I live in Highlands Ranch, Colorado and have two rental properties, one in Highlands Ranch and recently purchased another rental in Castle Rock. I am still actively looking for investment properties in this area, mainly in Douglas County. I don't think the rentals in this area really fit the 1%-2% rule or the 50% rule, but I see rentals are everywhere in my area based on research on Zillow and County Assessor web site. Would like to connect with other REI and landlords in this area to bounce off ideas and see how other investors are acquiring properties and getting loans to expand their rental portfolio.
Hi @John Yu I don't live in Denver, but own two properties in the Denver area and I am actively looking for more properties there. I agree with you that prices have moved well beyond both of your metrics. Since I own only SFRs, I'm curious how multi-unit buildings are doing.
I'm interested in keeping in the loop on these conversations.
Hi @Steven W. I haven't really explored multi-unit myself. Both of my rental are SFRs as well. I haven't looked beyond my farm area which is Douglas County, mainly Highlands Ranch, Castle Rock, and Parker, but a decent SFR rental here that fits my criteria is around $300k. Just curious, where are your rentals in Denver and where are you looking?
I'd buy something here if I could find something, too. But there's nothing. I've been considering Pueblo, but have some concerns about its job prospects.
The 50% rule isn't something a property hits. Its just a rough rule of thumb for what your expenses, capital, and vacancy will be over the long term for a portfolio of properties. Any particular property can do somewhat better in a year or can do much worse.
Jon Holdman, Flying Phoenix LLC
Hi John. I love the Highlands Ranch and surrounding market counties as target market. But agree with your analysis that break even or slight cash flow is normal. You need either heavy cash down, an owner occupancy model moving around, or a rare fixer upper. All this is challenging marker where there are more buyers than sellers. But I think that this heavy demand also spurs appreciation and the long-term hold model may be worth it long term - 20 or 30 years as property appreciates, inflation impacts, rents increase, and the home gets paid off. Happy to talk more.
Thanks @Jon Holdman. My current model is purchase SFR in the $300k range, put 20%-25% down, so my PITI is around $1300. I can usually rent them out for approx. $2200. These are nicer homes, usually without repairs, and are built after 1995. Would you have invested based on these numbers. I see all other rentals in the area have similar numbers in terms of purchase price and rental income. I am looking for more properties but keep coming up with 20% downpayment and qualifying for loans is a big challenge, but of course finding good deals is the hardest part.
All of the above. For better or worse, I think the economic drivers of the lack of inventory and huge appreciation we have seen in certain areas are sustainable. It will (likely) cool off but I do not think its a 'bubble' of any sort.
IMHO Denver is a strong market if you can get in on agreeable terms. Still looking here!
Hi @John Yu you should be able to find deals like that plenty of places in Denver. Those aren't close to my personal criteria. My analysis gives your deals a 4% cash on cash return with 20-25% down assuming I'm doing my own management. I think that's too low for rentals. Nevertheless, these may be good speculative plays and are generating a little cash.
Jon Holdman, Flying Phoenix LLC
Jon Holdman Hi Jon, just curious, how did you calculate the 4% cash on cash. Assuming purchase price is $300k and 20% (60k) down. PITI is $1328 (this is what I am currently paying) and rental is $2200 per month. So my calculation is ($2200-$1328)*12 then divided by $60,000 = 17.44% cash on cash. I understand 17.44% is not the actual cash on cash and your calculation includes expenses, vacancy, etc, just curious as how other investor calculate their cash on cash and what sort of expenses you included in your formula. Thanks.
@John Yu I refer to your number (rent - PITI) as "phony cash flow". It only accounts for taxes and insurance and neglects the plethora of other expenses, capital, and vacancy you will have over time. The 50% rule says that 50% of gross rents, $1100 a month in your case, will go to expense, capital and vacancy. A big chunk of that is property management. So, backing that out, I use 36%. That works out to $792 a month on average. For your P&I I get $1140 a month assuming 25% down on a $300K house with a 4.5%, 30 year fixed loan. So that leaves $268 a month, $3215 a year, in true cash flow. Which is a 4.3% cash on cash return on your $75K down payment.
Your number is your best possible month. Not all months will be that good. You will have maintenance, even on a brand new house. People living in a house have a way of damaging stuff. If you have carpets in those houses, you will have to replace those. The IRS says they last five years. I've been told judges in our area say three. Roofs, furnaces and appliances all need replacement. Serious tenant damage is a real possibility. A lengthy and expensive eviction is a possibility, too.
Lenders use the formula 75% * rent - PITI to estimate net rental income. In your example, that would be $1650 - $1328 = $322, which is a bit better than my number.
You'll find plenty of people who think this is overly conservative. And it is just an estimate. Reality will be whatever it is. You don't really control that.
Jon Holdman, Flying Phoenix LLC
@Jon Holdman Thanks Jon. That's great information.
Thank you @Jon Holdman
I found the post very informative, as I too am looking for deals in the Denver area.
@@Kevin Greer Hi Kevin, so do you own any rentals in Highlands Ranch? It is just crazy here, prices have gone up so much even just from a year ago.
I agree with Jon who is spot-on that in an "all-in expense model" which is how you have to look at each deal (use a detailed spreadsheet model) that cash on cash in these $300K homes is more realistic at 2-4% ROI. If you use a property manager, then maybe break-even. You have to be prepared to ride along long-term to make these deals work.
However, personal believe is that with rates likely to increase next year, demand will stay high, rents will increase, property values will increase and we'll find that these homes will be $400K homes within a decade. Compare to other large cities where comperable homes are $600, $700K, etc, people will continue to come to Colorado as long as the job market stays robust. Therefore, I see this investment game different than 1 or 2% rule and immediate cash flow and there is some risk involved. My 2 cents.
This is one of the best threads I've seen on here in a long time. Great information in valuing rentals.
@Kevin Greer Totally agree. Although my rentals may not yield high cash on cash, but I like having appreciation, loan pay down and the tax benefits as other avenues for my investment.
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