How to find a deal? (buy and hold rental - Denver area)

Question

I was hoping some of you experts could tell me how you go about finding your deals?  I'm looking to invest in single family homes, or possibly duplex to quadplex properties for the purpose of generating rental income.  I'm in the Denver metro area, and real estate is hot here right now…  obviously that's not the best time to look for deals, but I'm certain that some folks are still finding them out there somewhere (some of you on this site have even alluded to that fact).

I ran the numbers on a property that I got a lead on from a friend, and this property could cash-flow reasonably if I could get it for the right price.  Unfortunately the "right price" for me is about $20K less than the owner of this property offered to sell it to my friend for about 6 months ago (not a good sign with skyrocketing prices at the moment).  Even at that price it would be competitively priced in our local market, where a lot of places are currently selling above asking price.

So, how can I go about finding a great deal (or, even just a fair deal) in a market like this?  Do you guys have any general strategies you use to locate good deals on single family homes (or other 2-4 unit rentals)?

Matt M. · Answer

Want a "great deal?" Get out there walk the neighborhoods, & talk to people. Boots on the ground is where you will find your deal.

Mark Shaffar · Answer

@Kevin  H.you can try networking at your local REIA. Everybody says  go to your local market first, but it completely depends on what kind of investing you want to do. Some markets have better cash flow and some have better upward potential. I made a ton of money betting on appreciation in Beijing, China and now have completely swung the other direction betting on cash flow from turnkey rentals in the Midwest.

Ryan Robirds · Answer

I agree with what Linda said, just make sure the numbers make sense for you.  I have a rental that cash flows well even though it's only 0.9%.  I had initially lived in this property before moving and renting it out, so I kind of fell into it but it was remodeled when I bought it so the expenses are virtually zero at least for right now.  I wouldn't get into anything under the 1% rule if it needed any work, but maybe you can find something with tenants already in it or in move in condition for a good price where the rents make sense.  Also take into account that prices and rents might not stay high forever so it needs to make sense in the long run.  If it cash flows at 0.7% now make sure it won't put you under water in the future. Just because the market is hot doesn't mean there isn't anything out there.  It just means you have to hustle harder to find deals and be ready to jump on them quick when you find one that adds up to numbers you are comfortable with.

Bill S. · Answer

@Kevin  H. you are only $20K off. Get a meeting with them. Get moving on this deal. From what you have said your are talking yourself out of it without even being rejected. Let the seller tell you no. Get the number from you friend and make the call. Remind the seller you are saving them the RE commission and maybe they will come off some more.

Also $20k is a deal breaker. What percentage is that? How long do you hold it until it gains that $20k in value or rents increase to you floor. Look at the trends. The other thing to consider is interest rates. When those start heading North, you will wish you had mortgaged the farm at these low rates.

Linda Weygant · Answer

Hi Kevin,

What I'm finding now is that if you really want to invest in this market, you've got to throw some of the "rules" out the window.  I'm finding that in this market, the 1% rule is somewhat of a pipe dream.  If you can get something in the right price range, it needs so much work it will make any hope of a decent cash on cash return difficult.  Anything turnkey will give you a rent return something in the .5% to .7% range.

That said, rents are increasing, so something that is .7% now may be 1% in a year or two.

I'm actually waiting right now to hear whether or not my contract was accepted on a house that will yield .7% of rent to purchase price and the cash on cash will be something around 11%.  So not a home run, but a solid base hit.

I don't think there are any great deals to be had through the MLS right now, but I'm also thinking that getting on a couple of wholesalers' lists might yield some results, so it's the road I'm going down.

Good luck to you!

Kevin H. · Answer

Thanks, I appreciate the perspective.  If I find the next house I want to live in I'll certainly be renting the place I own now.  I think it is well situated to be a rental, and I've got it paid off. If you compared the price I paid for it to current rents it would be almost exactly at 0.9%, like your home.  But, if you went off of recent comparable sales in my neighborhood relative to current rents it would fall to 0.58%.  Granted, this is just one neighborhood (Arvada), but it seems like it wouldn't be easy to buy a positively cash flowing property around here with those numbers.

I think Denver will do well in the long run, which is what got me interested in investing here in the first place.  But, I don't honestly expect we're going to see continued appreciation at the rate we have for the past year (I could be wrong, but then again, you can only gain at 10% per year for so long).  As such, I worry about having an entirely flat (or money losing) investment if I don't find the right deal around here.

By way of comparison, I see numerous properties in the Pueblo area that would probably cash-flow well right out of the gate, with numbers around 1.35% or so upon first glance.  Admittedly, Pueblo isn't Denver, and there's a reason that these properties are cheaper (I once lived there, so I get it).  But, from a cash-flow standpoint they look a lot more attractive than Denver-area properties.  They probably won't appreciate quite like Denver, but I doubt they'll fall in value like some places in the Midwest have over time (there has certainly been some appreciation in the Pueblo area in the past ten years).

I'm not really sure where I'm going from here at the moment, but I've certainly come to the conclusion that you probably win or lose right out of the gate on most deals…  if you overpay from an investing standpoint you'll never do well, and if you buy at a good price you'll probably do fine (regardless of where the place ends up being).  Maybe I'm off-base here, but I'm also kind of just thinking out loud right now...

How to find a deal? (buy and hold rental - Denver area)

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