State of the Market: Denver Q3 2020

This is the first of our quarterly series on the State of the Denver Market. If you’re not sure where to start, this is it! Every quarter we’ll release a new one to give the latest data. In it, we discuss market trends, mortgage rates, underwriting basics, current opportunities, tips and red flags. We also answer common questions like “Is it still a good time to buy rentals?” Check it out to learn about Denver investment real estate.

This is the first of our quarterly podcast series on the State of the Denver Market. If you’re not sure where to start, this is it! Every quarter we’ll release a new one to give the latest data.

This is the first of many! Give us feedback and help us improve it.

This covers:

  • Market trends (Sales data, prices, rental trends, current events, etc)
  • Mortgage rates
  • Common questions, such as “Is it still a good time to buy rentals?”
  • Underwriting basics (plus… learn the “rules” that actually work in Denver!)
  • Overview and examples of different investment assets:
    • Detached single-family homes
    • Condos and townhomes
    • Multifamily (2-4 units)
    • Multifamily (5+ units)
    • House Hacking
    • Nomad™
    • Flipping
    • BRRRR strategy
  • Current opportunities, tips, and red flags

Three Learning Options!
  1. Listen to the podcast “#193: State of the Market: Denver Q3 2020” on the Denver Real Estate Investing Podcast
  2. Watch the YouTube video (at the bottom.)
  3. Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast or video.

Market Trends: Will Prices Drop?

Denver housing appreciation rates during recessions

Market Trends: Extreme Seller’s Market

months of inventory denver

Market Trends: Population vs Sales

relationship between population growth and residential sales

COVID-19 Rent Trends in Denver

  • From our “Denver Property Management Update” monthly podcasts, property managers are reporting:
    • Strong rent collection. Within +/- 2% of rents collected for the same month in 2019. More tenants are on payment plans. It’s taking longer to collect the rent, but they are collecting it.
    • Strong leasing activity with many reporting continued rent increases.
    • A higher percentage of tenants are staying and renewing their leases.
    • At time of publishing, the eviction moratorium is expiring, but there is a 30-day notice period and they have concerns for a big back log in the courts. Their recommendation is to work with your tenants rather than going through the eviction process.
    • Less than 0.5% of tenants are not paying any rent.
    • Potential issue: The extra unemployment benefits are set to expire soon which may impact tenants ability to pay rent.
  • According to the Q2 2020 Denver Metro Area Apartment Vacancy and Rent Survey:
    • Average rent now stands at $1,506 per month, down $30 from a year ago.
    • Vacancy dropped from 5.9% in the first quarter to 5.1% in the second. Historically, vacancy tends to fall as the market transitions from the first quarter to the busier second and third quarters, said Teo Nicolais, a Harvard Extension School instructor specializing in real estate.
    • New apartment construction added 1,170 units to the market in the second quarter, and the metro recorded positive net absorption of 3,801 units.
  • A separate survey of Colorado Apartment Association members found that 95.4% of renters paid June rent, less than one percentage point below the 2019 figure, and greater than the 92.2% collection rate nationally.

Denver Rent and Vacancy

Denver vacancy rates

Denver Mortgage Rates

Denver mortgage rates

Is It Still a Good Time to Buy Rentals in Denver?

There are a lot of factors that go into answering this question. As usual, there is no clear answer.

  • What is your personal situation?
    • Do you have job stability?
    • Do you have cash reserves to handle any potential issues?
    • Chris Lopez is increasing his cash reserves from 6 months of PITI to 9 months of PITI per rental.  Jenny is keeping her reserves at 6 months of PITI, but has also opened up lines of credit “just in case”
    • What’s your time horizon for holding the rental?
  • We are seeing no major indicators that there will be a price drop. 
    • There is continued demand from job and population growth, and supply is not keeping up.
    • Inventory is still incredibly low.
    • While cap rate is an important metric, it’s not the only one. The spread between the cap rate and your borrowing interest rate is more critical. The recent drop in interest rates has increased the spread.
    • Jenny’s personal anecdote: During COVID, two rentals came vacant due to planned turnover, and in both cases she was able to get them re-rented in a matter of days, and in one case raised the rent by $200/mo.  There is still a large demand for rentals that are priced at the median rental rate or less.

Many of our agents are actively buying rentals, house hacks, and Nomads™ for themselves. We are long term wealth building focused.

Underwriting Denver Rental Properties

Forget about the 1% and 2% rules from Google and BiggerPockets! The rules state that the monthly rent should be 1% or 2% of the purchase price. You will rarely find properties that meet these rules in Colorado Springs. These rules do not equal great rental properties or long term wealth building.

