Denver Market Softening/Retreat

Denver, CO · Member since 2016 · 16 posts · 7 votes

Hello,

So one thing to get out of the way from the start: the purpose of this post is NOT to debate whether or not there will be a softening in the Denver market. There are plenty of other posts on whether Denver is in a bubble that have been posted the last year or so. I'm happy to post separately on my thoughts there.

What I am curious on, is for those of you that are in the same place I am, which is firmly believing that the Denver housing market is overpriced, and is due for a flattening out after next year, and in some areas, like small multi-family is actually heading for a price retreat over in the next few years, what are your next moves? I've had a few offers on a duplex in Jefferson Park that I own, that are just ridiculous. Purchased at those prices, these "investors" would be just barely covering expenses, and definitely in the red if they were properly allocating for cap ex.

So what are you all doing? Selling? Just not buying? Buying out of state? What are your 1-2 year plans.

Thanks,
Mike

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Bill S.Pro Member

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Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes

@Mike Stephens I too own in Jefferson Park but don't agree with your assessment of the market. Here is what I am doing. I am not selling. From what I have seen over the years, real wealth is built through the long term ownership of real estate. Getting in and out of the market is expensive. Taxes and real estate commissions take a bite. If I sell and do a 1031 I am either trading out here in Denver or going somewhere else. I've not sold and here is why. Relatively speaking the trend in real estate is in the same direction. Sure you can get more cashflow in some markets but compared to what cash flow was in 2010 coupled with the prospects of growth in the future I don't see a compelling argument to move unless I shift my investing priorities. The question I ask myself, "Would I rather own my property in Jefferson Park in 40 years or somewhere else?" I can't think a better place to own. Now I'm sure smarter people will do better than me by trading up and making sure their equity is generating proper returns etc. I'm a pretty simple guy and base my investing on my grandfather's advise. Are you making money? Yes, then it's good, don't get greedy.

Am I buying. Yes and at full market price but with 100% owner financing (low out of pocket expenses). Personally I have stepped away from the BRRRR because I don't have the time to undertake the work of a typical BRRRR that I have bought in the past. I have plenty of cash flow to cover a correction and I think that any possible correction in the SFR market here is at least a year or two away. I limit it to 1-2 yrs because projecting beyond that is guessing in IMO.

People have been calling for bubble or correction in Denver for the past 3 years at least. Sooner or later we will at least get a correction but we don't know when nor how much. Had I stopped doing deals 3 years ago, I would have missed out on 30% appreciation in value and about 15% in rent growth. Not to mention the historically low interest rates. My 1-2 year plan is to continue buying property here. If I found a good deal (my definition) in Jefferson park, I would buy in a heart beat. Shoot I'll buy your place at your price if you do a wrap mortgage and the payment will be covered by current rents. Not trying to make a deal, just trying to make a point.

Happy investing.

