Multi-Family Metrics in the Denver Market

17 Replies

Hi All,

I'm relatively new to the Denver area, and very new to the Bigger Pockets forum. I've been keeping an eye on the Denver market for the last 6 months or so, and I've got a few questions for active investors in the market. Primarily, I'm interested in whether others are actually seeing many listings where the numbers work relative to standard buy and hold metrics. By that I mean 

  • Rent >= 1% of purchase price
  • Positive cash flow assuming
    • Conventionally financed properties 20% down
    • 50% rule or full estimates for operating expenses

I know that many of the best deals never hit the MLS, but I'm not seeing anything close to numbers that actually work. This leads me to believe that either everything where the numbers work are being snapped up before they hit the MLS, or that folks are buying multi-families that are not meeting the 1% rule, and/or are just barely breaking even with the hope that the market will continue to appreciate at a higher than average clip, or that rents will continue increase in the way they have the last few years. I'm seeing much of the same on the SFH market, but it makes a bit more sense there, because given the influx of new residents, and the limited inventory, we're competing with buyers looking for primary residences and the numbers don't need to work out beyond whether they can afford the payment.

Just curious what others are seeing. I'm looking to purchase a 2-4 unit property this year, but at this point I'm likely to stick with the Chicago market (my native market) where I'm still seeing Rent/Purchase at rates of around 1.5% and cash-on-cash return >= 15%, despite much higher property taxes.  My primary focus is cash-on-cash return, and I personally have no interest in gambling on continue appreciation or rents increasing at the rates they have the last few years here in Denver.

Looking forward to hearing from others on this topic.



I had this same viewpoint when I was just starting out in real estate about two years ago. In exactly the same position, I wanted as much cash flow as possible, RIGHT NOW. If you want that to happen, you will have to leave Denver. There are plenty of properties on paper that will do much better than properties you can get here, if you abide by the 1% rule and the 50% rule. 

The problem is, here I am today, cash flowing $500 per door per month, just two years later. Why? Because the properties are local and I can manage them myself, and because rents have gone up. You can say that's not cash flow, but I get one call every few months, spend an hour or two solving the problem, and move on with my day.

When you say that you "have no interest in gambling on continued appreciation or rents increasing at the rates they have the last few years" that's smart - you shouldn't buy a property that bleeds cash on a monthly basis. But, just because a property doesn't meet the 1% rule doesn't mean that it isn't capable of cash flowing right now.

Take my duplex, using 2014 numbers whenI bought it. I had a mortgage of $1,550 per month, rents of $1100 on both sides, and a purchase price of $240,000. Using the 50% rule, I'm losing $450 per month. But strangely, that didn't happen. I've had almost no vacancy in two years, and rents have risen substantially. Furthermore, my expenses in managing this property are more like $100 per month for operating expenses, and even if you budget in $250 per month for CapEx, that leaves you with $300 per month in cash flow, assuming you self-manage (which you should).

The problem with the 50% rule is that it is ridiculous to apply it to more expensive markets like Denver, at least in my opinion. How on god's green earth can one argue that it is substantially different to operate a 1500 sqft structure in Denver, than it is in a market like Milwaukee? 

Suppose you bought a 1500 sqft duplex in the midwest for $50,000 and each side rented for $500 per month - $1,000 total rent or a "2% rule" property. It is ridiculous to argue that maintaining my exact same duplex is $1100 per month and that same property in another state costs $500 per month. 

Materials cost the same. Utilities probably aren't too different. Appliances cost about the same. Handyman or contractor work is perhaps a little more expensive out here, but not 2X. 

To this point, the person that hasn't invested in Denver will argue, "But what about vacancies, property management, etc? Those costs are a percentage of rent, so of course they go up, right?

And that may be technically true. But, there are two problems with this. 

First, here in Denver, vacancies have not been a reality and will not be a reality for landlords until more units enter the market. I'm not saying not to factor in vacancies, but you can probably survive by assuming 2-3% vacancy instead of 5-10% like in other markets. 

Second, because per unit rent is typically well over $1,000 per month, you can't afford property management. Property management should not consume more than an hour or two per month per unit, if you are willing to self-educate. Hiring a property manager for my duplex (which now commands $2,675 per month in aggregate rent, because yes, rents rose) would cost me about $267.50 per month (property managers tend to charge 8-10% of gross rent). I don't know about you, but I don't make that much money per hour. In fact, I don't make half that, or a third of that, or even a third of that, per hour. Why on earth, then, would I hire a property manager to maintain the property for me when I have the opportunity to take on easy work that 1) will help me scale in the future when I do acquire hundreds of units and need to outsource that task and 2) saves me tons of money right now?

