Guide to Purchasing Multifamily Apartments in Denver
If you’re interested in multifamily investments, you may want to keep your eyes on Denver, Colorado: As Denver’s unemployment rate continues to fall, there is a newfound demand for apartment units amongst an influx of fresh employees moving to the area.
Denver’s multifamily market has seen growth and will likely continue to see change due to the construction of massive amounts of multifamily units.
Here are the steps you can take to purchase multifamily apartments in Denver.
Denver Area Overview & Population Demographics
Denver is the capital and the biggest city in the state, with a population of 738,594 as of 2020. Denver’s average household income is $99,151, and the poverty rate is 11.86%.
Colorado is the second-fastest growing U.S. state, and the population growth of Denver is a large part of that. Denver’s metropolitan area has a much higher population, with nearly 3 million residents.
Due to the mountainous terrain, Denver (and the state of Colorado as a whole) is considered an excellent place for hikers and other lovers of the outdoors. Denver is also the home of four major league sports teams: Denver Broncos football, Colorado Rockies baseball, Colorado Avalanche hockey, and Denver Nuggets basketball.
What’s Denver’s Commercial Real Estate Market Like?
The CRE market of Denver has been bouncing back after the pandemic; in fact, 2.4 million square feet of office space is being built in the city. However, the current economic crisis has created a new issue for some in the market.
Despite this, many properties are being leased out: Q2 2022 was the fifth quarter in a row to see deal volume exceed 1.0 million square feet.
The State of Denver’s Multifamily Market as of Q2 2022
The current vacancy rate of Denver’s multifamily properties is about 5%, and around 80,000 new properties are expected to be listed on the market within the next five years.
In the second quarter of 2022, the multifamily market gained more units, saw higher rent prices, and experienced increased sales transactions. This is due to the local labor market strengthening.
Many of these new workers are earning higher wages. Naturally, they’re looking for a comfortable, not-so-cheap apartment unit.
Before purchasing multifamily apartments in Denver, let’s dive into the steps you should take.
#1 – Clearly Define Your “Why”
In particular, real estate investing and investing in multifamily homes can provide you with high passive income. However, beginner and inexperienced investors may struggle with multifamily at first without the proper resolve to succeed.
This is why you should consider if investing in multifamily properties suits you. Here are some factors to think about multifamily investing:
- Investing in a multifamily property doesn’t end with the purchase. Property and tenant management are vast parts of ensuring you will profit from your property. It’s essential to monitor any problematic tenants and keep your buildings up to code.
- Commercial real estate deals are often long and complicated. Closing a discount on a multifamily property may take months; during this time, you’ll likely be faced with fees and other expenses.
- Any contracts and agreements should be written the first time correctly. As long as you work with the right commercial real estate team, your contracts should be written correctly.
Multifamily investments are not easy to master, so it’s okay if some mistakes are made. However, as long as you learn from those mistakes and prevent them in the future, you’re well on your way to successful multifamily investing.
#2 – Consider Working With a Broker & CRE Attorney
While educating yourself as much as possible about purchasing multifamily apartments in Denver is still a good idea, it’s even better to draft the right help in the form of an experienced team of CRE professionals.
Two ideal candidates for this team come to mind: commercial real estate brokers and commercial real estate attorneys. Brokers have more comprehensive experience, training, and access to local market intelligence than other agents, making your search for multifamily apartments in Denver smoother and more cost-effective.
Commercial real estate attorneys are helpful to investors since they can analyze any legal documents you’re given or requested by your sellers, such as leases and title documents, to ensure that you don’t run into any legal issues in the future.
#3 – Locate a Handful of Properties That Interest You
When looking for multifamily apartments in Denver to invest in, you should work with your broker to select a handful of properties that interest you the most, then narrow down that selection to just one or two.
Here are some key factors to consider about a property:
- The location of the property;
- The number of rentable units;
- How much the rent costs of each unit;
- Other sources of income, such as laundry machines;
- How you’ll split the bills with the tenants;
- How much property taxes cost;
- The current condition of the property;
- The cost of insurance; and
- Other expenses that the landlord will be in charge of.
An experienced real estate broker can help you analyze each property and see where it stands financially and physically.
The current median sales price for a multifamily property in Denver is $354,545 per unit, somewhat higher than the median price in 2021. But the city has increased the construction of multifamily units due to job growth, hoping to add more supply to the market and place downward pressure on prices.
#4 – Line Up the Right Type of Financing
You will most likely need to take out some loan to afford the property you’re buying, especially since multifamily apartments, in particular, tend to be more expensive than most single-family rentals.
The same loan program that you choose depends greatly on your needs. In addition, different loans have different interest rates, so you should choose carefully. These are just some of the various ways to finance a multifamily property:
- Fannie Mae/Freddie Mac loans are also known as “agency loans,” They’re a fairly common way to take out a mortgage on a multifamily property. They typically have high leverage levels and low-interest rates. However, it’s important to note that the agencies that provide these loans don’t offer them to borrowers directly, so you’d have to work with an approved lender.
- FHA loans are another type of agency loan. These loans have the most extended terms, the lowest fixed rates, and the highest leverage levels (up to 90%). Sometimes it takes up to 12 months to get approved for these loans, which are a bit more complicated to understand. They also must be done with an approved lender.
- CMBS loans, also known as conduit loans, are applied through conduit lenders, commercial banks, and investment banks. The property and profits are collateral for the loan, and an applicant will need relatively high credit.
- Bridge loans “bridge the gap” while waiting for the more permanent loan option. Since these loans are more temporary and short-term, they have high-interest rates and fairly strict term limits.
- Bank loans could be risky, as the bank could go for all of your assets (not just the property) if you default on your loans. They are more likely to have less leverage and interest-only options and require tax returns as part of the underwriting.
Conventional mortgages are another common type of loan since online lenders can have limited financing options. For example, some lenders will limit financing to two-unit properties.
Pre-approval letters are a standard part of the mortgage loan process. They let sellers know you are serious about buying a property and have the capital to purchase it.
Proof of funds is used to get a pre-approval letter, typically shown through bank statements or other financial documents. Once a pre-approval application is sent, the lender will give one of three responses to the letter: pre-approved, denied, or pre-approved with conditions.
A pre-approval letter will require the property’s purchase price, the loan program and interest rate, the amount for the loan and the down payment, and more.
#5 – Anticipate & Plan for Future Expenses
Investing in a multifamily property is best to prepare extra expenses to pop up here and there. For example, you may want to invest in marketing to attract more tenants once the lease is up on a current tenant. You may also need to fix the roof or renovate a unit after a bad storm.
In general, you should keep the mindset that you never know what issues could arise in the future and consider that you will likely want to make improvements to keep the value of your property up.
Consider Hiring Property Management
Depending on your situation, you may want to hire a property manager. Since owning a rental property is so involved, it may be worth spending the extra money to hire one. Property managers will find tenants, but they will also take care of the daily operations on the property.
For example, if you live over an hour away from your property, you would likely benefit more from hiring a property manager than self-managing the property. No right or wrong choice when hiring a property manager; it depends on your preferences, capabilities, and finances.