It’s been a couple of tough years for home buyers in Denver. Low inventory and skyrocketing prices have made purchasing a new home more difficult than ever. For the real estate investor, the road hasn’t been any easier.
Two Paths to Investing
There are two general paths a real estate investor will take when purchasing property. One, they can “Fix and Flip”. This is where the investor buys a distressed property at a discounted price, and restores the home to a marketable condition. The key is the investor needs to purchase the property at a low cost where the repairs to the property, plus the expenses to sell, leave a margin of profit.
The problem investors have experienced in the robust Denver market has been competition with buyers wanting to occupy the property. With inventory at record lows, home buyers have been willing to pay more, make that much more, for distressed properties. Often they will do the repairs themselves, just to get a home. With little inventory to choose from, buyers simply will often ignore issues to get the deal. This level of competition leaves no potential margin for the investor, and they cannot compete.
TV Creates New Challenges
A new obstacle traditional investors have seen recently is the amateur investor. Popular cable TV shows that portray investors buying and flipping properties for big profits have inspired a lot of would-be flippers. The shows make it look easy, and they always come out on top in the end. But that isn’t reality.
One Denver agent who typically works in the investment side of real estate said he has seen more contracts fall through this year than ever before. The inspired new investor finds a property they want to flip. They make an over-priced offer and go under contract, only to realize they are in over their heads and terminate the deal.
An area the investor continues to maintain an advantage is the ability to purchase with cash. For sellers, a cash offer is almost always a stronger than an offer with a loan. Investors will often have the ability to buy with cash, giving the seller a faster and more reliable deal, sometimes at a slightly lower price. Buyers with loans typically can’t compete.
Buy and Hold
The second path an investor may take is to “Buy and Hold”. In this case, the investor will purchase a property, make any necessary repairs, and turn the home into a rental. For the investor, they get the rental income over a period of years, and then the increased equity in the property when they sell.
The investor doesn’t need to get the property at a much lower price because they will make up their profit over time. But they do need to get it at a reasonable cost so the rental income covers their expenses and produces some additional profit.
Just like the “Fix and Flip” investor, the tight Denver market has made it tough for the “Buy and Hold” investor to acquire properties with the increasing home prices. If the investor buys with a loan, the debt service can eat all of the potential profits.
And the Winner Is
As the Denver real estate market begins to soften and shift away from the strong seller’s market we have seen for the last three years, buyers and investors will have more opportunity to purchase property. But even after a shift, the seller remains the winner. Missing the height of the market still leaves sellers with a lot of increased equity from months of rising values.