Paul Cunningham

Have you ever driven through Aurora North looking for a rental property and taken a close look at the roofs? Here's what you'll see: a bunch of 1950's ranches in varying states of repair or disrepair, lawns that are often grassless, old handcrank windows and roofs in almost perfect condition! This surprised me at first and perplexed me for a long time. Why, in a neighborhood devastated by foreclosures with properties with massive deferred maintenance are the roofs in such condition? Really! Stand in the middle of a typical street and looking at 10 roofs simultaneously, you'll be amazed. Well, it turns out the answer is pretty simple. There was a huge hailstorm in the mid-90's and most of the roofs were replaced by insurance companies then. The result is that while you certainly need to be careful about what you buy in Aurora North, chances are your roof is going to be fine. Thank goodness for small favors.

If you have not heard already, the inventory of home on the market in Denver has been declining. This is not true in many regions of the county. Your clients, who often only see national headlines, might not be aware of this favorable news. Our market has some unusual factors at work. Let's explore them, so you can better help your clients.

If you look at the first chart (MOI 1), you'll see the MOI (months of inventory) for Denver's suburbs on the bottom axis and the average sales price in that suburb on the axis on the left side. Denver metro currently has about six months of inventory (a balanced market, on average), but you can see there is a lot of variety from one city to the next. Lower cost areas, such as Thornton, are seeing inventory move fast. Sellers (mainly banks) don't have to wait long for offers. Thornton's average price in the last year was around $250,000 and the average MOI was about 3 months. Greenwood Village, on the other end of the scale, had about 13 MOI and an average price of about $1.4 million. Sellers are suffering there. The city of Denver is about in the middle.

If you look at the second chart (MOI 2), you'll see the MOI information sorted by the price of the home. In some cases, this might be more useful when you meet with clients. The city of Denver, for example, has many neighborhoods with homes under $100,000, and they are selling fast. On the other hand, upscale neighborhoods like Cherry Creek and Hilltop have significant levels of inventory and it's taking a long time to get homes sold, especially over the $1 million price barrier.

The left part of the chart show what percent of the active listings are REO (in red) and which are regular sellers (in green). For homes priced between $0 and $100K, regular (e.g.,, non-bank) sellers are 17% of the active inventory, but only 12% of the sales in the last twelve months. You can see on the left that since they are not getting their "fair share" of the sales, the MOI for the regular sellers under $100K is 2.7 months. For REO under $100K, it's a blazing 1.9 months. This probably isn't a surprise to any Realtor that has written an offer for a low priced REO and the listing agent has told them their buyer is competing with ten other offers. It's a strong seller's market at this price point!

Compare the homes from $480K to $1MM. Here, MOI is around 14 months - a very slow market. Your seller's experience with marketing time depends greatly on their price. I hope this information will help you demystify our market for your clients.

As investors we face a number of very real and very scary challenges. Making sense of this market is no mean feat and one has to be very careful with his or her investment. However, we usually think about danger as financial. Unfortunately, on rare occasion it can be even worse than that. The majority of the homes investors are buying these days are vacant and once in a while people break in and live in these properties illegally. The last thing you want to do is walk in on someone camped out in a house, perhaps conducting illegal an activity. This is no joke, you want to be HEARD when you walk into a property that is supposed to vacant. So make a lot of noise when you're at the front door. I always knock loudly before entering. Stomp your feet a little. Yell "Hello!" a couple of times. When you start walking down into the basement repeat the process. The goal is to have whoever is inside hear you and not panic and do something stupid. I hope you never need this advice, but keep it in mind the next time you visit a foreclosed home.

