Dan Korman, founder of Alpenglow Properties, discusses the pros and cons of buying a house as a rental property, vacation rental, or corporate rental. Sponsored by Alpenglow Properties.
Welcome to The Real Estate Update. My name is Dan Korman, owner, broker of Alpenglow Properties right here in Durango, Colorado, and a real estate expert with 17 years of experience. An increase in stock market volatility and everything monetary coupled with a record low mortgage interest rate is bringing out everyone and their banker. So let's get into it. Real estate investments, the American dream on steroids. If you buy a home that is not your primary residence, then that property will be considered either a second home or an investment property. The former fetch is a slightly better interest rate than the latter if you're obtaining a loan. But that's an entirely different video that we'll get into later this year. Today, we're going to focus strictly on buying an investment property. When buying a home as a rental, some key factors to consider are the gross rent multiplier, and your net operating income. The GRM is a high level analysis that can act as a quick guide to determine if the property should be further looked into. If you were buying a $400,000 home, and that property will fetch 1500 a month in rent, then that annual gross rent of $18,000 shows a GRM of 22, meaning it would take 22 years of gross rent to pay off the purchase price. Not great. And if buying as an investment, it might be an easy hard pass on that one. In a typical market, you might have aim to adhere to the 1% rule, meaning the gross rent would equal 1% of the purchase price. If you could get around 3,300 a month for that same $400,000 home, the GRM drops to 10, which would put you right on target for the 1% rule.
Here in Durango, we can't typically meet the 1% rule due to pricing, but a GRM of 12 to 15 is a good starting point to start digging into the numbers further, as our property taxes are really low and historic appreciation is strong. Long-term leasing a residential investment has standout benefits such as lower overhead due to less turnover, steady rent, ideally, and extensive lease provisions, which all help lend a hand in maximizing the net operating income. We don't have time to go through calculating an entire NOI right now, but I do have custom built Pro Formas that I'm happy to share with you in the event you'd like to take it further. Another popular residential investment is the vacation rental. Oh, vacation rentals. How controversially lucrative you are. Vacation rentals are highly regulated in many areas, and Durango, Colorado is no exception. There are currently only three zones you can purchase a home to operate a VR within the city limits. EN-1, or downtown on the grid. EN-2, which is along the West avenues and just across Main to the East, or in the central business district, AKA the CBD. The permits and EN-1 and EN-2 are all spoken for. So if you're planning to purchase in these areas with the hopes of renting the property by the night, expect to join an extensive waiting list. Last I heard it took about two years to turn over the list, which leaves the CBD as the only other area in town that allows for vacation rentals. The CBD zoning designation overlays either side of College Drive from Main to Eighth, and along the main Avenue Corridor about a half a block to either side. There's not a limit on how many vacation rental permits can be issued in the CBD, but there are some nuanced rules such as if the subject property is a condo or a town home, the covenants must specifically state that nightly rentals are allowed, or a permit won't be approved by the city. Outside the city limits, you are free to rent your home out by the night, Willy-nilly. So long as you pay the applicable taxes and fees. Vacation rentals are highly sought after investment products, as they typically fetch one and a half to two times the gross rent that a longterm rental can. This is a double-edged sword, as while VRS are a great business model for the property owner, it typically puts further constraints on the local inventory, and increases prices for the rental market as a whole. This is why municipalities try to keep it somewhat, if not highly regulated. So that brings us to the last type of single family, residential investment property, a hybrid of the two, if you will, the corporate rental. This type of investment will vary by definition, but I think of a corporate rental as a fully furnished unit, typically an accessory dwelling unit, ADU, or ancillary structure on a property that allows a minimum stay of 30 nights. This is an approved use within city limits here in Durango, and allows the property owner to reduce the amount of turnover costs while maximizing rental income. Do note that if you're in an HOA, 30 days may not be long enough, so check your covenants. It's a great way to increase your gross rental rate while having the flexibility to use the space for your own family or friends who come to visit. Many people in Durango are looking for one to three months stays whether it's a traveling nurse rolling through town, or a remote worker testing out the area, or a family needing a temporary home while they finished building a house. Overall real estate can be an incredible investment when well thought out and aligned with your personal goals. It's an important facet to any portfolio, and I'd be more than happy to assist you in analyzing any property that you may be interested in. That's all the time we have for this month's real estate update. But if you have any questions about real estate or real estate investments, please feel free to email me firstname.lastname@example.org or send us a message on any of our social media handles @DurangoBrokers. Thanks for watching, stay safe, and please be kind to each other. Thank you.