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Matt M.
Realtor · Denver, CO · Member since 2013 · 2k+ posts · 1k+ votes
9y
Buying when it makes sense to me, but I only buy excellent deals. Still not enough housing supply, so prices will continue to climb for the foreseeable future. I'm bullish 3-5 years out.
A lot of these investors need to 1031 into something, and they are also banking on appreciation.
There is a seasonal slowdown right now coupled with agents overpricing their listings.
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Ryan E.
Investor · Salt Lake City, UT · Member since 2016 · 287 posts · 270 votes
9y
@Mike Stephens I'm not in Denver so I hope you'll forgive my comment! Salt Lake City is in a similar situation as Denver just not as crazy from what I've read. I am in the process of getting capital in order to buy more rentals here and would buy as much as could if I had the money.
My thought regarding the market cycle is that 2007 was such a huge drop that supposedly it was a once in a lifetime event. I feel like most people worried about a bubble just assume that the next crash will be similarly large which is probably a very small likelihood. My question is how far do prices drop in a typical correction/recession? I'm thinking it will be like how you said, a flattening out or a smaller correction with prices dropping a few percent to low double digit percentages. If that's the case then why wait to buy when one can get solid, possibly double digit appreciation each year for the next couple years? If, for example, your property went up 12-15% and then dropped 10% you'd still be ahead as long as you bought "a deal" that makes sense in the current market. I'd love to hear you thoughts on this way of thinking, I'm sure I could be totally off base here!
On the other hand, if it doesn't cash flow that's a different story unless you are hard core speculating that rents and values will continue to climb.
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Bill S.Pro Member
Moderator
Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
9y
@Mike Stephens I too own in Jefferson Park but don't agree with your assessment of the market. Here is what I am doing. I am not selling. From what I have seen over the years, real wealth is built through the long term ownership of real estate. Getting in and out of the market is expensive. Taxes and real estate commissions take a bite. If I sell and do a 1031 I am either trading out here in Denver or going somewhere else. I've not sold and here is why. Relatively speaking the trend in real estate is in the same direction. Sure you can get more cashflow in some markets but compared to what cash flow was in 2010 coupled with the prospects of growth in the future I don't see a compelling argument to move unless I shift my investing priorities. The question I ask myself, "Would I rather own my property in Jefferson Park in 40 years or somewhere else?" I can't think a better place to own. Now I'm sure smarter people will do better than me by trading up and making sure their equity is generating proper returns etc. I'm a pretty simple guy and base my investing on my grandfather's advise. Are you making money? Yes, then it's good, don't get greedy.
Am I buying. Yes and at full market price but with 100% owner financing (low out of pocket expenses). Personally I have stepped away from the BRRRR because I don't have the time to undertake the work of a typical BRRRR that I have bought in the past. I have plenty of cash flow to cover a correction and I think that any possible correction in the SFR market here is at least a year or two away. I limit it to 1-2 yrs because projecting beyond that is guessing in IMO.
People have been calling for bubble or correction in Denver for the past 3 years at least. Sooner or later we will at least get a correction but we don't know when nor how much. Had I stopped doing deals 3 years ago, I would have missed out on 30% appreciation in value and about 15% in rent growth. Not to mention the historically low interest rates. My 1-2 year plan is to continue buying property here. If I found a good deal (my definition) in Jefferson park, I would buy in a heart beat. Shoot I'll buy your place at your price if you do a wrap mortgage and the payment will be covered by current rents. Not trying to make a deal, just trying to make a point.
Happy investing.
10 Reply
Tanya H.
Investor · CO · Member since 2011 · 107 posts · 28 votes
9y
I agree with @Bill S. I'm certainly not selling my Denver properties. The cash flow is tremendous at this time, and while there may be a correction coming, due to buying the properties at the bottom, they will always cash flow. But I'm not buying in Colorado for now.
Right now, I'm buying out of state. I'm buying in Michigan, as I have family there, so I have somewhat of a network that continues to grow. The prices there are unbelievable - so there is a lot of cash flow possibilities for buy-and-hold, and some nice profits in flips as well.
All of that is positioning me to be ready to buy more in Denver when the prices become more realistic. I know there are deals out there, but I've not taken the time to find them as the deals in Michigan are jumping out and hitting me along side the head!
Keep it fun and profitable!
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Scott TrenchPro Member
Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
9y
I agree with @Bill S. and @Tanya H. but am perhaps even more bullish than they. I believe that I am not going to look back in 10, 15, or 30 years and say, "Gee, I was really smart for leaving Denver, Denver hasn't grown at all."
So, I'm buying consistently, but not aggressively. Properties that are well within my means and the best deals I can possibly find. I am also working hard and saving aggressively, so as to buy great cash flowing properties out of state, in addition to, but not in place of, buying in Denver, where I believe most of my true wealth will be built over time.
Podcast Guest on Show #223
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Brian GarrettPro Member
