How to Choose a Good Investment Property in Denver
If you’ve been looking for ways to build long-term wealth—so you can retire early (or ever), chase a passion project, set your kids up for success, or, honestly, do whatever the heck you wanna do whenever you wanna do it—there’s no better place to start than real estate.
Investment properties have so many perks: cash flow, tax breaks, better returns with less risk than other investment strategies, and lots more.
But getting started can feel daunting. Even if you’re excited by the whole idea, it’s natural for your initial get-up-and-go to slow down as your questions start rolling in:
Where should I look first?
How do I know a place will generate income?
What makes this house better than that house?
What the heck am I doing?!
Don’t worry… we’ve got your back!
The Rental Property Newbie Checklist
You don’t have the time or money to waste on first-time investment mistakes. So as you’re hunting for properties, use this checklist to know if you’re on the right track.
#1 It’s a buyer’s market.
Just like traditional investing, real estate investment requires some economic know-how.
Here’s a quick and dirty explanation: When the economy is sluggish, the housing demand goes down—and so do prices. That’s a buyer’s market. When the economy is good, we get a seller’s market: Demand and prices increase.
So the ideal situation is to buy your property in a buyer’s market (so you get a great purchase price) and then rent in a seller’s market (so you can charge higher rates). Buuuuut, it’s been a long time since Denver has seen a buyer’s market. And given our population growth and the continued lack of inventory, we don’t expect that to change anytime soon.
Does that mean you’re out of luck? Nope. Your initial investment may be higher, but you’ll likely have people lined up around the block trying to rent from you. Plus, the market conditions are only one factor to consider when choosing a property.
#2 You know your borrowing position.
Before you even look at a property, talk with a lender (or several!). A huuuuuuuge part of picking a great investment property is making sure it fits your budget. Going into the game with numbers in mind—what kind of loan and interest rate you’ll qualify for—will set you up for success.
#3 The property matches your goals.
Let’s think big picture. Most people invest in real estate to build wealth well into the future. As you plan, consider your long-term goals and what investment success would look like to you. Ask yourself:
How much do I plan to invest?
How many rentals would I like to own?
How much am I looking to make per month?
When do I want to retire?
How much money will I need?
Then look for properties that fit these goals and success milestones.
#4 The property is a fair value.
Property valuation is the process of determining what a property is actually worth, which may or may not be the same as its sticker price. To get an initial idea of a property’s fair value:
Compare the potential sale to comparable properties. (We can help you with this!)
Compare the purchase price to the cost of building something similar, including land, construction, and depreciation.
Compare estimated rental income to the price of the property.
#5 It’s a single-family home.
There’s a lot of ways to invest in residential properties. You can take your pick from single-family homes, duplexes, apartment complexes, townhouses, condos, vacation homes, and more.
But if you’re new to this whole real estate investment thing, we recommend investing in a single-family home first. They’re easier to manage, have less potential for wear-and-tear, and are more likely to appreciate.
#6 It’s not a fixer-upper.
Listen, fixer-uppers are the ultimate catfish. You’re tempted by the illusion of a higher return on investment and think, “It won’t be that hard to fix it up!” But, even for experienced investors, these homes quickly turn into too-good-to-be-true, full-on money pits.
Buying a property priced below market that needs only a few minor and cosmetic repairs will serve you much, much better. (This is hard to do. We’d love to help you.)
If you’re really intrigued by a place that might need more work, get a detailed home inspection and quotes from several local contractors. That’ll help you figure out if it’s going to cost you more to get the place in shape than it’s worth.
#7 The property is middle-of-the-road.
Just like you don’t want a fixer-upper, you also don’t want a super pricey one. The more expensive the purchase price, the more expensive the ongoing expenses will be. And, thinking long-term, the nicest house can be the most difficult to sell. In short: Don’t buy the best or worst house on the block.
#8 The location is the total package.
A great location is a no-brainer for real estate investment. But location is more than just crime stats and distance to the nearest Target or RTD stop.