Forget about the 50% rule from Google and BiggerPockets! The 50% rule states that 50% of your rental income will go towards the property operating costs (All the costs except for mortgage payments). In Colorado Springs metro, we’re typically seeing between 25% to 35% of rents going toward the operating costs- similar to Denver.

We underwrite conservatively and realistically!  Make sure you understand the underwriting numbers from listings and other agents.

underwriting Denver rental properties

Detached Single Family Homes

Detached, SFR’s generally have the lowest cap rates (4% to low 5% cap), unless you go with the room by room rental strategy or find a place with an additional dwelling unit (ADU) or mother in law suite (5.5% to 7%+ cap). The room by room rental strategy gives you good cash flow, but are often too much work for many investors. Be mindful of the occupancy rules for where the property is. Plus we’ve yet to find any high-quality PM’s to manage room-by-room rentals. Down payment: 15%-25% (For rentals, not house hacks).

Lakewood Detached SFR Rental

  • Closed: Q1 2020
  • Type: 5 bed, 3 bath
  • Purchase Price: $402,500
  • Down payment: 25%
  • Total Initial Investment: $111,251
  • Interest rate: 4.49%
  • Cap rate: 5.2%
  • Annual cash flow: $2,936
  • Notes: Interest rates are now around ~3.5%, which increase cash flow to around $5,000 a year!
  • Listen to podcast #154 for all the details.

Denver Detached SFR Rental w/ ADU

  • Closed: Q2 2020
  • Type: 5 bed, 3 bath (house), 1/1 (ADU)
  • Purchase Price: $439,000
  • Down payment: 20%
  • Total Initial Investment: $92,340
  • Interest rate: 3.75%
  • Cap rate: 6.0%
  • Annual cash flow: $6,745
  • Notes: Houses with ADU’s are very hard to find.
  • Listen to podcast #179 for all the details.

Denver Condos/Townhomes

In 2019 we were buying condos and townhomes around a 7% cap, but cap rates have compressed over the last year. Currently we’re seeing them between mid 5% to low 6% cap rates. Condos tend to be the best cash flow and the most turnkey. We’re seeing rent ready costs from $0 to $5,000. These are updates that your PM can handle. Tip: Make sure you’re working with a lender that can navigate investor heavy HOA’s! Many lenders get tripped up. Down payment: Assume25% (For rentals, not house hacks).

3/2 Condo in Aurora

  • Closed: Q1 2020
  • Type: 3 bed, 2 bath
  • Purchase Price: $195,000
  • Down payment: 25%
  • Total Initial Investment: $60,291
  • Interest rate: 3.875%
  • Cap rate: 6.2%
  • Annual cash flow: $4,051
    Notes: This is one of our go to complexes.
  • Listen to podcast #153 for all the details.

Aurora Condo with Value Add Play

  • Closed: Q4 2019
  • Type: 3 bed, 2 bath. W/ option to add 4th bed
  • Purchase Price: $259,000
  • Down payment: 25%
  • Total Initial Investment: $68,357
  • Interest rate: 5.0%
  • Cap rate: 5.6%
  • Annual cash flow: $1,906
    Notes: Clients are currently refinancing to mid 3%, which will increase cash flow to ~$4,000. There is an option to convert 2nd living room to a 4th bedroom to increase rents!
  • Listen to podcast #158 for all the details.

Denver Multi Family (2-4 Units)

Multi family has incredibly low inventory. These are hard to find and very competitive. We’re buying these at a high 4% to a mid 5% cap rate. Pre COVID-19, we often used a local portfolio lender to do a 20% down payment ARM loan with an interest rate around 4%. Since interest rates have dropped, most investors are doing a 25% down, 30 year fixed with a rate in the mid to high 3%!

Aurora Duplex

  • Closed: Q2 2020
  • Type: 2 bed, 1 bath for both units
  • Purchase Price: $415,000
  • Down payment: 25%
  • Total Initial Investment: $110,000
  • Interest rate: 3.625%
  • Cap rate: 5.3%
  • Annual cash flow: $5,000
  • Notes: Classic side by side duplex.
  • Details coming out in a future podcast.

Lakewood Fourplex

  • Closed: Not yet. Active off-market
  • Type: 3 – 1/1, 1 – 2/1
  • Purchase Price: $1,050,000
  • Down payment: 25%
  • Total Initial Investment: $270,000
  • Interest rate: 3.5%
    Cap rate: High 4%
  • Annual cash flow: $10,000
  • Notes: This is an active off-market deal that we’re working. Great location across from a park. Plus a full rehab from studs out!
  • Hopefully we can share the details in a future podcast.

