Rules of thumb in Denver Metro

[Jason M.]

I'm curious what Denver area investors use for "rules of thumb" numbers since property cost are so high here. Obviously I'm pretty to new to this, but even when I come across a higher CoC ROI analysis (9 to 12% without PM.) the math on the 2% test doesn't even get close.

For instance: A 4/3 SFH in Aurora (No HOA) for $275K renting for $2200 would register .08% on the 2% test and around -7$ on the 50% test. Is my math wrong, or would this not be a decent deal after all?

[James Carlson]

@Jason M.

It's a great question and one I know a lot of our buyers have. My rule of thumb in Denver real estate investing is to not abide by the rules of thumb. ;)

I'm not anti-numbers here, but I do find these discussions kind of funny.  The basic premise seems to be, If my numbers don't work under one rule, find another rule where they do work.

The truth, as I see it, is that Denver is not a cash flow town. Can you squeeze out a $100/mo here, $250/mo there? Yeah, you can. But you're not going to crush it by that metric. House hacking by the room rental can certainly be cash-flow model in Denver, but I wonder how scaling works beyond a handful of those. That's a lot of rooms with individual leases to manage at some point. 

I know it's heresy on this forum, but Denver is an appreciation play and that's okay. I think it's right to have a mix of properties in a mix of markets. Some in cash-flowing Midwest. Some in appreciating metro areas. The big wealth, it seems to me comes from appreciation anyway. In Denver, for instance, home values in Denver have averaged 6% appreciation every year for the last 40 years. And that's accounting for a few bad downturns. 

Here's an example: Our first property purchase was just five years ago, a 1br condo in Cap Hill we bought in 2015. Since moving out, we've got between $35 and $200/mo cash flow. Nothing great. BUT! The value has increased $97,000 in that time. If this were a Midwest property, cash-flowing $800/mo, that'd still be about half as much wealth accumulation. 

The "you can't count on appreciation" idea seems birthed in a world where you can't evaluate things. Denver (and Colorado Springs and most of the front range) have a lot going for it. Diversified economy, low unemployment, increasing population, great quality of life. If this were a stock, you'd buy it. 

Will prices go down at some point? Yes, that's the nature of the cycles, but as William Wallace says with the cavalry racing toward him, "Hold ... hold ... hold!!!"

Okay, I'm off my soap box.