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Why now is a good time to buy a rental in Denver

Posted on November 26, 2007 by Ray Williams (NMLS #216267).

Many clients ask me what style of real estate investing am I a fan of in Denver right now. With the softening of the housing market in Colorado (which has actually been the cycle we have been in for quite some time here), there has been no shortage of opportunity to buy homes at discounted prices. The main reason has been because of the gluten of foreclosures in certain sectors of the Denver metro area. You have seen it on the news, read about it, and even seen the streets lined with foreclosed homes. I am definitely a fan and actively involved in the buy and hold mentality. After growing up in Denver and seeing people purchase homes multiple times in the past in similar real estate markets, I have been excited to see our current state of real estate in Denver.

What exactly caused this foreclosure epidemic you ask? There are so many variables, from over building, to a collapse of our tech economy, or adjustable rate mortgages just to name a few. This is an argument that has no one single answer.

If you are an opportunistic person who has lived in Denver for quite some time you know that this has happened at least twice before in the last 25 years. The reason is plain and simple! Real Estate is cyclical in nature.

So when will prices bottom out? That seems to be one of the hot questions I am getting these days. Truth be told there is no way you can ever know the exact time when that will happen. One problem people have understanding is what it takes to get a bank to accept an offer. The knowledge comes from knowing how much costs go into listing a bank owned (REO) home. There are all the costs they took once they bid the house out of the auction. Add to that carrying costs, agent commissions, seller closing costs to name a few. This means that when you look back on what the bank bought the house for at the auction. You have to figure when it is relisted on the market they (bank) are already factoring what the current market value is for that home. This doesn’t mean that you can offer them .50 cents on the dollar for what it is listed for. The bank’s listing agent has already done what is called a BPO (broker price opinion). This gives the bank an idea of the current market value of that home. Remember back to the fact that the bank was foreclosed on for a loan that was already an outstanding debt. What you have to remember is that if you can get the house for .85-.88 cents on the dollar (net to the bank) you are doing good.

WHY? because the bank typically relists homes already less then market value. Because typically the houses need repair. So the mentality that you can factor in how much you are going to have to pump into the house to remodel it, then reduce your offer to the bank by that amount is illogical. They already factored that it is in need of repair, remember, when they listed it for the price they did.

I will give you two live examples. Both individuals bought houses that were bank owned. Of course knowing they were going to have to remodel them to get them back into shape. After spending about $15,000 each, they both had their houses reappraised and restructured their mortgages. What this allowed them to do was to recapture the money they used to remodel the homes, and also actually reduce the payment while putting them at an attractive 75-80% loan to value. How do you suppose that is the case? Because I have access mortgages where you can restructure your mortgage based off the newly appraised value. In both of these examples the homes were purchased for close to the listing price of the bank. Also, in both of these examples the net equity remaining in the home after the refinancing of the home and taking about $30K out, was $40-$50K. Not too bad considering they were purchased for close to the list price. This is a great reason to buy the house. Not because in either of these examples it didn’t involve work and time. Because with any investment in real estate you have to have realistic expectations and understand it is real work to make money investing in real estate.

That earlier question is coupled by what are the current rates? That too is a complicated question because there are so many variables that go into qualifying you as a borrower. We have been seeing rates in the low to mid six-percent range. Yes, I have even seen under 6% this week. If you are looking to refinance shoot me an email for an honest approach to home lending.

Now back to the reason it is a good time to buy a rental home right now. As I projected a year ago it was going to be good to snap up rental properties. Simply because there are less buyers (especially now that you add the mortgage liquidity crisis). Add to that a sprinkle of economic troubles and you have a recipe for trouble. Many flippers have seen their profit margins deminish quickly with carrying costs of an unsold home, price reductions, and increased seller concessions to get it moved. From the buyers side this means, if you were going to buy your first home you may have either decided to wait or have been forced to wait. You are going to rent longer. Now top that recipe with a gluten of bank owned homes being sold at a discounted price and you have great potential as a real estate investor to pick up your first or another real estate investment.

Recent reports are showing that the number of available rentals in the metro rental market “condos, single family homes, and other small properties across metro Denver dropped to 3.9 percent during the third quarter, according to a report released today by the Colorado Division of Housing”. (John Rebchook, Rockymountainnews.com, 11/20/2007)

If you add those two components together with a consultation from me on how to take the 3 step process to cash flowing on a rental in Denver. You will learn real life real estate investing. Not based on the late night infommercial mentality (which is out there to sell books and products, not real estate). There are definitely some great areas in Denver that are actually appreciating right now, and have foreclosures you can purchase. I can put you with an agent who will find you a great rental property.

Enjoy your day and happy hunting~

Ray

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