Rentals in South Denver

[John Yu]

I live in Highlands Ranch, Colorado and have two rental properties, one in Highlands Ranch and recently purchased another rental in Castle Rock. I am still actively looking for investment properties in this area, mainly in Douglas County. I don't think the rentals in this area really fit the 1%-2% rule or the 50% rule, but I see rentals are everywhere in my area based on research on Zillow and County Assessor web site. Would like to connect with other REI and landlords in this area to bounce off ideas and see how other investors are acquiring properties and getting loans to expand their rental portfolio.

[Jon Holdman]

@John Yu I refer to your number (rent - PITI) as "phony cash flow". It only accounts for taxes and insurance and neglects the plethora of other expenses, capital, and vacancy you will have over time. The 50% rule says that 50% of gross rents, $1100 a month in your case, will go to expense, capital and vacancy. A big chunk of that is property management. So, backing that out, I use 36%. That works out to $792 a month on average. For your P&I I get $1140 a month assuming 25% down on a $300K house with a 4.5%, 30 year fixed loan. So that leaves $268 a month, $3215 a year, in true cash flow. Which is a 4.3% cash on cash return on your $75K down payment.

Your number is your best possible month.  Not all months will be that good.  You will have maintenance, even on a brand new house. People living in a house have a way of damaging stuff.  If you have carpets in those houses, you will have to replace those.  The IRS says they last five years.  I've been told judges in our area say three.  Roofs, furnaces and appliances all need replacement.  Serious tenant damage is a real possibility.  A lengthy and expensive eviction is a possibility, too.

Lenders use the formula 75% * rent - PITI to estimate net rental income. In your example, that would be $1650 - $1328 = $322, which is a bit better than my number.

You'll find plenty of people who think this is overly conservative.  And it is just an estimate.  Reality will be whatever it is.  You don't really control that.