Possible to find rental property in Denver that passes 1% test?

Question

Is it possible to find a rental property in Denver that passes the 1% or 2% test?  If not, what's the real expectation when looking for rental property investment?  A 4 unit multiplex property is being rented for $5200 with an asking price of $770000.  How would you ask the seller to drop it down to $520,000.00 to pass the 1% test?

Mike Wadsley · Answer

1% is really tough in the Denver market. You're better off looking at your COC return. Use the BiggerPockets calculator to slice and dice your numbers. It does a good job of showing what you can expect to see. Just make sure that you're reasonable about your NOI.

That kind of a discount won't even get you a response from a seller, unless they are desperate.

Lee Ripma · Answer

@Bao Vu

Appreciation markets almost never hit the 1% rule WHEN YOU BUY. Through time rents will go up as mortgage is locked in so you’ll get closer to it.

James Carlson · Answer

Short answer: No.

Longer answer: Possibly with the rent-by-the-room or house hack model, as @Jeff White said. But the real answer is that if you're stuck on the 1% rule, Denver isn't your market. (And neither is Colorado Springs at this point, either, another market where we work and have the un-fun conversations with potential investors about the reality of the Colorado markets.)

If you're coming here no matter what, then focus on a property in a decent area, but not the best area, a mid-to-outer ring of the "cool" areas, make it nice enough to rent but again not the top of the line, and do your best to cash flow a little. (And I'm talking a few hundred.) If you can do that, then start looking at the other ways you make money, which actually build wealth quicker than cash flow.

Or, if cash flow and the 1% rule are priorities to you, consider investing in the midwest. Good luck!

Jeff White · Answer

@Bao Vu Hi Bao, the only way to get rental property that is a 1% deal or close 1% deal is to purchase a single family house in the 400-500k range with 5+ bedrooms and 3+ bathrooms and utilize the rent by room strategy.  Since rent-by-room strategy works best with more bedrooms and bathrooms, ideally, if you found a 6 bedroom place and averaged $750 per room (very realistic in most parts of Denver), that would gross you $4,500 per month in gross cash flow.  Therefore, you would need to find a place for $450k. There are still plenty of houses that fit that description all around Denver metro, but mostly in Westminster, Arvada, Northglenn, Lakewood, West Denver, and Southwest Denver.

Since you are buying a large single family house, you need to look out for occupancy limits and make sure you have plenty of parking. It doesn't work in every neighborhood or location, but it is a strategy that works best if you desire the highest cash flowing property.

Matt M. · Answer

It's rare to find a 1% deal, but not impossible. However you have to have a solid network of people looking off market. I wouldn't focus on that because it'll be a long time before you pull the trigger. Lower your criteria and look at long term.

Michael Gilman · Answer

As of others have said in an appreciation market like Denver properties will not cash flow well as is, but you can typically execute reposition/value add strategies in these markets to give you higher returns then you could get in high cap rate/cash flow markets. For example, we have a 54 unit in contract at roughly a 5% cap in a developing area. Plan is to renovate, improve, increase NOI by north of 20% during hold and return 110% to our investors. This would typically not be possible in a high cap rate cash flowing market because the growth is not there.

Bao Vu · Answer

@Lee Ripma

@Mike Wadsley

Thank you.  Soaking it all in.  Back to the drawing board.  Maybe there’s something can be done with this one.   The building is sitting on a .3 acre lot with a chance to build out something.

Possible to find rental property in Denver that passes 1% test?

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