Denver Rental Deal Analysis - Cash Flow < Appreciation

[Zachary Gilula]

I'm evaluating a rental deal in Denver and I'm struggling to balance my emotions and the numbers. Looking for guidance!

Deal:

1 bed, 2 bath, 698sf

Price: $375,000

Rent: $1,650-$1,750/mo

Property Tax Est: $166/mo

Home Insurance: $131/mo

Management Fees (No HOA): $75/mo

Goal: Long term hold, rental property. This is my first property that I would personally be managing. 2 minute drive away from my house.

I've been looking to get my first rental property and I live in an extremely desirable area in Denver. This townhome is in my neighborhood, on a great commercial/residential strip that I believe will continue to experience a ton of growth well into the future. I know the area very well. 

My initial models show that I would basically be breaking even on the cash flow, so this is a play on appreciation and my belief in the area.

It is also a new build with a 1-year warranty.

I'm struggling to overcome everything I've read about the 1% rent to home value rule of thumb vs. my personal belief in the long-term potential for this property.

I'm trying to balance the risk and long-term potential. What am I not considering? 

Thanks in advance!

[Lee Ripma]

@Zachary Gilula

A lot of folks on BP drink the cash flow cool-aid. I was sold on it when I first started and went to a cash flow market. Now that I've been in RE for a few years I care very little about cash flow and instead focus on IRR. Cash flow is a hedge so that you don't lose your property. It is a very small amount of your overall ROI.

My concern with your property is not that it's not close to the 1% rule it is that there is very little room to force appreciation. So you'll have to bank ONLY on market appreciation. I would like the deal better if you had a way to force appreciation. If you ask me there are six wealth generators of RE, listed in the order in which they have been a contributor to overall ROI for me.

1. Forced appreciation 

2. Market appreciation 

3. Tax benefits 

4. Time freedom from W2 that allows you to generate income that isn't trading time for money 

5. Principal Paydown

6. Cash flow 

Note that you can't control market appreciation on the SHORT term but you can always control forced appreciation. The value of your property going up through time is critical to having a high ROI in RE. Good luck!