I speak to a lot of investors about the real estate market and how things have changed over time. The thing I hear most often is they wish they had bought property during the downturn.
I definitely understand this sentiment, though in truth it’s a bit of unhelpful Monday morning quarterbacking if you ask me. But anyhow, it got me thinking about what the investing world looked like during the depth of the downturn in 2008 versus what I and my clients are buying today, 8 years later in this incredibly strong real estate market.
So I decided to do a comparison of the typical property we were buying during the downturn with what we are buying today, and the results really surprised me. In this case study, I picked what I felt was a perfectly typical investment property we were buying in 2008 when I was closing 70 properties/year and will compare it to a typical recent purchase from an investor client. I think it represents the pros and cons of both eras of investment purchases and will give you a little insight into the differences and similarities investors are facing today versus 8 years ago.
Below is a snapshot comparison. Read on for the full details.
2008 Denver Rental - Single Family Home
My client put an offer on 850 Kingston St, a stereotypical bank owned, 1954 home in North Aurora in August, 2009. It has 3 bedrooms and one bath squeezed into 872 sq. ft of living space. These neighborhoods were built very inexpensively with homes that haven’t aged particularly well and suffered a huge drop in price during the downturn.
At its height in 2006 this property would have sold for about $150,000. The previous owner lost it to the bank in a foreclosure and it was put on the market on July 12, 2008 at $70,000. My client had already bought several of these types of properties and really liked the returns he was getting so asked me to put in an offer. I spoke to the listing agent who told me there were multiple offers on the property (which was very typical for these types of deals during the downturn) so we offered $72,500 and were delighted to get the property under contact!
Next was the inspection. With a bank owner property the buyer is free to do an inspection but banks seldom doing any work as a result of an Inspection Objection, that’s just the way it was. We did the inspection with a professional inspector and found the typical items these older Aurora North properties had: older wiring, older plumbing, pretty beat up roof, lots of cosmetic work to be done (your standard semi-train wreck) but no absolute deal breakers. The sewer line was reasonably intact and the furnace was operational. My client could handle most everything on his own so we went ahead with the deal. He budgeted $10,000 for his time and materials to get the property up to rental standard. He closed on the property and spent about 6 weeks getting everything ready and rented the property for $900/month.
2008 Denver Rental - Deal Analysis
This was a very typical, very solid deal, the type of deal we were doing by the dozen during the downturn. Take a look at the spreadsheet to see how the numbers played out. (Note that I added the $10,000 in repairs to the purchase price to give an accurate representation of the cap rate and cash-on-cash returns.)
2016 Denver Rental - Condominium
Now let’s fast forward to 2016 and take a look at a very typical deal during our incredible upturn. I tried to pick a deal that was emblematic of the current cashflow investing environment in Denver, that was typical of the types of properties we’re buying today so you can see how it compares to what we were buying back during the downturn. The property my client bought on East Girard worked well as I consider it a good example of a property our investors bought in 2016.
This property is a 3 bedroom / 2 bath 1,191 sq.ft condo built in 1969 in the Hamden Court development in Denver. It had a slightly funky layout with a legal bedroom in the basement area, but it was spacious and it looked like a sold rental. It was being sold by the homeowner who originally priced it at $190,000 but had to drop the price to $185,000. We offered $173,000 and after much negotiation we got it for $177,000 and were glad to get it.
We did our inspection and found several items of concern, one of which was Federal Pacific electrical panel. We wrote an Inspection Objection and submitted it to the seller. The seller balked and said they weren’t particularly interested in making any improvements. After a good amount of back and forth the seller agreed to drop the priced by $1,200 so we ended up closing for $175,800.
After closing, my client contracted to have about $4,000 of work done to the property to get it ready to rent. He was able to get a tenant without any problem in this tight rental market and rented it for $1,700.
2016 Denver Rental - Deal Analysis
Here’s the spreadsheet to see how the numbers played out. As with the Aurora North property I added the $4,000 in repairs to the purchase price to give an accurate representation of the cap rate and cash-on-cash returns.
2008 vs 2016 Denver Rental Investment Results
The 2009 Aurora North purchase came in at a 9 cap once all the work was completed and accounted for. By comparison, the 2016 Denver condo was an 8.4 cap. And herein is the point of this analysis. What I have found is that, much to everyone’s surprise, the cap rates we were getting during the very lowest points of the downturn were not that much higher than they are for properties we are purchasing today, simply because the rents have increased right along with property prices.
If both the rents and prices rise evenly, the cap rate stays about the same over time. I can also argue that the Aurora North / Denver Southwest / Commerce City properties we were buying during the downturn were older, lower quality properties in worse parts of town than the typical Aurora South /Denver South East condos and townhomes we are buying today.
- Need help analyzing deals? View our Denver Investment Property Analysis Spreadsheet Course
- Read "The Practical Guide to Colorado Real Estate Investing" eBook
- More Denver real estate case studies
We'd love to sit and talk real estate if you're looking to buy your first or tenth Denver investment property.
What are your thoughts on investing in 2008 vs 2016?