If the property only produced $500 per unit in rent, and all the sudden I'm doing $20 per hour work in managing the units in a 2% neighborhood with higher turnover, then of course property management becomes a no-brainer.

Lastly, gambling on appreciation is a fools game. But so is ignoring it entirely. The question isn't how much cash flow are you going to get today, it's how much are you likely to get in 5 years, 10 years, 20 years, and 50 years. Who is going to have more cash flow after those timelines? Midwesterner, or Denverite? You don't have to go cash flow negative on a property to at least give yourself a reasonable chance at decent appreciation. You just have to understand that if you go to a place that will surely offer you cash flow today, you often (but not always) forgo the opportunity for increased cash flow down the line.

So, after all of that - You're right. There are no deals that approach the 1% rule here in Denver. Therefore, there are no deals that cash flow, if you assume that operating expenses are 50% of gross rents. However, in spite of math that appears to prove otherwise, I will continue to steadily buy a property or two every year, and will likely continue to cash flow by "cheating" and performing extraordinarily high paying work myself, with a large amount of cash saved up from frugal living in the bank. I expect this plan to allow me to survive and thrive in a market crash if it ever comes here in Denver, and to consistently take advantage of the city's appeal if it doesn't. Critical to that philosophy is the fact that I believe that over the course of 20, 30, or 40 years, prices in Denver will appreciate more than those in other cities around the nation and that I will continue to love living here. 

Hi @Scott Trench - Thanks for the quick reply. I was initially going to apologize for the length of my original post, but you beat me twice over :-)  In all seriousness I'm not at all intending to offend anyone currently buying in Denver. I appreciate the thoughtful response, and it was exactly what I'm looking for from active investors in this market - which is "How are you making it work, and what is your mindset/philosophy despite the numbers not aligning with typical metrics."

A couple in response to a couple of your comments (I'm paraphrasing your points here):

"The 50% less applicable in more expensive markets, because upkeep is similar for a 1,500 square ft. structure in Denver where it yields $2K a month vs. Little Rock where it generates $500."  There is truth to this, but a lot of it is market specific. In a lot of other markets, a big part of the 50% rule is property tax, which tends to pretty closely follow the purchase price, which tends to follow the rent. This is certainly true in a lot of other high rent cities. I'm remain pleasantly shocked all the time by how low property taxes are here.

"Vacancy rates are low in Denver, and will likely stay that way so you are safe with a lower than average vacancy factor." I'm interested to see how all of the units coming on the market downtown are going to play out. I saw some recent numbers that showed rents falling in LoDo as vacancy ticked up. I think that will continue to ripple out a bit as more high density building is replacing lower density or vacant lots closer to downtown. This could also be magnified as they start to convert these to private condos over time. I also think rent as a % of income is starting to reach a ceiling in many, but not all, neighborhoods.

On the property management front, I'm with you. I'd actually prefer to be hands on there while my unit count is low, which is why I'd love to be able to make something work here.

@Marc Allen and @Scott Trench . This is a great discussion - Looking forward to following. I have no idea how people are buying today with comfortable cash flow that would allow them survive a decent drop in rent. Personally I don't buy anything where my cash flow isn't high enough that I couldn't survive a 15% drop in rents and still break even. I have two duplexes here in Denver (one in Jefferson Park I purchased in 2012 and one in Cole I bought in 2013), and I'm doing fantastic on those properties given the rent increases and appreciation, but I don't pretend its all skill. Really anyone buying in '12, '13, '14 should be doing well right now based purely on the luck that our market blew up, but I'm most curious to see who does well going forward, because if I was a betting man, my money would be on a much more flat trajectory for our market the next decade. That said, my properties cash flow numbers worked out when I bought them, and would've continued to even if the market had stayed flat and I'll only continue to buy with that mentality. 

@Marc Allen Hey Marc - I think you make some great points there. I wasn't offended! I think that's just how I write sometimes, so sorry if I came off like that. I fired that off a little quickly at the end of the day, so definitely not trying to be defensive! I sincerely apologize that some of that post came off as a little aggressive, which I now see in rereading it. That was not my intention, but rather to passionately point out that while some folks don't like the Denver conditions, other people can't see why you'd leave! There is no one right way to invest, in my opinion. I also agree with @Mike Stephens remarks here.

Per your point about vacancy rates - yes, the vacancy rate is up a little bit in LoDo in particular because the units have come on the market. Average rents actually fell a little bit year over year in that particular neighborhood, and economic rents fell as well, but I believe that is due largely to the number of brand new units coming in at the high end (average rent is in the $2,000s in LoDo). So, those vacancy rates will have a negligible impact on folks like me renting in the $1100-$1500 range in properties with yards, in my opinion. However, as rents have risen, I believe that I should be fine, even in the event of a 20% rent decrease in the neighborhoods with my rentals.

