital, maybe save up some money, seek that money elsewhere. And that's another great way to get in into an expensive market. So those are the first two strategies that I recommend if you want to invest in an expensive market. Take advantage of value-add opportunities. that could be in the form of flipping or the Burr method. When we come back from this quick break, I'm going to talk about how you can find cash flow.

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15:18Welcome back to the BiggerPockets podcast. I'm Dave Meyer talking about how it is possible to make a profit and to invest in an expensive market. Before the break, we talked about value add investing, either in flipping or a burr. But I want to turn our attention to cash flow because this is really the challenge of an affordable market. It is hard to find, but there are ways that you can do it. Like I said before, if you were to go out and just buy a regular single family home in an expensive market for 500 grand, it is very unlikely that you're going to cash flow. You know, in most markets, you're going to rent that out maybe$2 ,500,$3 ,000 if you're lucky.

15:56Probably not going to work. But there are certain strategies, there's two or three of them, that I kind of consider as cash flow superchargers. It's not really changing the approach. You're still buying a single-family home or a duplex, something that you want to hold on to for a long time. But hopefully using one of the methods that I'm about to tell you, instead of generating $3 ,000 a month in long-term rents, you can get that cash flow up to$4 ,000. That's close to cash flowing. Or$4 ,500 or even more. And it can definitely work. And the three different cash flow superchargers that I consider are one, you've definitely heard of this, which is short-term rentals.

16:35I know everyone calls short-term rentals a totally different strategy than long-term rentals. And in some ways it is. But to me, you're still trying to buy something and hold on to it for a long time. And that's really the play in the expensive market, right? Because you want to hold on to something for as long as possible to capture that appreciation when it comes. We don't know when that appreciation is going to come. It could be this year. It could be next year. It could be three years from now until we see that big spike. But the real estate market works in cycles. And there will be another cycle where prices go up.

17:05Whether or not you rent it as a long-term rental, a short-term rental, a mid-term rental, or co-living, all strategies I'm about to talk about, that's kind of up to you, right? Like that's just being opportunistic about what's going on in the market. If you can get great rents, generally I recommend long-term rentals. It's just easier. There's less wear and tear on the property. It's less operational headache, but in these expensive markets, usually that doesn't work. So you can turn to short-term rentals, which definitely has the potential for higher cash flow than long-term rentals. Now I am saying that is potential because short-term rentals, even more than long-term rentals are very location specific.

17:46So if you're in LA or San Francisco, where there's a lot of tourists coming, New York, Boston, these kinds of things, people take vacations there and you can be in a great location where people are going to want to stay there and you don't have a lot of competition from other short-term rentals. This can definitely work. I do want to caution, though, that short-term rentals are not magic. Over the last couple of years, people have said, oh, short-term rentals generate more cash flow. Yeah, on a per-night basis, that's true. Like the rate you can charge for one night of a short-term rental is much higher than you can for a long-term rental.

18:21But with short-term rentals, the risk of vacancy is way, way higher. And over the last couple of years, if you look at the short-term rental market, that has definitely become true almost across the board. There is just more supply of short-term rentals so you have more competition and demand for them, even though it's stagnant, it just hasn't kept up with that more supply. And so if you're gonna do a short-term rental, you have to really focus on competing and being the best product in your neighborhood so that you can fill that place and keep it filled. Now, a lot of people do that with a lot of success.

18:54I have a lot of investors' friends who are still able to do this, but just don't go into short-term rentals saying, I'm doing it because I want more cash flow. You need to actually do your research and figure out if that is realistic for you in your area. The next strategy I want to talk about is pretty similar. It's called midterm rentals. The idea here is kind of like a short-term rental, but it's for people who stay for 30 days or more. And this has become popular with traveling nurses or corporate housing. I've stayed in midterm rentals myself when I'm moving to a new city, for example. And this is kind of a nice combination.

19:29It's sort of a blend or a hedge between long-term and short-term rentals because you're getting the higher daily rate like you get for short-term rentals. But because people book them for longer periods of time, you're mitigating your risk of a lot of vacancy. Now, if you have a vacancy with a midterm rental, it can last several months. So that is a challenge. But in markets where there is a lot of demand for midterm rentals, it can be an excellent way to generate cashflow. As an example, we were talking about buying a$500 ,000 home. It's very realistic to think that you could charge four grand or 4 ,500 bucks for a nice furnished apartment in one of these markets and make your property cashflow.

