Investment Guidance on Denver Colorado

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Investment Guidance on Denver Colorado

Sunny Basu
Denver, CO · Member since 2016 · 4 posts · 0 votes

Would really appreciate some feedback on the below specific scenario from Denver experts.

I will be in Denver for maybe another year max before moving out to another city/state (due to the nature of my job which keeps me moving every 2-3 years). 

I am planning to invest in a house in Denver as looks like the property prices would keep on appreciating and the city itself is growing.I will be the end user for the 1st year or so before renting out.

I am very familiar with the Southeast Aurora area ( The Farm, Siena, Wheatlands, Tallyn's Reach, Beacon Point etc) and would like to invest there.

What is the price point I should look at which would have the maximum possibility of cash flow from rental income ? I see a few homes in this area between 400-450K. my target rental audience would be family with kids due to CCSD and some highly rated schools in this area.

Questions:

***** Am going to give around 5% downpayment , hence would have to pay MI. I am able to see the "asking price" for rental properties in this area in Zillow, padmapper but not sure how much they actually rent for. 

Any idea on rentals of SFH in this area ?

***** What is the price point I should look at which would have the maximum possibility of cash flow from rental income ? 

For example: with 5% down -- a $425,000 home would come to $2500 per month mortgage ( as per zillow mortgage calculator)

***** If a slowdown happens and rental prices drop, how much of a drop (worst case) can be expected. I can absorb $200-300 every month for 2 years ( Rental minus Mortgage(+MI+Taxes) ) 

***** When i move out of state -- i may have to hire a Property Manager -- so I  have to factor in that cost as well.

Within 3 years I plan to put some extra money into the Mortgage and get rid of the PMI, so that should take out the $250 per month extra payment.

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Travis Sperr
Lender · Denver, CO · Member since 2009 · 1k+ posts · 597 votes
9y

@Sunny Basu This is a tough on because you intend to live in the property before moving (meaning you may need a better neighborhood than a straight investment purchase). It has been my experience that it is difficult to make money on single family properties with a value above about $250-300k. The mortgage amount is so high and the rents only increase marginally after about $2,200 per month. I am not sure what you are seeing for rents in that area? 

Does your zillow calculator include taxes and insurance? Toss a property manager, vacancy and repairs in the mix and it gets tight.

Not saying it cant happen but I would really encourage you to run your numbers and see if the cash flow makes sense. You might find that a smaller purchase price with 3 or 4 beds would yield a better return.

Last thought is if the property doesn't perform well it could make it difficult to finance a purchase where you are moving to.

Good Luck!

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  • Travis Sperr
    Lender · Denver, CO · Member since 2009 · 1k+ posts · 597 votes
    9y

    @Sunny Basu This is a tough on because you intend to live in the property before moving (meaning you may need a better neighborhood than a straight investment purchase). It has been my experience that it is difficult to make money on single family properties with a value above about $250-300k. The mortgage amount is so high and the rents only increase marginally after about $2,200 per month. I am not sure what you are seeing for rents in that area? 

    Does your zillow calculator include taxes and insurance? Toss a property manager, vacancy and repairs in the mix and it gets tight.

    Not saying it cant happen but I would really encourage you to run your numbers and see if the cash flow makes sense. You might find that a smaller purchase price with 3 or 4 beds would yield a better return.

    Last thought is if the property doesn't perform well it could make it difficult to finance a purchase where you are moving to.

    Good Luck!

    1Reply
  • Dan MackinBusiness Member
    Real Estate Agent · Erie, CO · Member since 2014 · 1k+ posts · 512 votes
    9y

    @Sunny Basu do you own a house already? If not you may qualify for other loans that don't have PMI and still have low down payments. If you make too much this will also disqualify you, but it's worth checking. Tacking on to what Travis said, the numbers would be very difficult to make work at that price point. If you're playing on appreciation that is up to you, but as a pure rental calculation you would be hard pressed to make that property worth while. Other than schools what appeals to you in the 400k+ SFH price point? That's not an easy market to make work overall with rentals in the Denver area.

    720-466-3378
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  • Sam Kabli
    Littleton, CO · Member since 2016 · 14 posts · 2 votes
    9y

     @dan mackin I was reading your post and am curios what loans you are reffering to here " you may qualify for other loans that don't have PMI and still have low down payments" because i personally dont own a house but so far all the quotes I received for finance require some type of MI with low down payment ?

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  • Sunny Basu
    OP
    Denver, CO · Member since 2016 · 4 posts · 0 votes
    9y

    @Travis Sperr thanks for your reply. Yes looks like its getting tight. 

    Yes Zillow calculator includes Taxes and Insurance and PMI.

    I just looked up Zillow Rentals and Zillow On-Sale Simulataneously (for example for Tallyn's Reach). Seeing rentals of 2.6K and 2.8K (asking price on Zillow) and similar homes(3/4 bed and 2/5/3 ba) listed for sale between 400K to 430K.