You walk into a property you're looking to buy and rent and you walk down into the basement and voila! you find a full second kitchen. Great! You start calculating how much rent you could get if you could rent the downstairs separate from the upstairs and the cashflow is out of this world! But wait, there are a number of very real problems with this scenario. First of all, it's illegal unless the property is zoned for more than one tenant and the property has been converted to non-residential use. But there are even more practical reasons why having two separate tenants is often not a great idea. The first is the utilities. Since it's a house there will only be one bill for Excel and water. Who's going to pay it? Can you really get the tenants to pro-rate their share if you pay it? Good luck. Or do you just pay it, figuring the extra rent will more than offset paying the utilities? Maybe, but what you'll find is that when a tenant is not paying the utilities they have the heat at 90 degrees all winter and every time you go to the house the kitchen sink is running. Your great cashflow gets eaten up by outrageous utility bills and you're back where you started. For these reasons and many more I suggest you don't try to put two tenants into a property made for one. But that doesn't mean the second kitchen has no value. It might be useful for an extended family who needs the extra space kitchen and might actually command a larger rent. Check with your local building department and your insurance agent though, to make sure it's acceptable to have a basement kitchen in the first place.

Investor often ask me what types of real estate investments are available on the market. Here's what we tell them.

This is the first of several postings on the topic.

Please offer comments - positive or negative!

Assignments. If you don't have much equity to work with, and/or if your credit power is limited, assignments can be a way to get started in real estate investing. You will need to have a strong "sales" personality to succeed at it, though.

Rental Condo or Rental Home. Purchase of a residential property to be rented out to tenants, usually on a 6-12 month lease term. This is how most new landlords get started. You can hire out all of the property management functions, but in many cases you will do many of them on your own. There are smaller down payment requirements than for larger rental buildings. The purchase process and financing process is very similar to what you experienced buying the home you live in now. It's a great way for beginners to get started.

Small (2-4 units) Apartment Building. Purchase of duplex, triplex or quadplex to be rented to tenants, usually for 6-12 month terms. Usually what the rental home / condo landlords graduate to. In most markets they cost a little more than a rental home, but are much more likely to cash flow on the average month. Less cash flow risk; if one unit is empty you have other tenants that still help you with the mortgage payment so it doesn't all come out of your pocket. Many owners will start to delegate some of the property management tasks to an on-site assistant (typically the most responsible tenant), such as yard maintenance and showing empty units. The financing process is only slightly more involved than a residential loan. Relatively small down payment requirements make it affordable. The purchase process is also very similar to purchasing a home. It's a good way for beginners to get started.

Large (5+ unit) Apartment Building. Still targeting tenants for 6-12 months at a time, buildings with more than five units are considered "commercial" property. The loans are more difficult to qualify for, and usually a larger down payment is needed. Uncommon for the new investor; this is usually what landlords with several years of experience "trade up" to. Cash flows on larger buildings are more stable than for smaller buildings, and the economies of scale make it practical (and desirable) to hire a property manager to take over most the work for you. This takes reduces the hassle factor of the landlord process.

Lease Options. Again you are seeking a tenant for a property, but usually for a slightly longer term (12-18 months) and frequently (though not always) with the goal that the tenant purchase the property from you at the end of the lease. If you purchase the property, then it's an easier process; if you find a highly motivated seller to let you re-lease the property to another tenant, it can be a lot of work to set up. However, the re-lease method doesn't require any cash out of pocket and does not rely on your credit score, so it is appealing to many investors. Great for beginners with the right skills and attitude.

Fix and Flips. Purchasing a home that needs work. The scope can range from the basic "paint and carpet" to extensive overhauls to scraping a decrepit property and completely starting over. Usually does not involve tenants, and the objective is to get in and out of the property as quickly as possible. Great for beginners with the right skill sets or the willingness to learn.

Conversion of Apartments into Condos. A synthesis of the fix and flip and rental operations - purchasing an apartment building in a neighborhood dominated by owner occupants, then converting the building from apartment building to condominium. Often requires renovation of the units to meet the expectations of owner-occupant buyers in that area. Complex and time consuming, but has wonderful tax advantages compares to fix and flips and often has superior returns to all other asset classes. Ideally suited for the sophisticated investor with extensive experience.

Scrapes, Pops and New Construction. Purchasing a small home in an expensive neighborhood that may or may not need work. The home is bulldozed and a new home or duplex is put on the lot. Alternatively, the existing home is renovated and more square footage is added on. A pop-top is adding a second story to an existing home to add more square footage (commonly, a master bedroom suite).

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