Westminster, CO · Member since 2016 · 68 posts · 22 votes
9y
I'm just getting my feet wet with REI - however I gave up on the Denver market a while ago. I keep an eye on it, but from what I've been able to tell, I can do a far better job cash flowing in other markets with more of them AND have someone else manage the properties. We'd manage them here in the Denver market, but even with self-managing I was seeing monthly returns of a few hundred bucks a month at best. I've also seen quite a few deals for duplexes and larger multi-families go on the market only to be marked down a bit after a month or so... so I definitely think there is a softening - but I don't think it's going to fall off entirely.
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Bill S.Pro Member
Moderator
Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
9y
@Brian Garrett so if all you want is cash flow then Denver would have not made your radar in the last 20 years. Those investing in the Denver market use Internal Rate of Return (IRR). Over the last few years I know several investors who use that metric and have been North of 15%. They are buying off the MLS and for the most part are paying market price for their deals. Add another 10-20% discount for buying off market at a discount and it is hard to beat Denver
2 Reply
Andy C.
San Mateo, CA · Member since 2016 · 78 posts · 28 votes
9y
Ryan E. I'm also interested in SLC and UT and curious to get your pulse and take on the market. And what you're seeing there. And how does it compare to Denver. I've heard some draw some comparisons between the two, perhaps SLC being a few years or more behind (in a good way) I can PM if easier
1 Reply
Ryan E.
Investor · Salt Lake City, UT · Member since 2016 · 287 posts · 270 votes
9y
@Andy C. pm sent.
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Brian GarrettPro Member
Westminster, CO · Member since 2016 · 68 posts · 22 votes
9y
@Bill - while I don't disagree with you as I certainly don't understand how to apply an IRR (I'm still new to the process), here's my very pedestrian view of the Denver market vs. a market like maybe Kansas City MO.
In Denver, the numbers that I've run against SFH's I am looking at an entry level property of $300k. That requires a down payment (assuming a conventional loan and 20% down) of $60k. If I get a good house, in a good location and a good price and self-manage, at best I can positively cash flow $200/mo. With a single family home I also have a greater exposure to vacancy as I have a single property with a single renter that I have to keep filled. If I'm looking into multi-family in the metro area, that price jumps to at least $500k and that is going to be for a so/so property at best, but helps to offset some of the exposure to vacancy, but rents are also operating on a pretty razor thin margin and I'd still have to self-manage to really make ends meet.
If I look at the KC market, I can get a really nice duplex for $150k, for $30k down, have it managed professionally and still cash flow $400/mo. My exposure to vacancy is now halved, I've only had to put out half the down from the SFH in the Denver market and I'm having the same level of cash flow per unit - although twice as much right away. I also don't have to manage the property whereas the Denver properties I would likely do it myself.
If I understand the IRR function correctly, the calculations are based on assumed appreciation of property over time and the longer you hold the property the more appreciation the property gains - which makes sense. My main issue with that methodology is it's an assumed gain. I don't disagree that the Denver market is going to continue to see appreciating gains, my goals are to create the passive cash flow for an ongoing process and to use that cash to purchase additional properties going forward.
Clearly if I'm way off base I'm all ears. I'm all about doing things better or more efficiently and welcome the additional education.
1 Reply
Chad C.
Rental Property Investor · Denver, CO · Member since 2017 · 25 posts · 16 votes
9y
I'm somewhat new in this game as well but I agree with Brian Garrett on this front, I'd love to buy some rentals in my back yard but cash flow can almost be negative if you go with .95/.5 rules to run some initial figures. Case in point is a Duplex for sale near me that needs rehab but is listed for 425K and will likely rent for less than 3K per month. Homes like these are typical, but I'm sure there are better deals to be found.
In my research I've found that appreciation should be looked at more like icing on the cake rather than the main factor on buying. KC might not appreciate as dramatically, but I like the slow steady cash flow over a long period of time. That said, I'm kicking myself I wasn't buying more properties 10 years ago and it's possible that 10 years from now I'll kick myself for not buying now. Denver is kind of an anomaly and it very well could be the next major American city years from now. I'd love for someone to tell me I'm dead wrong and buying in Denver can work as a cash flow method, I just can't seem to make the rental numbers work.
Now for fix and flips I do think there's a lot of potential in a few neighborhoods. The market is so hot it's a great opportunity to turn around a distressed property and sell very high. Competition can be tight but as a flipper you can't beat this market for selling.
1 Reply
Chris LopezPro Member
Real Estate Agent · Denver, CO · Member since 2015 · 1k+ posts · 858 votes
9y
@Brian Garrett IRR is my favorite metric for calculating returns. If you have an interest in learning more, read Frank Gallinell's book, "What Every Real Estate Investor Needs to Know About Cash Flow." It's all financial metrics. It's one of the best books for investing (not just real estate) that I've ever read. It has many advanced financial metrics in there which is overkill since we're not running hedge funds. Regardless, it's an outstanding read. It's the only real estate book that I've read more than once.
