After decades of cheap money, seven percent mortgage rates seem high. Investors might wonder if buying a rental property is a good place to park their money. It seems simple enough:
- Buy a home.
- Rent it out at a price to cover the monthly mortgage payment.
- Put profits in the bank while the property appreciates.
Like most things in life, it is not as simple as that. Rentals are a good investment with the right property, sound accounting and financing, and an eye for detail.
Is Buying Investment Properties a Good Idea?
Making rentals a decent long-term investment does not take much monthly profit. Owners generating $100 or more in monthly net income are in a good position because rents may increase by 3 to 5 percent yearly. After 20 years, this results in an impressive return on investment. Investors should be picky about what they buy and avoid properties that lose hundreds of dollars monthly and are located in questionable neighborhoods. Successful rentals are usually near parks, with good shopping and dining options. Renters look for places to live with acceptable access to downtown Denver and Denver Tech Center.
Is Denver a Good Place to Buy Investment Properties?
According to a recent article on Fox 31, Denver has the hottest housing market in the nation. Some factors that make Denver a housing growth market are our low unemployment rate, few mortgage delinquencies, and low rental vacancy rate. Real estate values are high because there are not enough houses to fuel the current demand. All these factors make Denver a good bet when investing in home rentals.
Financing Rentals
Buyers of income properties typically make a higher down payment than someone buying a home. Most lenders require at least a 25 percent down payment because they consider rental loans riskier. Investors must do their homework before applying for a loan to buy a rental. Lenders need to feel confident that the borrower will pay the mortgage in hard times and will scrutinize the investors’ business plan to acquire and retain tenants and all costs associated with the rental.
Higher interest rates make it harder for the property to be cash-flow positive if rates are twice as high as they were two years ago. According to Freddie Mac, interest rates in the US averaged 5.4 percent from 1971 until 2023. They reached an all-time high of 20.0 percent in March 1980 and a record low of 0.3 percent in December 2008. Today, 30-year fixed-rate loans are in the 6.0 to 7.0 percent range, which is above average but, as the chart shows below, historically not too high. These mortgages attract real estate investors because they lower interest rate exposure. The loan payment stays the same during fluctuations in the market throughout the life of the mortgage.
Appreciation is like icing on the cake. Once an investor decides to sell, appreciation can contribute significantly to a property’s value. Historically, real estate appreciation in Denver has gone up over time but should not be included in the calculation to buy a rental property.
The Case for Professional Management
The decision to put rentals under professional property management depends on the investors’ financial goals. As explained above, buying the right property is paramount to a decent investment return. Active rental investors put much effort into researching the neighborhoods they targeted to make purchases. If they have several properties in their portfolio, they probably do not have the time or desire to manage their properties themselves. On the other hand, investors who own one or two and are good at finances and property maintenance may decide to manage their properties themselves. A lot goes into managing rental properties, including insurance, advertising, tenant relations, utilities, advertising, cleaning, repairs over time, and taxes, to name just a few. Even the most self-sufficient investors sometimes decide to let professionals take care of their investments so they can pursue other things in their life.
Being a landlord is demanding. Expert property management takes the hassle off owners’ hands. DenCO manages over 150 home, duplex, and apartment rentals in the DU, Washington Park, and other Denver neighborhoods and has been in business since 1990. Call us at 303-722-9688 or click here to complete a contact us form.
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