    There is no way for me to confirm the FINAL rental prices , but from the asking price it does look like you are absolutely bang on -- not much of rental yield (specially considering Property Manager + Maintenence etc ). Mortgage payment = $2600, rental between $2600 and $2800

    The only positive factor is that if I stay in the house for a year -- then I would be saving the 20K towards my current apartment rent

    However in 3 years time, when I am able to ay 20% of the home value (with extra payments) -- the Mortgage payment would be 2K and rental 2.6K (assuming no change). So a $600 per month margin

    @Dan Mackin thanks for your reply . Zero houses as of now . i will try to research the other loan options (what are they ?). I earn in six figures (lower end) -- so not sure whether i would still qualify.

    Apart from Good schools, other positives to me are Newer homes (as opposed to smaller older homes in DTC/Centennial area), close to Southlands mall and Aurora Reservoir (Tallyns Reach, Beacon point, Wheatlands), 20 min drive to DTC and 25 min to Airport (via 470 toll rd). All in all , looks like these factors may attract families to my rental property.

    Regarding Appreciation of property -- am wondering what it would be if I am able to hold the property for 5-7 years.  I am hoping (as some experts are saying) that we would continue to see  between 8-10% annual appreciation and may be Denver suburb prices would become closer to prices in CA, but on the other hand I keep hearing that prices have hit a plateau. So a bit of a gamble there 

    As both of you mentioned, looks like the "sweet spot" is indeed the $300K mark. Shall do some more research to see what options I have ( area, home size etc) at that price point and the ongoing rentals.  Most of the homes in the above areas which are in the 400K range were in the 300K mark a couple of years back -- so may be I may have missed the golden boat -- but still don't want to sit in the sidelines without doing anything

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  • Dan MackinBusiness Member
    Real Estate Agent · Erie, CO · Member since 2014 · 1k+ posts · 512 votes
    9y

    @Sam Kabli and @Sunny Basu the loan is called HomeReady. It's 3% down conventional with no PMI. Rate is reasonable too and for most of my folks has been under 4%. If you're making 6 digits it's likely you're over the income qualification, but it's always worth checking. Send me a PM if you want the info for the mortgage broker my clients have used for the program.

    Sunny, the 300k mark is what is working now. Yes, the numbers were better a few years back, but for those looking for rentals currently that's just the current higher mark for most properties that would make sense as a rental. Not all will of course. Another thing to consider is what areas will have the best development happening over the next 5 - 10 years. Some of those areas you're considering are nice homes, but they are also on the outer scope of the Denver area. You may have better chances elsewhere.

    720-466-3378
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  • Travis Sperr
    Lender · Denver, CO · Member since 2009 · 1k+ posts · 597 votes
    9y
    Originally posted by :

    thanks for your reply. Yes looks like its getting tight. 

    Yes Zillow calculator includes Taxes and Insurance and PMI.

    I just looked up Zillow Rentals and Zillow On-Sale Simulataneously (for example for Tallyn's Reach). Seeing rentals of 2.6K and 2.8K (asking price on Zillow) and similar homes(3/4 bed and 2/5/3 ba) listed for sale between 400K to 430K.

    There is no way for me to confirm the FINAL rental prices , but from the asking price it does look like you are absolutely bang on -- not much of rental yield (specially considering Property Manager + Maintenence etc ). Mortgage payment = $2600, rental between $2600 and $2800

    The only positive factor is that if I stay in the house for a year -- then I would be saving the 20K towards my current apartment rent

    However in 3 years time, when I am able to ay 20% of the home value (with extra payments) -- the Mortgage payment would be 2K and rental 2.6K (assuming no change). So a $600 per month margin

    Regarding Appreciation of property -- am wondering what it would be if I am able to hold the property for 5-7 years.  I am hoping (as some experts are saying) that we would continue to see  between 8-10% annual appreciation and may be Denver suburb prices would become closer to prices in CA, but on the other hand I keep hearing that prices have hit a plateau. So a bit of a gamble there 

    As both of you mentioned, looks like the "sweet spot" is indeed the $300K mark. Shall do some more research to see what options I have ( area, home size etc) at that price point and the ongoing rentals.  Most of the homes in the above areas which are in the 400K range were in the 300K mark a couple of years back -- so may be I may have missed the golden boat -- but still don't want to sit in the sidelines without doing anything

     A couple notes

    I don't follow when you said you would be saving the $20k toward rent? there is almost 0 loan pay down in the first year especially when considering the money you will spend on the property.

    No Idea what this means: However in 3 years time, when I am able to ay 20% of the home value (with extra payments) -- the Mortgage payment would be 2K and rental 2.6K (assuming no change). So a $600 per month margin

    Don't count on such high appreciation, the Denver Metro appreciation over the last 40 years is 6% per year.

    Also do a little research on what a turn over costs especially on a higher end home with sq ftg.

