Last week, Charles Roberts invited me along to one of his Denver rentals for a Section 8 inspection. Since I have zero experience with Section 8, I said: "Of course!" It was an eye opener for me.
The two parts of this post (video tour and numbers) will present the facts. I'll save my commentary and takeaways for the last part.
Denver Section 8 Rental Video Tour
Watch the video for the virtual tour. Charles also shares interesting insight into how he could afford a 20% down payment on the property 19 years ago. Touring his property, made me think about my rental!
Section 8 Rental Return on Investment
It did it not take long for our conversation to turn towards discussing the numbers and then breaking out our financial calculators for some analysis.
Appreciation over 19 years:
19 years ago, Charles purchased the duplex for $167,000. Based on what's happening in the neighborhood, he could get $500,000. 5.94% is the annual rate of appreciation. Which is not surprising, since Denver's historical appreciation is 6% a year.
Rent growth over the last 5 years in Denver's hot market:
5 years ago, the unit was renting for $950/mo. Now's renting at $1,762/mo. The last 5 years saw a 13.1% annual rent growth. Wow!
Rent growth before the most recent rent growth:
My first response was, "Damn - 13% annual rent growth, that's freaking awesome!" But, this is his 19th year of owning it, what was the rent doing the 14 years prior to this most recent rent growth? I knew there was no way 13% was the norm over the last 19 years.
For full transparency, Charles couldn't remember the exact amount he was renting it for when he bought the place. It was between $700 to $750, so he split the difference at $725. Rent growth from $725/mo to $950/mo over 14 years is a 1.95% annual rent growth.
Rent growth over the last 19 years:
$725/mo to $1,762/mo over the last 19 years is a 4.79% annual rent growth. The historical average rent growth for the Denver market is 4%.
Over-improving - My first thought upon walking into the unit was, "Damn, I way over-improved my rental..." Over the past couple of years, I've heard more experienced investors talk about how many newbie investors over-improve their rentals. I was well aware of that common issue but am still guilty of doing it.
Walking into this unit was a reality check for me! It's one thing to read and hear about it, but very different when you see it in person. Adding to the investing checklist... resist the urge to over-improve.
Perspective on returns - Comparing the 1.95% rent growth over the first 14 years versus the 13.1% rent growth over the last 5 years tells two different stories. Great reminder to always put things in perspective and then compare to the long term averages. After all, returns usually return to their long term averages.
Buy and hold for long term - I've heard Charles say numerous times that he made some of his best real estate deals when he knew the least about investing. This was his second property he purchased.
This case study drives home the point of focusing on finding "good" deals and not getting tunnel vision on "great" deals that can keep you out of the game. It reinforces my (still evolving) investing strategy of buy when the numbers look good as an investment and work well with my current personal finances. There will be good times and bad times - the key is to make sure you can ride out the bad times. Holding on the real estate for the long term cures most investing issues!
Carpet vs hardwood floors - After we left the property, Charles shared with me that at first, he put carpet over the hardwood floors. The carpet kept getting destroyed and needed frequent replacement. Then he had an "aha moment" and just used the hardwood floors. He saved money and no tenants ever complained.
Recommended Resources and Notes
- The financial screenshots were generated from http://www.calculator.net/finance-calculator.html
- Learn all about the long term Denver rent and appreciation averages by watching our Metro Denver Real Estate Trends webinar recording.
Do You Have Section 8 Experience?
Visiting Charles' Section 8 property was a great learning experience. I have no experience with Section 8, other than knowing that investors either hate it or love it. Please share your thoughts or experiences.