Consider the common renter. Where you buy determines the type of tenants you’ll have. For example, renting near a university is great from August to May. But come summer, you’ll encounter plenty of vacancies that eat into your profits.
Review property taxes. Areas with higher property taxes are a double-edged sword. While you’re more likely to encounter great amenities and long-term renters, the taxes might be too high for your bottom line. Contact the municipality’s assessment office to get a rundown of the property taxes you should expect. (The good news is Colorado’s property taxes are among the lowest in the nation.)
Check out the schools. If you want to attract families, make sure your investment property is in a great school district.
Think of future development. In general, development means growth for the neighborhood and your wallet. But there are some exceptions—like if an apartment complex has been approved and zoned near your ideal property. Now you’ve got competition! Check with the municipality’s planning department to see what projects are underway.
Research job growth. We all hate a commute, right? Investing in a property near booming employment opportunities can help you attract tenants. The US Bureau of Labor Statistics can give you a first look at what types of jobs are growing and where.
Consult Google Maps. Speaking of commutes, double check how far you live from your potential investment property. If you’re managing it by yourself, think about the commute time for every tenant issue. Are you OK with driving an hour each way at 3 AM for a broken HVAC? Probably not. (Of course, you can always hire a property manager. See #4 on our list of 25 Tips for Buying Your First Rental Property.)
Evaluate current vacancies. We don’t love Zillow, but it can offer a quick glimpse of how many places are for sale in a given area. That’s helpful to know, because a lot of vacancies means the neighborhood has seasonal cycles or is generally declining. Find a sweet spot among the supply and demand for your perfect investment property.
Check for flooding. Not every property insures equally, and flood insurance is reaaaaally expensive. Double check if the property is in a natural disaster hotspot before pulling the trigger.
#9 The property will give you positive cash flow.
Cash flow is the money left over after all your expenses—utilities, insurance, mortgage, repairs, taxes—are paid up. Assess if the property will give you a positive long- and short-term cash flow by calculating:
Month-to-month cash flow from rental income
Increases in intrinsic value after long-term appreciation
Tax benefits of depreciation
Cost-benefit of renovations before sale
Cost-benefit of a mortgage against appreciation
You can also use a pro forma analysis from the seller’s agent. A pro forma analysis is a property’s cash flow projections that details potential monthly rental income, expenses, taxes, and expected return on investment (ROI).
#10 The property fits into the 1% rule.
Super-smart financial experts have determined that rentals typically pencil out if you’re able to set your rates at 1% or more of the total upfront cost (purchase price and initial repairs or updates).
For example, if you invest $300,000 in a property, rent should be at least $3,000 per month. Think you can get that much from a renter? Think you can get a mortgage with monthly payments no more than $3K? If not, walk away.
#11 You can charge a fair rent and stay cash-flow positive.
Take the previous example again. To maintain your positive cash flow, you need to charge at least $3,000 a month. But if comparable properties in that area typically go for $1850 per month, you’re less likely to fill your vacancy. Find the balance between what you need to make and what you should fairly charge your tenants.
Do a quick Google search or use services like Rentometer to compare for-rent properties. You can also look at the U.S. Department of Housing and Urban Development (HUD)’s Fair Market Rent tool to see what you should charge in rent, based on government voucher programs.
#12 The property has a high capitalization rate.
Another way to assess the value of your investment is the capitalization or cap rate. This percentage will tell you how long it will take to recoup your investment by dividing the net income by the purchase price.
For example, if you invest $300,000 on a property that nets you $25,000 a year, that’s an 8% cap rate. At that rate, you’ll recoup your investment in 12 years.
Finding the highest possible cap rate among your investment options can help you choose the best property.
#13 You’ve talked to lots of people.
You can’t underestimate the power of networking! Talking with local real estate investors who have tried, failed, tried again, and succeeded will be your secret weapon to finding a great investment property the first time around.
Hi! We’re the people!
We’re your partner for all things real estate. And when it comes to investing in your financial future, we’d love to help. Book a Discovery Meeting to tell us all about your real estate investment goals!
