As a state, Colorado takes great pride in its reputation for active outdoor living and adventure. With a high quality of life and a cost of living that ranks as average compared to other western states, Colorado keeps drawing new residents. At Rentometer, we wanted to see how a couple of Colorado's top rental markets compared head-to-head rental rates and returns for the rental property investor. We took a look at Denver and Colorado Springs, two thriving areas in Colorado and perfect for this head-to-head match-up.
Methodology for state rent comparisons
We set report parameters to look at average rents over 12 months for a 2-bedroom, 1-1/2 (or more) bathroom house/duplex in Denver and Colorado Springs. We looked at properties renting at the 25th, average, and 75th percentiles to explore cash flow across different rent levels. With additional data from Realtor.com®, we also gathered background to track price and sales increases in both areas.
Three key metrics will combine to reveal which market is most attractive for the rental property investor:
- average purchase price
- the average rent for a 2-bedroom, one 1/2-bath house
- cash flow potential
To estimate cash flow, we looked at the details for an "average" property in the rent report from Rentometer.
- assessed tax value
- last purchase price
- mortgage amount
We'll assume loan terms based on a standard 20% downpayment and an interest rate of 5% on a 20-year loan – similar to terms an investor would get at a local bank.
To estimate operating costs, we used conservative industry standards and then factor in debt service for the loan:
- 5% vacancy allowance
- 8% management fee
- 5% maintenance allowance
- 10% for insurance
- 5% to fund capital reserves
With the three key metrics in mind, let's see which area will generate better returns for the rental property investor – Denver or Colorado Springs?
Denver's Rental Market
According to Realtor.com®, Denver is #9 among the top housing markets for 2021; it's in a strong seller's market. The median home price is $520,000, an increase of 5.4% over the previous year, and home sales have shown growth of 12.5%. This growth makes it hard for homebuyers to buy right now, but a market this hot typically keeps rental rates strong as well.
What do the Rentometer reports show?
Denver has 257 2-bedroom, one 1/2-bath houses currently listed for rent. Rentometer’s QuickView report shows 25th percentile rent at $1,518 per month; average rent is $1,950 and 75th percentile rent is $2,382. Using these numbers, we'll look at a sample property in each percentile level to determine possible cash flow.
Our sample property* in the 25th percentile is listed to rent for $1,455, just below the average of $1,518. The area's rent trend line shows an increase in June 2019 held steady through the first half of 2020. Between June and October of 2020, rent then rose dramatically – to $2,200 – but settled back down over the next six months to reach the rate of $1,455 in April 2021. Based on tax information that showed a mortgage of $92,239 and estimated operating costs outlined above, the Zenobia St. property cash flows $232.68 per month. A decent cash flow in the 25th percentile.
Property costs overall are a little higher when looking at the 75th percentile. Rent at the 75th percentile in Denver averages $2,382 monthly. Our sample property asks $2,300. The rent trend line shows a few more rent spikes for the properties within the 75% than the Zenobia St. property. In April 2019, rent started at $1,400 but increased to $2,000 by October 2019. There was a slight dip in January 2020 to $1300 but slowly increased through June to $2200. In October 2020, rent dropped to $1,800, which held through January 2021. The area has settled at $1,800 in April 2021, but our property now asks $2,300. The Zeno St. property fails to cash flow, showing a -$717.85 monthly deficit based on the tax information and the estimated value shown on Realtor.com®, plus estimated operating costs.
So what does a property renting for average rent generate for cash flow?
Average rent property
Denver's average rent is $1,950 per month; Our sample property's* asking rent is also $1,950. The area's rent trend line showed a rent spike in the second half of 2019 when rent jumped from $1,500 in June to $1,600 by October. Then asking rent slowly fell through 2020 to reach $1,500 in October. By April 2021, the average rent has seen a slight increase to $1,550 for the area. The Irma Dr. property shows negative cash flow to the tune of -$185.86 monthly, based on the tax information, the mortgage listed on the Rentometer report, and estimated operating costs. While the rent rates seem reasonable initially, the high housing costs correlate to lower cash flows. The only property segment that seems to make sense in Denver is the 25th percentile due to lower purchase prices.
What's happening in Colorado Springs in the same rental rate segments?
Rental rates in Colorado Springs
Colorado Springs ranks below Denver on Realtor.com®, coming in at #45 among top housing markets for 2021. This city is also in a seller's market, with a median home price of $363,000, a sales increase of 5.4%, and prices increased by 6.2% since 2020. Let's check out the Rentometer reports for Colorado Springs. For 2-bedroom, one 1/2-bath houses, Colorado Springs has 89 properties currently listed for rent. According to QuickView, the 25th percentile rent is $1,198, the average rent is $1,443, and at the 75th percentile, rent is $1,688. Using these numbers, we'll look at a sample property in each segment to determine possible returns for the rental property investor.
Our sample property* in the 25th percentile asks for rent of $1,150, slightly below the average of $1,198. According to the rent trend line, the area has been struggling to stay at $1,100 since a crash in 2018. In October 2020, average rents increased to just over $1,100 and continued to rise, reaching $1,200 in April 2021. Based on tax information from Zillow and estimated operating costs, the Magnolia property shows negative cash flow of -$733.00 monthly based on the tax information on Zillow, an average sales price of $269,000,
The 75th percentile segment in Colorado Springs has an average rent of $1,688 monthly. Our sample property rents for $1,645. According to the rent trend line, the area has shown a steady increase in rent since bottoming out at $1,300 in January 2020. By January 2021, the average rent had increased to $1,475, and now in April, sits at $1,480. The Colony Circle property cash flows $459.86 monthly, based on tax information, the mortgage on the Rentometer report, and estimated operating costs.
What does our average rental property in Colorado Springs look like for cash flow?
The average rent in Colorado Springs is $1,443; our sample property* lists rent at $1,450. The area's rent trend line shows rents steady at $1,000 through April 2020. Rates increased to $1,200 in January 2021 and now sit at $1,190 in April 2021. The Cascade Ave. property cash flows for $327.76 monthly, based on the tax information, the mortgage listed on the Rentometer report, and estimated operating costs.
Both Colorado cities look like they should generate reasonable rents and returns for the rental property investor. However, rising housing prices mean that's it's even more essential to find a below-market deal or pursue properties before they hit the market. Purchasing property at today's Retail prices make it tough to cash flow in Colorado.
When we compare the two cities based on the lower-rent segment, Denver comes out on top. In the average and 75th percentile segments of the market, negative cash flow is a likely outcome. On the other hand, 25th percentile properties in Colorado Springs lose money, but both average and higher-rent segments show likely good positive cash flow.
Overall, Colorado Springs wins the battle of Colorado rental markets.
This article was written by the Rentometer Content Team. The Rentometer Blog features fresh takes and insights on rental housing topics, services, and technology. If you liked this article, subscribe to Rentometer's email newsletter to stay up-to-date on the latest trends in rental housing.
* Sample reports available to view with a Rentometer Pro account.