I wouldn't bet on appreciation to make my property work, but I have a really hard time if I cannot have a reasonable expectation of a property appreciating at the pace of inflation (2-3% a year.) I'm not familiar with KC's market. I'm wary of many of the cash flow markets appreciating at the pace of inflation. How is in investing in an asset that doesn't keep up with inflation, a good investment?
If I can make an educated guess that I'll have a property that has higher appreciation, I'll take that bet. As long as it fits with my overall finances and profile. In 40 years when I'm 75, I want my properties to be in places that have job and population growth, not flat or declining growth in many areas. No matter where you buy, you need to people to rent out your property!
If you take a long term view of Denver (20+ years), it's in a "Goldilocks" phase. Real estate is still affordable (compare it to coastal cities), great outlook for job and population growth.
@Scott Trench 's one line is a great summary: "I'm buying consistently, but not aggressively." I really think that's the key for the average investor for building long term wealth. That's what my strategy boils down to at the end of the day.
Podcast Guest on Show How to Use Equity in Your Home to Reach Financial Freedom Faster
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Brian GarrettPro Member
Westminster, CO · Member since 2016 · 68 posts · 22 votes
9y
@Chad C. - we should get together again and discuss the flipping. Maybe we can make something work in that area.
@Chris Lopez - Thanks for the book recommendation. It's downloading now to my kindle app. I'll see if I can make some heads/tails on the IRR thing. I want to be prudent and effective with my investing so maximize my returns. I guess I just think the Denver market has a huge "me too" amount of investing going on that makes the homes nearly impossible to make the numbers work. In the KC market (I've been watching it for a little while and have a few full-time investors who buy and hold in that market) they have obviously good and bad neighborhoods. It kills me a bit that I don't actually live there because the fix/flip or BRRR homes are readily available and I can to the lion's share of a flip myself. So the BRRR there isn't AS attractive to me.
It's hard for me to imagine a market with a good employment base not at least keeping pace with inflation. But I do hear what you are saying. KC certainly could get hit harder than other areas and take longer to recover if/when the next bust happens (and it will happen)... but again if I'm being conservative it might be easier to buy/hold a property there for that time at half the cost of a Denver home than buying a Denver home and suffocating under the load here.
I do think the midwest is going to do better over the next 40 years for a few reasons, but again it's rolling the dice.
I'm not sure exactly what you mean by the "Goldilocks" phase. Right now I don't see the salaries keeping up with the housing expenses here and that is weighing things down.
I am definitely in for the longer term wealth for sure - so that's why I'm appreciative of the advice granted from your experience.
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Chris LopezPro Member
Real Estate Agent · Denver, CO · Member since 2015 · 1k+ posts · 858 votes
9y
@Brian Garrett My "Goldilocks" reference is to "Goldilocks and the Three Bears" fairy tale where she found the porridge "just right." I think Denver is in that "just right" area for great long term cash flow and appreciation.
Look up salary to housing expenses in LA, San Francisco, Seattle, and other coastal cities. The prices have kept going up there. Just a different perspective.
I agree with your opinion about the midwest doing better over the next 40 years.
Something I always keep in mind is that investors are making money in every single market across the U.S. There is no one "right way" or "right market" to invest in. It's what works best for me.
Let me know how you like the book.
Podcast Guest on Show How to Use Equity in Your Home to Reach Financial Freedom Faster
2 Reply
Brian GarrettPro Member
Westminster, CO · Member since 2016 · 68 posts · 22 votes
9y
@Chris Lopez and I signed up for your course on your website as well.. I'll take that over the next few days. I just wasn't sure how you were applying a little girl who eats porridge.. ;)
0 Reply
Chris LopezPro Member
Real Estate Agent · Denver, CO · Member since 2015 · 1k+ posts · 858 votes
9y
@Brian Garrett Sounds like I need to work on my metaphors!! haha
Podcast Guest on Show How to Use Equity in Your Home to Reach Financial Freedom Faster
1 Reply
Jim S.
Rental Property Investor · Denver · Member since 2017 · 121 posts · 121 votes
9y
I know from personal experience who is moving into Denver - techies that like to ski, hike, etc. My friends, previous co-workers, etc. all of which make >100k working in tech. My current co-workers have mostly moved here from SF, NYC, or D.C. where they paid crazy high rents and buying a house wasn't even a thought.
With or without jobs in-hand great tech talent is flooding here due to lifestyle choices (many techies like myself love the mountains). I believe the market is fairly priced currently on pure home values, rents will rise to catch up eventually.
That said - I've been looking unsuccessfully for about 4 months because I'm not going to bank on the appreciation and I agree there could be a short-term correction in prices.
I need a property that will cashflow (even minimally) before I'll pull the trigger. Planning to continue to be patient until I find the right deal, bought a multi-family out of state in the meantime and will save up for another if nothing comes along locally.
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Mike Stephens
OP
Denver, CO · Member since 2016 · 16 posts · 7 votes
9y
Hi @Jim S. - I'm taking the same approach. Strong believer that patience, and a reasonably conservative approach will prove to be the right move in the long term in the Denver market.
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Michael Plante
Deland, FL · Member since 2017 · 2k+ posts · 1k+ votes
9y
Originally posted by @Mike Stephens:

