Are there LTR deals in Colorado?

Question

Looking for advice from any investors in Colorado! I'm an out-of-state investor with family and friends in Colorado, so I'm evaluating the market there. I'm looking for SFR and Multifamily, something on the more passive side (I would hire property management) and I'm looking to hew as close to the 1% role as closely as I possibly can.

Is the 1% rule possible anywhere in Colorado? Thanks in advance!

Chris Lopez · Answer

@Sean Conroy you won't see 1% rule properties in Denver. But forget that rule! It's not a great rule of thumb that doesn't take into consideration a lot of other factors. Denver still cash flows and has upside in rents and appreciation.

Plus the 1% rule takes no consideration into account with your financing costs. Since interest rates have dropped, there is a bigger spread between cap rates and borrowing costs... which is great!

Greg H. · Answer

@Scott Emsley

1% is a bad metric to use for a multi-family as you have 2 or more of almost everything to repair except a roof

I do agree that the Western Slope and Grand Junction is a good area to invest as far as appreciation goes as we have a place here the we occupy part-time

Jeremy Norman · Answer

There are tons of threads about it on the site so I will just say the 1% (or 2%) rule has many serious limitations.  Anecdotally, I've noticed that a $100/unit number requires somewhere between .8% and 1.3% depending on the exact submarket in Pueblo (which is a relatively small city compared to Colorado Springs and North)... Actually to be completely honest, there are some areas of Pueblo where I think 2% would be needed once actual operations start.

In my experience, it's always necessary to completely underwrite the property to estimate cash flow here. A % doesn't work. Hard $'s per month are real. Pueblo and Colorado Springs, for instance, cost about the same to fix everything, but the house prices in one market are half of the other. I'm not a fan of "10% for repairs" when the rents are 500 vs 1500 but the same roofer (or whatever) fixes both locations. Denver and Colorado Springs have a less exaggerated, but similar problem. Honestly, after you've done enough underwriting it's a matter of seeing it and the rule is just "know it when you see it." Seems like I can only create rules as simple as a % rent vs price at a street or neighborhood level.

Rules aside, there are properties that cash flow on the Colorado front range (and even some BRRRRs, in Pueblo at minimum, maybe others). The market here is so hot though, even now, properties often sell for negative cash flow or break even if they make it to the MLS. However, it's not always the case and so the persistent bird gets the worm. Generally, small multifamily (2-4) have better odds of cash flow... in fact I got a listing from Colin Smith earlier this week that cash flows ~$50/unit as is in Colorado Springs, if I recall. (I recommend him, btw, if you are looking in the Springs)

Now, after all that... I agree with @Steve K.... The real power in any deal along the front range is that there is a lot of growth without enough supply to cover it. That means that a lot of appreciation is happening both in equity and cash flow.

I'm at a stage in my journey where I can't buy a house every month anyway, so I'm just picky and wait for the property that can cash flow the amount I want and then also get all the goodies that an appreciation market brings too. They seem rare, but they happen. Increasingly, it's getting hard to find cash flow out of the gate, but that's a problem I want - the harder it gets, the more my existing acquisitions (where I locked in my cash flow) are just going to get better and better.

Scott Emsley · Answer

Good to see someone from the Western Slope has already replied. I would like to second her sentiment. I'm a Realtor and investor here. I am especially biased to Fruita, CO. It's a less common play than I've seen on this site, but I think multifamily new builds are the best bet right now. I'm getting pretty darn close to the 1% rule with my new multifamily build, and this area has been continuing to have great appreciation for the past several years and in spite of the pandemic.

Sean Conroy · Answer

@Steve K. Such a thoughtful, well-articulated answer. Hugely, hugely appreciate that. Learned strategies I didn't even know existed. Time for me to dig in deeper and get back to you all! Appreciate everyone's time and input here.

Alex Bekeza · Answer

@Sean Conroy I've seen BRRRR deals and general LTR scenarios pencil out well in Pueblo.  It's a bit of an outlier in CO that functions more like a typical BRRRR market in the mid west or south.  You won't experience the same type of appreciation that you would in Denver but the cash flow actually can make sense.

Steve K. · Answer

Not necessarily. It's definitely harder if you're trying to be a passive investor here unless you have excellent boots on the ground, but I've BRRRR'd 4 deals here, and they all cashflow very well even after refinancing out most of my cash. It's not easy to find deals like this but the value add small multifamily strategy works well here in providing a perfect blend of cash flow and appreciation.

I have friends and clients that are implementing successful cash flowing strategies in small multifamily, condos as well as renting single family homes by the room to create cash flow that way. It's hard to buy retail off the shelf with immediate day one cash flow without adding any value, but it can be created in 6-12 months fairly easily simply by making cosmetic upgrades and increasing rents if you buy in an up and coming location. For those that can afford to jump straight into the $1M+ price band, there's less competition and more cash flow in multifamily, with day one cash flow being possible in that category, as well as appreciation, which is why I like that asset class the best personally.

The biggest factors that really juice overall returns here are rent increases and appreciation. On my favorite building I own, a small multifamily near Wash Park, it was cash flow negative the first full year as I made improvements and turned over the under-rented units, but now it cash flows very well. Here's the kicker: appreciation has been equal to $350 PER DAY during my ownership of that building. I'll take $350 per day appreciation, PLUS $350/per month cash flow, over JUST $350 per month cash flow, every time.

Because property values are high, principle pay down is also nothing to sniff at for buy and hold investors in this market either, and depreciation tax benefits help boost overall returns as well.

Sean Conroy · Answer

@James Carlson "and at the risk of sounding like a real estate agent selling the city he works in" :) This line is great.

But just to be clear: "That doesn't take into account a lot of of factors that still make Denver and Colorado Springs super attractive." I have zero doubt there's a lot that makes CO investment a smart play, but unless I'm missing something (and I am pretty new to RE investing), those factors all add up to an appreciation play, correct?

Jonah Torres · Answer

I've been searching in Colorado Springs, Pueblo, and Denver.

James Carlson · Answer

@Sean Conroy

I'm sure there's some area where the 1% rule still works in Colorado, but anywhere interesting -- say, Denver or Colorado Springs -- it's going to be nearly impossible to find such deals.

But as others have said -- and at the risk of sounding like a real estate agent selling the city he works in -- that doesn't take into account a lot of of factors that still make Denver  and Colorado Springs super attractive.

Are there LTR deals in Colorado?

Most Popular Reply