The recent upswing in the Denver real estate market that I described on CNBC last week has me convinced that now is the time to invest in a Denver rental property. When I first thought about this a few months ago, I wondered if it was already too late. I think it probably is for people wanting to invest in cheap, single-family homes. But there is another alternative to think over outside the box.
Investors began snatching up those inexpensive cracker box houses a couple of years ago at bargain basement prices. Now, even more investors and enter the real estate market and competition for those homes priced under $250,000 is fierce. In fact, those homes are receiving multiple offers and selling within days if not hours of the time that they’re put on the market.
As a result, home prices in that category of houses has escalated in price to near “bubble” levels. And, the few homes that an investor can buy are no longer in good neighborhoods within a 30 minute commute of downtown.
So, as the train already left the station? In some ways, I think so. If an investor is looking for a single-family home in a good neighborhood, increased prices make those homes less attractive from a cash flow, and maybe even an appreciation perspective.
But, I think I’ve found an acceptable alternative. Consider an investment home in a premium neighborhood that will attract a premium tenant.
Some good values still remain for homes in premium neighborhoods with the best-rated schools. So, a more affluent, and less transient, tenant would be the likely renter.
For me, that sounds like a great choice. I suffered through tenants who abused my properties and would terminate leases likely were not worth the paper they’re written on. Wear and tear on these properties was excessive causing increased maintenance costs between renters.
I never want to have tenants selling crack cocaine again. Yes, that actually to me. I owned a duplex near Washington Park and the tenants in one unit caused neighbors to call the police and me. I actually “staked-out” the house one night to see if the neighbors complaints were true. Sure enough, about 10pm the cars started lining up to pick up baggies of crack from the curbside service. It looked like the drive-through line at McDonald’s. I vowed I would never have scum tenants like that again. So, I evicted them (a story in itself) and sold the property.
This time, I first identified my ideal tenants based on the neighborhood and price range. For me, I chose the Bluff Lake area in Stapleton to buy a home as an investment. The likely tenant there would be a health worker, possibly a physician, who could ride a bike to the nearby Anschutz Fitzsimons Medical Complex. They wouldn’t even have to use a busy street to get there. It’s a 1.9 mile commute taking 11 minutes on a bicycle.
When I ran the financial analysis, it became clear that this was not a bad alternative. The amount of rent would cover all costs even with a 15 year amortized mortgage. That’s the benefit of the interest rates being so low these days. I also was able to project lower maintenance costs and lower turnover.
When I started looking for a home in that Stapleton neighborhood, I ran into a problem. Even in that higher price range, resale homes were hard to find and selling at a premium to the cost of a brand-new home. So, I contracted for a brand-new home which I am building right now. It will be delivered and ready to rent by July.
The icing on the cake is that my projected rant may even be higher by July. Fact is, let’s have been increasing for single-family homes there at about 12% per year. So, my cash flow could easily be better than I had he been projected.
Sometimes, it is better to think outside the box. This is not kind of rental you will hear about on those late-night real estate shows promising a fortune in real estate. But, it will be an investment that will be easy to manage and, best of all, it will be paid for in only 15 years. That means, the value of the $480,000 asset today will be at least $1million based on the historic performance of the Denver real estate market. And, that home will be free and clear of any mortgage!