As for the future, things may well flatten out. I plan to buy consistently, but not aggressively each year-18 months. This, I hope will spread out my risk from any market cycles, and allow me to take advantage of the party continuing if it stays hot for another few years.

I'm also based out of Golden and grew up in Arvada. If come across a great deal I'm always looking to partner.

Curious to see what others have to say here as well. I purchased two properties in the last two years. Both have been able to appreciate in terms of property value and rental potential rather significantly, but it has been hard to find SFRs or small multifamilies that make sense for cash flow recently. I am trying to buy another property at the moment, but not sure if I am being too conservative with my estimates, too scared to pull the trigger on tighter deal, or not looking in the right places.

@Mike Stephens - appreciate the input - looks like we have a similar investment philosophy. 

@Scott Trench - thanks for going first here. 

Looking forward to hearing from other active buy and hold investors here in Denver.

I've been active with Denver rentals since 2008 (12 units) and am still bullish on Denver at a reasonable price (you will have to put in a number of offers).  Denver is a great place for rentals right now, and, as @Scott Trench said, in general the costs of owning/managing the properties has been fairly low for us. I think we've had about 2 weeks of actual vacancy expense that wasn't covered by a deposit in the last 5 years. Of course that all depends on your up-front work in rehabbing the properties, selecting the tenants and staying on top of things. I run my own spreadsheets to determine what I think is ok for cashflow, ROI and anticipated expenses rather than a strict formula - it may not be as much of a no brainer as a 2% type of rule, but it works. One word of caution is that Denver has been cyclical in the past, and as a Realtor I've liquidated portfolios for investors who over-leveraged their properties and got caught by a down cycle. Check the rents and prices of what's around you, and make sure you can still survive if you have to go lower than them for a few years or need to exit quickly.

This is a great discussion!  I'd like to put some input in regarding the concern with the influx of units being built in Denver.  There were 8,900 units permitted in Denver between 8/15 - 8/16.  Colorado, as a state, is seeing about 102,000 people moving to the state per year, which is 8,500 people per month.  Out of those 8,500 people moving here each month, roughly 20% of them are moving to Denver, that's 1,700 people moving to Denver each month.  That puts the monthly inventory of the new units at 5.23 months.  Considering that a "normal" housing markets's inventory is 6 months, I think we'll be fine.  That argument, however, is not bullet proof.

Another, and arguably more important, metric to consider is jobs being added. Denver has 6.05 jobs gained for every 1 unit being built.  The national average is 6 jobs per 1 unit. That indicates Denver permitting is in balance with job growth.   

Hi @Tripp Howell - Thanks for the response. Can you share the source on those numbers? Not questioning them at all, but always looking to add some additionally data sources to the toolkit, and population growth numbers and job growth numbers are about as important as any.  I follow them from a few other sources, but your's seem a bit more real time.

@Marc Allen they're from a company called Axio Metrics, they pulled them from the US Bureau of the Census and the US Bureau of labor statistics. You can find a lot of good info on that govt site.  The bit about the 20% moving to Denver was from the Denver Post.

Thanks, @Tripp Howell - Those are actually the sources, I review, but I just misread your first post and thought your population numbers where from 08/15-/08/16 and I was wondering how they were getting them ahead of this year's Census release.  I see those are for building permits. 

For those who are interested in following the Census releases, they release according to a defined schedule each year, starting at a high level and then getting more detailed. (U.S. and State (December), then County (March), then City (May)). Below is the schedule for release of 07/15-07/16 numbers:

As with others in Denver, I am glad for this discussion, thank you @Marc Allen for opening it up.

I hear from many of you that you are working with great numbers in Denver, but in every case, it appears, purchases were pre-2015. 2016 is yet another story. One of my questions is -- when the purchases were made 2012-2014, did the numbers look solid (1% give-or-take), or did it seem like a gamble back then, as well?

I have had my eye on investing in Denver since last March with the aim of relocating here from the east coast (sorry, natives...). To me, being in Colorado/Denver is reason enough to try to make the investing work, despite the current challenges. The population and jobs picture also provide an interesting draw from an investment standpoint.  