20:09So those are two good examples of cashflow accelerators, short-term rentals and midterm rentals. The other one I want to bring up, It's not new, but the term for it is kind of new. People call it co-living now. People used to call it rent by the room. It's the same idea, which is buying that$500 ,000 house. And instead of renting it to a single tenant where you can maybe get three grand, it's a four bedroom house, let's call it. You rent out each bedroom for$900. That is a reasonable amount for someone to pay. And now instead of getting$3 ,000 a month, you're getting$3 ,600 a month. Now I'm making up those numbers.

20:45You might be able to get a thousand bucks a bedroom or eleven hundred. I don't know. But this co-living strategy does really work. Like we have a book about a guy named Miller McSwain just wrote a guide for it for bigger pockets if you're interested. But it can really work in these expensive markets because number one, it boosts your cash flow. But number two, inexpensive markets, rents are typically really expensive. And there are a lot of tenants who are looking for affordable options. Just using the example I've been giving out so far. Right. You can rent a bedroom. Let's say it's a thousand dollars for easy math, thousand bucks a month for a bedroom in one of these homes, hopefully a nice home.

21:22Whereas getting a one bedroom is probably eighteen hundred bucks. So obviously those are different living experiences, but some people are willing to make that trade off and live in a co-living home. And so in these expensive markets, it has demand and it can generate cash flows. So this can be a really good option for you to check out. So, so far, we've talked about two different options for value add, either flipping or BRRRR. Next, we talked about cash flow. Again, I don't think long-term rentals are going to work in most of these markets, but you can opt for one of these management styles, short-term rental, mid-term rental, or co-living that can help you generate that cash flow.

22:01The last option for investing in market for an expensive market is an owner-occupied strategy, and there are two of them. Owner-occupied strategies give you a lot of benefits, mostly that you can put lower amounts of money down. So you can buy a house hack or do something called a live-in flip. And sometimes you can put as little as 5 % down, which really addresses that affordability issue that exists in these expensive markets. So for a$500 ,000 property, instead of putting 20 % down, which is $100 ,000, then you're going to need closing costs. Then you're going to need cash reserves. You might need to do a renovation.

22:39You're probably talking about 120,$140 ,000 of capital that you need. That's a lot to start your investing journey. But 5 % down, you are putting$25 ,000 down. Plus those other things, you're probably in the 50 to$75 ,000 range. That is nearly half. That means it's much more achievable for people to get into these owner-occupied strategies. The other thing is owner-occupied loans tend to be a little bit cheaper in terms of mortgage rates. And there are all sorts of government programs that are out there that help homeowners purchase homes. So there's down payment assistance programs. There are rate buy downs.

23:19There are closing cost credits that state and city governments often give out. They don't give those out to investors. They give them out to homeowners who can go and buy a house hack or a live and flip. Now, which one of these owner occupied strategies you pursue is up to you. If you want to generate cash flow and build a rental portfolio, house hacking is the better option. You buy a two unit, a three unit, or a four unit. You live in one unit and you rent them out and it gets all the benefits that I was just talking about. Now, if you put only 5 % down, it's going to be a little bit harder to cash flow.

23:53But the magic thing about a house hack is that it doesn't need to cash flow. All it needs to do is lower your cost of living. That's the benefit. So if you were paying two grand in rent, you go out and buy a house hack and all of a sudden, yeah, you're still paying $800 for your mortgage every month. You're still saving$1 ,200 in post-tax money that you can then use to buy your next deal, to renovate the property, do whatever you want with. So house hacking, really good option in a lot of expensive markets. I should also mention that you can combine house hacking with that co-living model. So instead of buying a two or three or four unit property, you buy a single family home with a lot of bedrooms, ideally.

24:33You want like four or five bedrooms. You live in one bedroom and then you rent out the other two roommates. This is not for everyone lifestyle wise, but it is a very effective method. If you want to hustle your way into a great deal in an expensive market, house hacking with the co-living model, that combo can be an amazing boost to your portfolio and a great way to start you on your journey towards financial freedom. Now, there is another owner-occupied strategy. It's called the live-in flip. It's basically doing a flip, buying something that's not up to current standards, renovating it and building all that equity.

25:08But you actually do it as an owner-occupied, and it gives you three incredible benefits. The first is financing because most people who flip use a hard money loan. You pay a couple points, 12 % to 15 % interest rates. That could really eat into your profit. But as As an owner occupied, if you're buying something that is in decent shape, you should be able to get that with a conventional loan. So you can get that with 5 % down. You can get that with 10 % down sometimes. Even if you get a conventional loan at 20%, you're still paying 6.5 % interest rates instead of 12 % interest rates. And that makes a really big difference.