Real Estate Investing in a Crazy Market: Running the Numbers [part 2]
In part 1 of this series, we looked at how to analyze the local market vs the national market to answer the question, "Is Northern Colorado a safe investment?" After answering that in the affirmative, we move on to define exactly what we're looking for.
Our focus will be "Buy-and-hold" investments, which have about as obvious a definition as you'd expect. A buy-and-hold investment is one that you plan to buy and then hold for usually a minimum of 5 years to realize both appreciation and cash flow. We've already talked about appreciation in part 1, and cash flow is simply the money left over from rental income after expenses, i.e., Cash Flow = Rent — Expenses.
Criteria for Buy-and-Hold Investments—30,000 Foot View
Strong economic outlook
What attracts people to this market? Is it hype? Seasonal jobs? Or are there solid primary job-creating industries, universities, etc.
What does this market look like historically during up and down periods?
Supply vs demand for rentals in our market—look at vacancy rate
Is there a lot of new construction that could compete with your investment?
Criteria for Buy-and-Hold Investments—Zooming In
1% or 2% rule
Gross monthly rental income / purchase price should fall in this range
*Realistically, this is nearly impossible to find in a strong market for a rental-ready property
Cap (Capitalization) Rate
Used to compare investments across asset classes
E.g. Return with a standard savings account is .06%, while most investors won’t buy a property at lower than a 6% cap rate
For a real estate investment, cap rate is determined by dividing net operating income (gross rental income—expenses) by purchase price
E.g. A home purchased for $150,000 netting $10,800/year in rental income would have a 7.2% cap rate (often stated as "7 cap")
These are some helpful criteria to keep in mind as we look at individual properties to know whether we've got a deal on our hands.
Now we're going to move on to actually analyzing properties by looking at a few single and multi-family rentals in Fort Collins and Greeley that have been selected to be as comparable to one another as possible. All of these properties are near universities where the majority of renters will be college students.
Single Family Rentals
There are dozens of real estate investing calculators out there, but we like this one for it's granularity and the fact that it's free: https://iqcalculators.com/calculator/real-estate/
We've created a helpful screen-by-screen guide for the calculator, using info from our first subject property, 2218 6th Ave, Greeley, CO.
Using the calculator for our two properties, we can put together this side-by-side comparison to see how these look as investments.
Note: The percentage figures under "Cashflow and Rate of Return from Sale" refer to the Before-Tax Internal Rate of Return, which you can learn more about on the calculator site and a number of external resources. For our purposes (unless you really feel like getting into the nitty gritty), use these numbers for their comparative value.
Using national and local data, we can have a reasonable degree of confidence (nothing is a sure thing) in the Northern Colorado real estate market to continue to appreciate.
Knowing that, to find an investment property that complies with our (your) personal investment criteria, we can use tools like free investment calculators to run our numbers and figure out expenses and projected income.
These comparisons we've run show just a few examples of the kinds of opportunities that exist for real estate investing in Northern Colorado. Each individual investor has their own specific criteria and preferences. Regardless of what that looks like for you, always run the numbers.
We'd love to help anyway we can, whether that's talking through your goals and pointing you in the right direction, double-checking your deal analysis and weighing in, or taking the reins and doing all of this work for you. That's why we're here, so don't hesitate to reach out!