With an initial investing goal of buy and hold to build a small portfolio over 3-5 years for supplementing eventual retirement with cash flow, now I'm not so sure that is a realistic goal for starting here in Denver in 2016. As a newbie with limited skill it is difficult to find that good deal quickly and a little unsettling to purchase at less than 1%, not knowing exactly how that will play out. I also carry a healthy fear of negative cash flow this close to retirement. Younger folks have more time to recover and gamble with an expectation of eventual positive cash flow. However, as @Scott Trench  has pointed out, some monthly costs for rental property calculations should be the same in Denver as, say, the midwest, and, therefore, makes the 1% rule overly conservative for Denver. Instead, it makes more sense to work with a spreadsheet that uses Denver-specific percentages for monthly costs to guide decisions regarding purchasing rental property. I would love to get a sense of what those percentages might be for the Denver area from a variety of folks with a several-year track record of their rental property expenses. Then, these can be plugged into the BP calculators (as adjusted percentages) for analysis. 

Still, even with all this in mind, converting to a strategy of house hacking with a 1 year goal for re-sale (also providing a place to live) might be a more realistic approach here in Denver for the short term while waiting to see if a down cycle might make buy and hold investing a little easier to pull off in a year or two?? I'd be interested to hear from anyone who has made 2016 purchases for buy and hold that are either neutral or in positive cash flow, recognizing that CapEx expenses could be lurking in the shadows to change that picture.

Having landed in Denver (finally) last week and living, temporarily, in my first purchase (condo in Arvada) to make some improvements before renting/selling -- I'm seeing that rental at a stretch would be .07% (maybe $1500 rent for a $213,000 purchase). I landed this condo after three previous failed attempts to buy, and, yes, impatience allowed me to ignore the numbers to just get started. Now, it seems the $213,000 I paid is fine for an owner occupant but not such a great idea for rental investment. I'm considering bailing -- and selling in spring where, who knows, I could possibly see a sale price for $240,000 with a few upgrades? Forget ROI, I'm looking for break-even (all expenses considered) and thinking I should start over and be a little more careful before diving in with the next purchase. I had initially hoped to do that before the end of 2016 -- but time is running short for finding that great deal. Meanwhile, prices keep going up faster than rents...

@Scott Trench @Mike Stephens @Bob Collins @John Negomir

Hi @Patricia Miller I think that if you wait for the down cycle, you'll either be right, or you'll be waiting forever :). As for the metrics about pre-2015, I think that this might be just how it feels right now. I remember buying in 2014, and everyone was saying the same thing about how fast the market had grown. If you ask me again in 6 months, I hope to add another solid property to the portfolio and can talk numbers about that one at that time. I'm just starting to look at deals now, and probably need another 3-4 months to save up enough to buy properties of the type that fit in with my long term plan. 

Furthermore, I think that the cash flow problems may be mitigated a little bit if you can owner-occupy slightly larger properties. A triplex for example might go for $500K, and generate rents of $1000 - $1200 per unit. If you put down 25%, your mortgage will probably come to about $2400 per month or so at 4.65% interest (interest on my recent refinance, I'd have to check current rates). So, two units occupied cover the mortgage, and the third would provide your cushion. I'd have to imagine that managing the property wouldn't set you back more than $500 per month, if you do it yourself. The rest can cover capex and vacancy, with likely a substantial left over for cash flow. So, on a $125K downpayment, you might find yourself cashflowing $700-$1000 per month. 6% - 10% Cash on Cash. Obviously you are doing work yourself to realize that "return", but that may be worth it if you believe in the long-term prospects of the property. 

Here's an example of this type of property that was just recently on the market:

That's 1340 S Irving Street

It's not the specific neighborhood I'm going for, and the listing indicates that it needs some work but assuming that you could affordably get it updated (I haven't walked it), a property like that might make some sense for a local investor. 

So, the point is that deals exist that are a) unlikely to put you underwater if you do your homework and some sweat and b) are available to the public, and you don't have to be on the "inside" to get started necessarily.

@Patricia Miller so timing the market is a fools game. Thinking it's going to dip in the near future is not currently bore out by the statistics. We have all time low inventory. If no one bought a house for 4-5 months and people continued to list properties that is how long it would take to get to the point where history says supply and demand are balanced.

At the same time we have a significant number of people moving to the state each month. They either buy or rent. Unless we start losing population, there is no reason that demand will wain. 

Now all that said, do not reach to make a deal work. Negative cash flow will kill you if something goes wrong and doesn't something usually go wrong? You are learning the market and you are getting close to the market. Continue to learn and watch the market. The holidays sometimes offer opportunities to make below market purchases. Spring will likely be crazy again. Sharpen your pencil and make some offers on deals that work for you. Don't reach. If they counter stick to your guns and your price. 

BTW the property @Scott Trench mentioned listed on the MLS at 2:13 pm and was changed to under contract at 3:00 pm the same day. Time on market 47 minutes. Probably was really sold as a pocket listing but you get the idea.

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