Evaluating deals in Denver: what's a realistic NOI?

10 Replies

I have been analyzing condo and townhome deals for the last couple months in Denver metro and I am having a really hard time making the numbers work. I am looking for a little advice from some seasoned pros as to what is a reasonable NOI before and after debt service. I am afraid that I am setting my expectations too high and might be tossing out perfectly good deals because of unrealistic expectations.

For instance, I found a condo for $60k (list price), $200/yr taxes, $184 HOA, 10% vacancy, 10% management co, and $60/mo insurance. I am estimating rents at $760/mo. If I ignore debt service (assume I buy cash), then my NOI is $208/month.

Is that good for this market? Seems like a ton of risk and work for $200/month. I feel like I want $500/month minimum NOI to make me feel like I am getting compensated for my risk and hard work.

If my math is right, that's about a 4% cap rate, assuming your total money invested (purchase price, closing costs, renovation) is $60K. Everyone has their own goals and valuations, but that would be way to low for me.

Rough #'s if you leveraged and put 20% down, using your numbers above, add in 5% for monthly for repairs and est. $2,000 renovation, then you get a cash on cash return of 3.9% and about $51 cash flow.

From what I've been seeing, condos/ townhomes are really tight w/ the numbers, especially w/ the HOA added and razor thin when you add the PM.

Personally I don't see too much in Denver that excites me as a long term hold from a cash flow perspective. I would say this about your analysis. 10% vacancy is twice what the market is. Currently we are running about 5%. I would say you can probably do better on the average if you have a good manager. 10% for PM is on the low side since lots of PMs want 10% per month plus first month's rent for finding tenants. I know there are those that do it cheaper but in general you are going to pay in others ways IMO. If you self manage you can donate your management time to your property and that puts some more cash in your pocket. Is your insurance based on a quote? I have seen insurance on condos in that price range about $300 per year. Might want to check it out.

If you want a better rate of return you have to find units that have so many non-owner occupied that they don't qualify for FHA backed loans. Then you are only competing with other investors but we all know there are plenty of those to go around.

Condos and Apartment buildings really scare me. There is so much new building going on (I read 18,000 new units under construction with 10,000 to come to market in the next year - normal is considered around 4-6K units). I foresee rent growth coming to an end and higher vacancy rates. That said, new projects are being planned each day so until people actually see the market contract I doubt there will be any slow down in building.

SFH (something with a yard) I think has some potential. Something like 60% of the building permits are for apartments - "normally" it's about 25% so I still think there is room for growth there. Things close to downtown or along light rail are high on my list. I would only buy if I got full coverage of debt service with none of my money. In those cases I would have some serious equity going in. Given that, I would buy with the idea of flipping it within the next 2 years. BTW those deals aren't in the MLS.

Right now the Denver market is in rapid appreciation. S&P Case-Shiller home price index up about 9% last year for all of the metro area and we have past our previous high index value from 2006. We are one of only one or two Cities to get to that point so far. Who knows how that's going to play out. Perhaps like SoCal in days of old where it lasted for years, perhaps like Phoenix not so long ago, or even somewhere in between. My crystal ball is a little foggy. It appears that most people are betting on continued growth in rents and property values. The 2% rule is a fairly tail here and the 1% rule (same as 2% just different number) is hard to find. It's my observation that most buyers are willing to breakeven with debt service or even go a bit in the hole since the appreciation (value and rents) is so good.

I know investors from the Coasts come to Denver and laugh at the low values and low rents for all classes and types of properties.

Fortunes are made during times like these. They can also be lost if you remember just a few years back.

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What Bill S. said. Though I am less concerned about condo/apt supply/demand going forward than he is. All my rentals were purchased below market in 2008-2011. I am selling some of those as my tenants leave. Prior to Feb 2012 one could find very cheap condos that cash flowed well in the MLS. Those days are long gone. I see posts on this board about the 2% rule and just chuckle. Most of my purchases in the 2008-2011 didn't even meet the 2% rule, and the low end market is up 25+% since then

Thanks everyone. Great comments. I am also finding 2% rule to be unattainable with the properties I have seen. I am looking at online auction sites as well as working with investor focused realtors. Still, even the decent properties on the all-cash auction sites are being bid up to levels that increase risk tremendously for a property you can't even get into for a peek.

I do wish that I had a few more wholesalers in my contact list. But I have also heard that even they are having issues buying deep discount properties.

I listened to nearly all of the podcasts and I hear about all these people scooping up great deals and hitting good cash flow numbers and I feel like I am doing something wrong. I don't need that many properties - only two per year.

I was originally looking for condo deals but the more I do the numbers, the more the HOA fees (and special assessments) when compared to the rents are making such properties low cashflow BEFORE debt service. Once you factor in the debt, they quickly go negative and that's not a property I am going to buy.

I am pretty sure that Colorado will continue to attract young people as it has done for many decades. People from all over move here for the lifestyle and the pro-business attitude so I am pretty confident that we will get pretty good appreciation over the long term. I came from NY and when I bought my own house, it was half the cost I would have had to pay on Long Island.

But, when you look at the deals from an investor perspective, rents are simply not high enough to justify the costs. In many instances, I would not turn enough cash flow even if the property was free! The HOA fees are out of line. I've seen $200 HOA for a 600 sq ft apartment that will rent for $650.

I am never going to place bandit signs and knock on doors to find deals - it's too much time and expense for what I am trying to do.

I may have to switch up my strategy a bit and try to land a few SFH. Sad thing is that I have cash ready to go and I can't find a place to buy.

Quite simply, this is why I sold my Denver property and moved my capital out of state. I feel pretty confident about my decision, but it's early days yet- check back with me in a couple of years...

I would never buy a property with a HOA. Besides being big brother in your business, you get very little back for your money. If you were to buy a $100k property without a HOA, you could have a lower payment than a $60k with a $200/m HOA payment.

Originally posted by @Jean Bolger :
Quite simply, this is why I sold my Denver property and moved my capital out of state. I feel pretty confident about my decision, but it's early days yet- check back with me in a couple of years...

Exactly. When I'm ready, I wont be buying rentals in Denver or the metro area. Maybe the Springs, but likely somewhere strong in the midwest.

@Bill Coleman There are 2% deals in Colorado just NOT in the Denver Metro area :). If you go to rural Co, the small communities treading water have all kinds of those deals. I have leads on a number of properties in different communities that are about 2-2.5 hours away that meet the 2% rule. The down side is they were selling for about the same money 20 years ago and the population of the counties is lower now than it was then. Talked to one "seller" and if he can't get his price he'll "turn it into storage" Every town has number of empty buildings returning to dust.

@Bill S. No doubt! There are some really small towns 2 hours from Denver. I am not interested in those at all. I want the option to self-manage so I am staying within 45 minutes of my house. I'll get back into the business, see some success and then decide if I have the time and energy to branch out.