This article was originally posted as “Colorado Real Estate Market Heating Up, Investors Clean House” on Technorati, by Tim Paynter
I had an interesting meeting with Greg Beran of Performance Property Management, LLC on South Broadway in Denver. He thinks now is a great time to put some money into the market. After years of flat real estate prices and zero growth, he may be right.
In part that is because investors usually bottom fish. The majority of us have properties that are rented to those who are really struggling. The super rich have their own properties, and finding a middle class family to pay a good return considering the cost of middle to upper middle class homes is usually a wasted effort whistling Dixie.
The following article was written for Technorati. I have reproduced it here because I think it has a great message.
Real estate investors have spent years trying to figure out where the bottom of the market is. According to Gregory Beran of Performance Property Management in Denver, Colorado, we are a few steps up from bottom in the Mile High City of Denver, Colorado.
According to Beran, the two ingredients that make residential properties attractive to buyers are low prices and high rents. Beran, a long time property manager and investor in the Denver metroplex, says those conditions exist right now. He says competition is heating up for his rental units and vacancy rates have plummeted.
“We don’t have any single family homes available” the lanky investor told me during an exclusive interview. “They don’t stay for rent longer than a week or so.”
When asked about two bedroom apartments Beran was only able to offer one prospect for a fast move.
“It is the trickle down effect,” Beran said during our discussion in his nicely appointed office on South Broadway Boulevard in Denver. Unlike “trickle down economics” in which wealth trickles down from the super rich to the middle class as promised by the Bush administration, the trickle down effect Beran is talking about is from those transitioning from home owners to small house and apartment renters after losing their homes in foreclosure.
“The banks aren’t letting people stay in their homes any more,” Beran explained. “So people are moving from large houses into anything we have.” The same is true for apartments, as people face a substantial lower standard of living after losing their homes and condos and being forced to accept significantly less.
Even though a person has a foreclosure or bankruptcy on their record Beran may still work with the tenant.
“I like to work with people to see if we can help them. If I am convinced they will pay the rent then we overlook a lot,” he told me.
Beran qualifies the tenant by checking their criminal and civil background. He is looking for serious criminal charges as well as prior evictions. Assuming the person has stable employment, the Denver leasing agent tries to put them into something they can presently afford.
All of this is good news for landlords trying to hang onto their properties and for new investors. Sales prices still remain competitive in Denver. There are scores of fixer uppers on the market. An investor who is able to buy right can lease the property for positive cash flow. One bedroom units rent for $550 to $595 in lower income complexes, which are favored by investors. Two bedroom units go for $650 to $750.
Here are the numbers. Let's say you are able to acquire a condo for $30,000. If you pay your broker handsomely for finding the deal, and throw in financing and closing costs, plus a carpet and paint budget, perhaps your investment costs another $5,000, for a total investment of $35,000.
If you are paying 7% on the borrowed money, the monthly interest payments would be about $205.00. Condo dues will add another $250 bucks to the tab, and property taxes another $80.00. Your total monthly nut will be $535. A rental rate of $595 per month means your tenant is paying the costs of your investment while you wait for appreciation and take the tax benefits. If you paid cash for the unit you would be getting a whopping 55% return on your investment. While I did not take depreciation of furnishings or vacancy into account, these items should be easily offset from appreciation and tax deductions.
After congress stuffed their pockets with a $139,000 unfunded tax break to every single millionaire in the US in December of 2010, they are not likely to shoot their mortgage interest and other deductions in the foot too hard. The net after tax benefits makes the return on investment soar!
“Prices are being kept down because banks are not lending unless you have good credit,” Beran noted. “So people who have lost their homes are unable to qualify for less expensive homes.” That pitches former home-owners against those who traditionally rent, tightening the market.
Since banks are not lending, sales prices continue to remain weak. This provides the perfect scenario for a wise investor who has capital to invest and management expertise. As credit eases, values will likely rise. For those who prefer to let others handle the tenants, Beran is still accepting management contracts for properties.
“Are you in the market right now?” I asked him.
“I am always in the market!” Beran told me. The words are spoken like a true investor. Beran prefers small apartment complexes. He looks for a cap rate higher than 8% and is ready to move if he likes the deal.
How do you know when the real estate market has hit bottom and is on the way up? When seasoned investors slide off the fence and return to the market, you can bet they know something. Considering Gregory Beran bought his first rental property when he was 20 years old in 1978, you can bet he knows a thing or two.
No one has a perfect crystal ball. Trying to catch the ‘exact high’ or ‘exact low’ of the real estate market seems futile. Isn’t it better to invest with the trends? And what are the best trends?
Buy when everyone is selling. Sell when everyone is buying. A lot of people are buying right now but most have yet to get the news. Now may be your chance to salt away a nest-egg rental house for your future.