Denver Multi Family (5+ units)

Cap rates are typically between a high 4 to mid 5 cap rate for 5+ multis. The 5+ multi family lending world froze for a couple of months during the initial COVID crisis. Towards the end of Q2, banks started lending again. The lending world has changed dramatically. Knowing the right lenders and bankers is critical as we’re seeing quotes all over the place. We’re seeing rates between 3.5% to low 4%.

5+ Multis are where we’re seeing the best value-add possibility by increasing rents, updating units, implementing utility bill back, and bringing in better management. Expect a 12 to 18 month turn while 1 to 2 units are turned every 4-8 weeks as leases lapse. Then stabilize, refinance and pull part of your initial investment.

8 Unit Near Denver University – Actual

  • Closed: Q1 2020
  • Type: All studios
  • Purchase Price: $1,262,500
  • Down payment: 25%
  • Total Initial Investment: $327,165
  • Interest rate: 3.625%
  • Cap rate: 4.7%
  • Annual cash flow: $7,261
  • The plan is to update two units ($15,000 total), bring all units up to market rent, implement utility bill back, charge for parking and storage, bring in better management, and then stabilize over the next 12 months. Then refinance to a non-recourse loan and pull out money. The conservative proforma shows a 5.3% cap rate. The optimistic proforma is a 6.3% cap with $27,000/yr in cash flow! It’ll probably fall between the two.
  • Our estimates show a cash-out refinance range of $100,000 to $225,000. They’ll use that money to help buy another place!
  • Listen to podcast #163 for all the details.

Denver House Hacking

House hacking is where you buy a place as an owner-occupant for favorable loan terms (lower down payment and lower interest rate), move in, rent out space to reduce your living expenses and then eventually move out to convert it to a rental property. The classic example from BiggerPockets is to buy a multifamily house hack. It sounds great on paper, but it is hard to execute in Denver due to the limited inventory and high investor competition on small multis. The stats from our closed house hacks are that about 10% are multis, 20% are condos/townhomes, and 70% are detached SFR’s. Note: These stats include our repeat clients on their next house hack property, which typically eliminates multis.

Room by Room House Hack in Aurora

  • Closed: Q1 2020
  • Type: 5 bed, 2 bath
  • Purchase Price: $375,000
  • Down payment: 5%
  • Total Initial Investment: $26,675
  • Interest rate: 3.875%
  • Cap rate: 7.1% (After client moves out, renting four bedrooms, room by room)
  • Annual cash flow: $4,971
  • Notes: While he’s living there, his living expenses will be around $350/mo!
  • Listen to podcast #144 for all the details.

Wheat Ridge Duplex House Hack

  • Closed: Q1 2020
  • Type: 4 bed, 2 bath and 2/1
  • Purchase Price: $545,000
  • Down payment: 3.5% FHA
  • Total Initial Investment: $30,615
  • Interest rate: 3.5%
  • Cap rate: 5.3% (After client moves out, renting four bedrooms, room by room)
  • Annual cash flow: ($1,446)
  • Notes: Clients are living in the larger unit to have more space. They could move into the smaller one to really reduce their living expense!
  • Listen to podcast #149 for all the details.

Denver Nomad™ Properties

Nomad™ is an investing strategy that is often confused with house hacking. Nomad™ is buying a future rental property by moving into the property to get favorable loan terms, not having roommates or tenants, and then moving out after the one-year occupancy requirement. This is a great strategy for families or people that want to acquire rentals for little money down, but want privacy as well. 

Nomad™ in Westminster

  • Closed: Q2 2020
  • Type: 3 bed, 2 bath
  • Purchase Price: $349,000
  • Down payment: 0% VA loan
  • Total Initial Investment: $8,040
  • Interest rate: 3%
  • Cap rate: 4.3%
  • Annual cash flow: ($4,099)
  • Notes: Don’t expect cash flow when using a 0% down VA loan. The client will most likely stay there a couple of years before moving out, so hopefully the numbers are better. Of course he can self manage to get cash flow close to break even.
  • Listen to podcast #185 for all the details.

Family Nomad™ in Littleton Townhouse

  • Closed: Q1 2020
  • Type: 3 bed, 4 bath
  • Purchase Price: $322,500
  • Down payment: 5%
  • Total Initial Investment: $25,567
  • Interest rate: 3.75%
  • Cap rate: 5.5%
  • Annual cash flow: $697
  • Notes: This is a family of four with two toddlers. A room by room house hack is out of the question.
  • Listen to podcast #146 for all the details.

