Math is math.

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It is my belief that a good real estate agent should protect you from yourself. Sometimes this looks like talking an HGTV junkie out of a marriage and finance-ruining investment that has foundation, roof and mold issues. Other times it looks like helping someone stand back and look at the big picture: yes, the other side is being difficult about an $800 window repair during inspection, but is $800 important long-term? Is it worth going back on market? Do you have confidence this same situation won't repeat itself and/or a different, but equally taxing, situation will show up and you'll be in the same place. More and more lately, these conversations revolve around the Denver and Colorado Springs real estate markets and cash flow.


Real estate is regional, but unfortunately real estate education is not. And the reason why we care about this is because a lot of investment education prosthelytizes cash flow. The attitude is that if you can't make your numbers work (aka, if you aren't getting cash flow or hitting the 1% rule), it's not a good investment. And, so it goes that solid investors only buy "good investments."


The reality in the Denver and Colorado Springs' rental markets is that much money is lost because of this cash-flow indoctrination. Case in point, the average equity gained on a single-family home in Denver from January 2020 to January 2021 was $100K. And in the past decade, most homes in Denver have doubled in price. Since the average Denver single family home at the time of this writing is $625K, property owners have made more than $300K in equity in ten years.


Since we know that the midwest has strong cash flow and that usually looks like $400-$800/month in cashflow each month, let's look at the numbers. If you were making $800/month on an investment, it would take you 125 months (or almost ten and a half years) to reach the level of appreciation Denver got in one year. It would take you 31 and a half years to reach the level of appreciation Denver experienced in the past decade.


I was having this conversation with an investor this morning and he said, "but appreciation isn't a sure thing and cash flow is." I disagree with the assertion that cash flow is a sure thing. Was it a sure thing IN 2020? What if the college next to your property suddenly has a decrease in the student body? What is the industry you rely on leaves (auto manufacturing) or is disrupted (hotels), is cash flow still a sure thing?


I believe you can pay attention to some markers that will give you an idea about appreciation: diversity of industry, inventory v. demand, days on market for properties and have a pretty good idea what the future of appreciation will look like for those markets. Alternately, if you are nervous about appreciation stopping in a market like Denver or Colorado Springs, ask yourself how much the appreciation would have to decline for it to make less sense than a cash flowing property? What would have to happen to stop the appreciation?


People are resistant to this logic, and I get that... but rents have not strongly surpassed mortgages on the front range, and that's what you need for a positive cash flow investment. You will find positive cash flow in the midwest, where rents have surpassed mortgages- but the downside man of those homes have seen almost zero appreciation in the past twenty years. If that's the case, then it makes sense to adhere to cash flow.


I have seen many investors enter our market, run their numbers without success for cash flow on properties and then decide to invest elsewhere after property prices climbed $50K in the six months they were researching. I understand the reluctance to go against what the investment books have educated us all on, but math is math.








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ERIN SPRADLIN

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erin@erinandjamesrealestate.com

JAMES CARLSON

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james@erinandjamesrealestate.com