With all the bad press regarding the real estate market it may surprise you the there are many savvy investors currently laughing their way to the bank.  There are several Denver metro areas that are experiencing leaps in appreciation or low vacancy rates and rising rents.  So, if you are ignoring the press and doing your homework you may find there is still money to be made in the market.  However, you have to be careful.  This market isn’t for those that are looking to get rich quick.  The days of “fix and flip” have turned to “fix and rent” and automatic double digit rises in appreciation are hard to come by.  So, who should be buying and why?

First lets talk about the “why”.  Historically the national home ownership rate has been about 63%.  The rise in risky loans made it easy for anyone breathing to reach the dream of home ownership.  Our ownership rate increased to about 70% over the last few years.  However, the current trend is showing a decline.  We have dropped to about 68% and it is still on the downward slide.  All those folks that really should have been renters to begin with are going into foreclosure and witll be back where they started shortly… renting.  Now, while the over supply of inventory and foreclosures are pushing prices down in many areas these same areas are seeing a rise in demand for rental property.  This rise in rental demand keeps pushing vacancy rates down and rental rates up.  In investment circles you hear stories of a families that sold their home through a short sale or pre-foreclosure and are now renting a home four doors down.

The “why” by the numbers could surprise you even more.  In some areas you can purchase a single family residence for almost half of what it last sold for.  For example, my mother in law sold a property in 2003 for $184,900.  It is currently owned by the bank and is listed for sale at $119,000 and it is very likely that it will actually sell for less.  There are hundreds of examples just like this.  Many of these areas are still experiencing high foreclosure rates (some upwards of 78% over the last year).  So, the “fix and flip” won’t work.  But these high foreclosure areas are also experiencing the highest demand for rentals.  If you purchase one of these properties at $100,000 and finance 80% your PITI (principle, interest, taxes and insurance) would run about $650 but the rents investors are collecting in these areas are between $900 and $1,200 a month.  Further, rents are rising about 3-5% a year while vacancy rates are below 5%.  And if you look at the current building trends, there are very few new units coming on line. The numbers are showing a trend that supports owning investment property.  How does an extra $500 a month sound to you?

Now before getting too excited we better discuss the “who” part of the equation.  There is no “free lunch” so you have to think hard about the risks involved.  Whether it is time, money or effort…. you will be giving it up.  With the tightening of credit standards you will have to be ready to put some money down.  Further, most of these “deals” require some repair.  And finally, many people aren’t comfortable being a landlord.  But if you have some money in the bank, a good credit score and aren’t afraid of a little work there is money to be made.  And if you think you aren’t in the optimal position right now, you may be surprised how quickly you can get there by doing some planning.

A little planning goes a long way.  If you don’t have liquid cash but have a retirement account (401k, IRA, etc) it is possible to put that money to work.  If you credit score is less than 720 there are some quick fixes to help boost that score.  And if you think you aren’t cut out to be a landlord, well many properties will see a positive cash flow even with hiring a professional property manager.  The key to being successful is to plan and do the homework first.  Don’t fall trap to the television shows.  Surround yourself with experienced professionals.  They are out there and willing to share their stories.  If you are interested but don’t know where to start or the questions to ask, start with the following:

1.  Do I know what my credit score is?

2.  Do I have some cash reserves AND money for a down payment (savings, 401k, IRA, stocks, CD’s, etc.)?

3.  Do I have an understanding of construction (repair costs, time lines, permitting, etc.)?

4.  Do I have the time to manage a “project”?

5.  Do I understand the liabilities and benefits thoroughly?

If you don’t have a sure answer to these questions you need to get them to before getting started.  And even if you answered “no” to some of the questions it doesn’t mean that you are suited to own investment property.  You just may need to hire professionals to help get you on your way.  Many professionals don’t charge for their services up front and often will educate you for free in hopes that you will use their services later.  Further, there are many experienced investors out there that are willing to share their experiences with no motive other than to share their success.

If you have specific questions or want help getting started you can email me at andrea@1228home.com