Denver Flipping and BRRRR (Buy, Rehab, Rent, Refinance, Repeat)

They are both businesses, not investing. If you want to flip or BRRRR, you need to be proactive in building your business. One contact or agent will most likely not do everything for you! Many people are successfully flipping.

Tips for success:

  • Network with everyone (agents, investors, wholesalers, people in your network)
  • Clearly defined criteria for your desired property type.
  • When a deal comes along that fits your criteria, execute! Otherwise, people stop bringing deals.
  • Having financing ready to go. If BRRRRing, have take-out financing ready to go.
  • Review “Elevate Your Flip” series for a detailed breakdown.

Considerations:

  • The BRRRR Strategy is very hard in our current sellers market. Usually works best in a buyers market (opposite market conditions that we have now.) Investors are BRRRRing, but the ones we see are experienced investors.
  • Remember, these can be great businesses, but businesses take time to build, scale, and become profitable.
  • Consider house hacking or Nomading™ for easy “base hits” while you’re building your business.
  • Due to the current market conditions, many investors are focused on longer time frame opportunities:
    • Buy a rental, then after 5-7 years, do a cash-out refinance or sell and trade up.
    • Buy a property in a transitioning part of town that is in “good enough” rental shape. Collect rents, then after the area turns, do a delayed flip by rehabbing it, selling it to an owner-occ, and then 1031 the money into another deal.

Opportunities / Tips

Take advantage of the low interest rates!

Refinance your primary residence and/or rental properties.

  • Chris refinanced his primary in November 2019 at 3.75%, then refinanced again in March 2020 to 2.75%. That’s over a $200/mo savings!
  • Chris refinanced his fourplex that he purchased in August 2019 at 5.25% to 3.5% in July 2020. That’s over $600/mo in savings!

Tap into your equity

If you’ve owned a property (primary or rental) for a few years, you’re probably sitting on a significant amount of equity. Consider:

  • A HELOC
  • A cash-out refinance
  • Selling, utilizing a 1031 exchange and trading up to buy BIGGER and better rental properties

Not sure what the right move is? Then reach out to us to run your property through our “Equity Optimization” Spreadsheet to present all scenarios.

General election

  • The Denver market typically slows down around election time. This year may be the same or different (who knows with COVID-19). Be on the lookout for a relatively better buying opportunity.
  • According to Joe Massey at Castle & Cooke Mortgage, interest rates historically increase by about 0.5% after the election, regardless of who wins.

Thinking of going into forbearance?

  • Understand the rules because it may delay or limit your ability to buy or refinance. The rules are fluid. Make sure you talk with your lender BEFORE going into forbearance to understand the pros and cons.

How Can We Help?

There are three main areas that make us different than other agents:

  1. We’re investor-friendly Realtors® in Denver and Colorado Springs. Over 95% of our transactions are investment properties. Our properties range from single family rentals to small apartment buildings (<20 units.)
  2. Many agents are impressive one person shows. We’re team centric and have a small team working with clients. Our agents are specialists based on geographic location and investing type (multifamily, residential, flips etc.)
  3. Investors buy properties to achieve a certain rental cash flow goal for retirement. Most financial planners are great at stocks, bonds, and life insurance, but do not understand the real estate investing world. One of our team member’s roles is to work with clients to track and help optimize portfolios to help achieve the retirement cash flow number. Every year we meet to review the portfolio and to make sure we’re on track to achieve your goals.

We’re always happy to discuss your personal situation. Please schedule an Investment Strategy Consultation.

If you’re interested in Colorado Springs investment real estate, read about Colorado Springs real estate market trends.

YouTube Video: Quarterly Market Update Denver Q3 2020

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Rental Property Spreadsheet • House Hacking Spreadsheet BRRRR Calculator Spreadsheet • Fix and Flip Deal Analyzer Investing Maps • Rehab Pricing Estimator
Start analyzing your Colorado investment properties today
Rental Property Spreadsheet • House Hacking Spreadsheet BRRRR Calculator Spreadsheet • Fix and Flip Deal Analyzer Investing Maps • Rehab Pricing Estimator
Authors
Chris Lopez
Chris Lopez is a Denver area real estate entrepreneur and investor, as well as the host of Bigger Pockets’ House Hackerz and the Denver Real Estate Investing Podcast.
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