Our special guest for this episode is Lon Walsh, the founder of Your Castle Real Estate. Preston and I sat down with him to talk about how he turned his comic book collection into a real estate empire, his advice and outlook on investing, and a case study of a property in Pueblo that walks through how he approaches investments.
- Listen to the podcast “#269: Building Wealth Through Comic Book Sales w/ Lon Welsh” 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.
From Comic Books to Condos
Lon’s dad collected comic books, a collection he gave to Lon and to which Lon added to throughout his childhood. During the summers, he would work odd jobs to finance his collection, putting in around $1,000 over the years. As an adult in 1998, he and his wife moved to Colorado, just after she graduated medical school and they had a mountain of student loan debt. However, Lon knew he wanted to start investing in real estate right away, so he turned to his comic collection for a down payment. At the time, eBay was the place to sell niche collectibles, and soon Lon liquidated his collection into $9,000 cash.
Using this money, he was able to make a down payment on a condo in Vail. This condo was right next to the gondola and didn’t have a view, but did have a garage spot which would turn out to make it more valuable. Lon and his wife rented out the condo and used it as a free vacation home. Soon, they were able to buy another basement unit that they fixed up. Although these units didn’t bring massive returns, they were comparable to stock market investments with the benefit of having a mountain retreat.
Beyond the Vail properties, Lon was getting serious about investing in real estate for a profit. He purchased multifamily units in Golden and Denver and converted them into condos that he sold. After getting laid off from his corporate finance job, he and his wife had a serious talk about him working full time in real estate, knowing he wouldn’t make a profit in the first couple of years. She agreed, and he began working as a production realtor, selling 97 properties his second full year. He decided to start a brokerage in 2006, creating a 10 year business plan.
In 23 years, Lon went from the owner of a comic book collection worth $9,000 to having $2 million in equity, with some fun vacation properties along the way. He also learned how to invest in real estate, teach others how to follow suit, and founded Your Castle Real Estate and First Alliance Title.
Lon’s Advice on Investing in Real Estate
During our podcast, we picked Lon’s brain on what trends he looks for in the market, how best to tap into equity, and how to decide on which asset classes he wants to own.
How and Where Do you Decide to Start Investing?
When most people start investing in real estate, they look at residential properties. These properties have the lowest barrier to entry since they’re much cheaper than offices or warehouses. To start, find a good real estate agent who can help you figure out where and what makes the most sense for you.
Different types of properties will be more advantageous to invest in at different times. During the recession, Lon bought 60-70 condos because they were so cheap to purchase. People thought he was crazy to invest in properties that had lost around 70% of their value, but Lon knew that he wasn’t trying to make money on their current value and they wouldn’t always be that cheap. It’s important to look at trends and decide what your long-term strategies are.
Lon also recommends looking at up and coming neighborhoods. When he first started investing in Denver, he knew the area north of Capitol Hill would soon be valuable because of its prime location and walking distance to the Capitol. These days, he thinks the area near 41st and Fox as well as Sun Valley south of the Broncos stadium are looking up.
What’s the Best Way to Tap into Equity?
The two best ways to access your equity are a refinance or 1031 trade. Deciding which is the best choice for you depends on how much time, energy, and interest in investing you have. Because Lon enjoys looking at the MLS in his spare time to find new properties, he often goes the 1031 route, but not everyone wants to be so actively involved.
For a faster return on investment, the ideal path is to buy a fix and flip property and put in a tenant immediately. Keeping in mind that you can write lease terms for however long you want, rent the property for 12-18 months, knowing that the best time to sell in Denver is in the spring. Then spend about eight weeks fixing up the property to sell after the tenant vacates. You will have owned the property for over a year at this point and can defer gains. If it goes well, you’ll probably be able to buy two more properties from what you gain by selling one. While the payoff is faster this way, the downside to this tactic is that it requires a lot of effort. There is a considerable amount of time involved in overseeing the rehab and consistently buying properties.
If you have other obligations, the less involved approach of refinancing may be better. For this investment path, buy a property that you plan to hold for about five years, and refinance about two-three years into your ownership. The payoff for this takes considerably longer to get to but is much less involved.
Making the Jump in Asset Classes
Many people see real estate investing as a game of Monopoly: eventually they want to trade in their green houses for a red hotel. There is a perception that the goal of buying individual homes is a step toward the ultimate goal of owning a multifamily property, office, warehouse, or retail space. However, that isn’t necessarily true. Deciding on which asset class to invest in depends on what level of risk you want to accept, as well as the level of effort.
There is a degree of risk involved in every investment, and each type of asset class of building brings different risks and rewards. Residential properties have shorter leases, making it easier and faster to rehab the building, hire a new property manager, and raise rents. Conversely, office buildings generally have five-seven year leases, meaning it would take longer to raise rents, but they tend to be easier to run than apartment buildings. Depending on how much time you want to spend holding the property and how much energy you have to manage it will determine what type of asset class in which to invest.
Lon started buying office buildings right before the pandemic hit and is seeing the changes in what tenants are looking for in office space. Smaller office spaces for 1-2 people are starting to see some activity as people are getting tired of working from home, and 5-7 person offices are starting to pick up, as well. He’s also seeing a trend toward tenants looking for A locations but moving down to B level buildings to save money on rent. He’s keeping an eye on how these trends will change as the vaccines start to become more widespread.
Case Study: Pueblo Multifamily Unit
A few years ago, a group of investors went on a bus tour down in Pueblo, Colorado to look at potential investments. The group looked at a 12-unit apartment building, and Lon said that if nobody else moved on it, he would. When no one else stepped up to put in an offer, Lon bought the building.
How did he know so quickly that buying the building would pay off? Lon ran us through the numbers to show us how he made his decision.
Lon made calculations that showed how he would be able to make money on this investment. He used basic computations calculating rent and various costs, such as utilities, property management, taxes, and insurance. He also determined the Internal Rate of Return (IRR) to get a high level picture of how much the property would be worth. Other metrics can be useful in evaluating return, such as cash on cash, gross rent multiplier, or the cap rate, but Lon prefers the IRR because it takes into account appreciation.
He made similar calculations that proved that the property was a worthwhile investment. The building was almost entirely occupied by tenants with a special type of Section 8 plan that paid less to the landlord per month but covered some vacancy costs and paid out a certain amount if an apartment were left in poor condition. The problem was that neither scenario occurred enough to make up the difference, so Lon worked with the Pueblo Housing Authority to move the building to a normal Section 8 program. Just doing that saved money every month and didn’t disrupt the tenants. Simple money saving changes, such as installing low flow toilets or LED lightbulbs, may take years to pay off, but doing the math shows that they are worth the time it takes to do them. Any opportunity to decrease operating costs or increase rent will raise the value of the property significantly.
Listen to the podcast to hear Lon walk through these calculations in more detail.
Thanks to the power of compounding interest, Lon was able to turn his comic book collection into a strong real estate portfolio. He follows simple guidelines and knows how much time and energy he wants and can to devote to different properties. To learn more about real estate investing in Denver, check out the classes at Your Castle (anyone can attend) or contact an Envision Advisors at Your Castle agent.