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  • Sunny Basu
    OP
    Denver, CO · Member since 2016 · 4 posts · 0 votes
    9y

    @Travis Sperr thanks for your comments, you are right I was not correct on a couple of comments

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  • Bill S.Pro Member
    Moderator
    Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
    9y

    @Sunny Basu personally I think it's a really bad idea. In that price point $300k-$400K you will struggle to find qualified renters. Anyone that can afford the rent will buy. Perhaps you can eek out 1 year from a family moving to the area that wants the schools and to test drive the area. Bottom line is you are probably looking at a vacancy every year. That makes turnover costs (paint, and carpet) sky rocket. You then have a month vacancy as well and when you pile on property management fees for filling the property you end up way behind. 

    There is immense competition coming on line in that price point as well. Sure you will have a yard but with most kids playing computers and ipads I don't think you would have too much over one of those big box apartment complexes and I'm sure they are going to be running some serious deals in the next few years. 

    You mentioned you can absorb $200-$300 every month for 2 years. That is what is known in the business as an alligator. It will eat your lunch. It's likely after three years you will beg someone to take it away from you. 

    Remember everything costs more and takes longer. I would guess, you could easily see a delta of $1,000 per month. That means you taking that kind of $ out of your disposable income for the next 2-3 years. It would seem the $20K you would "waste" over the next year would pale in comparison to what it will ultimately cost you. Generally speaking it's not considered a good idea to buy a home in an area unless you plan on living there (the area) longer than 2 years. While we have had good appreciation, it will end and I would not bet that it will last another 3-5 years at anywhere near the current rate.

    I might be wrong. If I am you would loose the opportunity here but if you buy where you are going, the cost is going to be relatively low. If I'm right, it could set you back years in your investing.

    IMO now is not a good time to be "reaching/stretching" to make a long term hold work.

    You asked for feedback and obviously you can do what you want.

    1Reply
  • Jared Bouzek
    Lender · Denver, CO · Member since 2015 · 404 posts · 227 votes
    9y

    @Sunny Basu & @Sam Kabli I agree with the overall sentiment of the thread that $400k is probably not a great price point for buy & hold rentals. As stated above, your best bet is probably $300k and below. Willingly taking a negative cash flow to make it work sounds like a recipe for disaster because you're relying on future factors that are entirely out of your control to make the deal work.

    On the subject of the HomeReady program I have a couple of notes. HomeReady does in fact come with mortgage insurance similar to nearly any other loan program where you choose to put a low amount down. But like those other programs, HomeReady comes with multiple options on how to handle the PMI. You can pay it monthly with your mortgage payment (Borrower-Paid Mortgage Insurance - BPMI) or you can pay a slightly higher interest rate and the lender pays your mortgage insurance (Lender-Paid Mortgage Insurance - LPMI). There are also options with combinations of those two options that aren't worth delving into here.

    Here is a purely hypothetical math example for how this works using made up interest rates:

    Let's say your "par" interest rate for a 30 year fixed HomeReady is 3.75%.

    You can choose BPMI and pay .75% in monthly mortgage insurance making your effective interest rate 3.75 + .75 = 4.5%.

    Or you can choose LPMI and the lender will finance the PMI making your interest rate 4.125%.

    There are plenty of lenders trying to sell LPMI as "no mortgage insurance". The reality is you're just paying the mortgage insurance in a different way. The lender is required by federal law to disclose this fact to you, so if they don't, they are out of legal compliance.

    The advantages to HomeReady are 3% down, reduced PMI requirements compared to other programs, and if you have over a 680 credit score, you have no "hits" to your interest rate aside from PMI factors. So if you are a 681 FICO putting 3% down, your interest rate is treated similar to somebody with an 800 FICO putting 25% down. There are other benefits that probably don't pertain to your situation.

    On the subject of the HomeReady income limits, they can vary widely from place to place around the Denver metro. Some places have income limits and some don't have any income limits at all, so even if you're making six figures, you may find an area of the city where you can buy with HomeReady. You don't need a loan officer to look those limits up for you. Fannie Mae provides a free tool at this link: HomeReady Income Limits

    One note of caution about using that lookup tool is that the tool is really supposed to be address specific. Yes, the income territories cover areas much larger than address specific but I would be hesitant to simply plug in a zip code to that lookup tool and assume that everything that falls within the polygon it draws falls within that income guideline. In my opinion, the best way to use the tool is to take a specific address of a home you're interested in and use it to search the income limit.

    1Reply
  • Carl Olsen
    Investor · Conifer, CO · Member since 2016 · 14 posts · 7 votes
    9y

    @Sunny Basu have you had a look at the numbers using the rental calculator on BiggerPockets. I think filling in the fields on the calculator prompts you to include all the costs and will give you a better idea of what the numbers look like. 

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  • Sunny Basu
    OP
    Denver, CO · Member since 2016 · 4 posts · 0 votes
    9y

    @Bill S. @Jared Bouzek @Carl Olsen @Dan Mackin @Travis Sperr  thanks for the inputs , they have certainly made me more educated and helped put things in the right perspective and will help me make a more uniformed decision. Thanks for your time

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