Hello,
So one thing to get out of the way from the start: the purpose of this post is NOT to debate whether or not there will be a softening in the Denver market. There are plenty of other posts on whether Denver is in a bubble that have been posted the last year or so. I'm happy to post separately on my thoughts there.
What I am curious on, is for those of you that are in the same place I am, which is firmly believing that the Denver housing market is overpriced, and is due for a flattening out after next year, and in some areas, like small multi-family is actually heading for a price retreat over in the next few years, what are your next moves? I've had a few offers on a duplex in Jefferson Park that I own, that are just ridiculous. Purchased at those prices, these "investors" would be just barely covering expenses, and definitely in the red if they were properly allocating for cap ex.
So what are you all doing? Selling? Just not buying? Buying out of state? What are your 1-2 year plans.
Thanks,
Mike
If I thought, as you do, prices are going down I would take the money and run
0 Reply
Matt R.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
9y
Originally posted by @Chad C.:
I'm somewhat new in this game as well but I agree with Brian Garrett on this front, I'd love to buy some rentals in my back yard but cash flow can almost be negative if you go with .95/.5 rules to run some initial figures. Case in point is a Duplex for sale near me that needs rehab but is listed for 425K and will likely rent for less than 3K per month. Homes like these are typical, but I'm sure there are better deals to be found.
In my research I've found that appreciation should be looked at more like icing on the cake rather than the main factor on buying. KC might not appreciate as dramatically, but I like the slow steady cash flow over a long period of time. That said, I'm kicking myself I wasn't buying more properties 10 years ago and it's possible that 10 years from now I'll kick myself for not buying now. Denver is kind of an anomaly and it very well could be the next major American city years from now. I'd love for someone to tell me I'm dead wrong and buying in Denver can work as a cash flow method, I just can't seem to make the rental numbers work.
Now for fix and flips I do think there's a lot of potential in a few neighborhoods. The market is so hot it's a great opportunity to turn around a distressed property and sell very high. Competition can be tight but as a flipper you can't beat this market for selling.
You are dead wrong. Just responding to your request. Seriously though if investors take into account rent growth that goes with asset appreciation , overtime a Denver type market on average is more profitable ( cash flow + equity) than the average midwest city. The cash flow will also be higher eventually as well.
For example the top 3 cities for highest total profits since 2000 are LA, SF and SD. These usually have low initial cash flow when compared to others. Initial cash flow alone does not always predict future total profits we can understand.
Good luck!
1 Reply
Chad C.
Rental Property Investor · Denver, CO · Member since 2017 · 25 posts · 16 votes
9y
Thanks for calling me out :) Your logic is sound and I suppose a big factor is my comfortability with long term growth vs. the immediate cash flow. Any good investment can be a long game and cities like Denver historically have been solid. My aim now is to make the biggest bang for my buck, but I won't count any area out just yet. Thanks!
1 Reply
Luke F.
Littleton, CO · Member since 2015 · 59 posts · 14 votes
9y
Originally posted by @Jim S.:

I know from personal experience who is moving into Denver - techies that like to ski, hike, etc. My friends, previous co-workers, etc. all of which make >100k working in tech. My current co-workers have mostly moved here from SF, NYC, or D.C. where they paid crazy high rents and buying a house wasn't even a thought.
With or without jobs in-hand great tech talent is flooding here due to lifestyle choices (many techies like myself love the mountains). I believe the market is fairly priced currently on pure home values, rents will rise to catch up eventually.
That said - I've been looking unsuccessfully for about 4 months because I'm not going to bank on the appreciation and I agree there could be a short-term correction in prices.
I need a property that will cashflow (even minimally) before I'll pull the trigger. Planning to continue to be patient until I find the right deal, bought a multi-family out of state in the meantime and will save up for another if nothing comes along locally.
I'm in the same boat as well. Our of curiosity as being more on the newbie side of things, what are you calculating for cap ex, repairs, and vacancy per month?
0 Reply
Matt R.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
9y
Originally posted by @Chad C.:

Thanks for calling me out :) Your logic is sound and I suppose a big factor is my comfortability with long term growth vs. the immediate cash flow. Any good investment can be a long game and cities like Denver historically have been solid. My aim now is to make the biggest bang for my buck, but I won't count any area out just yet. Thanks!
Right on. Now there could also be smaller pockets in the midwest or KC that could keep up with a Denver type. El problemo es how does the Denver solo artist score those? KC locals snag those beforehand 99 out of 100. When I see an outsider small guy get inside one of those pockets it usually is just by random in the path of progress luck vs any well thought out insight. The advantages of being local for small investors is significant we can also understand.
Good luck!
1 Reply
Jim S.
Rental Property Investor · Denver · Member since 2017 · 121 posts · 121 votes
9y
@Luke F. 5% for vacancy is my standard for multi-family.
Repairs/capex both depend on the condition of the property. I don't think it makes sense to tie either to % of rent as they are independent of how much $$ comes in.
My 150 year old brownstone I allocate $2500/yr for maintenance which is likely a little light, a newer place I'd say $400-500/unit. I assume capex to be in a similar ballpark to maintenance costs and adjust up or down depending on condition of the roof, hot water/furnace, appliances, etc.
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Will Cook
Lender · Denver, CO · Member since 2017 · 16 posts · 3 votes
9y
I read an in-depth report by some local analyst who have been spot on about a number of real estate trends. They predict that in late 2018 early 2019 a healthy and normal decline will begin totaling 10-percent. For how many months that takes, IDK. Their model did factor in the current 3% unemployment rate and housing supply.
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