March 29, 2022

JF2765: Market Comparison: Appreciation in Denver vs. Cash Flow in Cincinnati ft. Sarah May


Denver-based Sarah May and Cincinnati-based host Slocomb Reed discuss in-depth how cap rates and population growth impact the way investors operate in their very different respective markets. A few topics they cover include: 

  • Ideal cap rates. In Denver’s current market, Sarah wants to see about a 6% cap rate when purchasing a value-add property, with an opportunity to sell between 4% and 5%. In Cincinnati, however, Slocomb says investors are seeking to purchase at an 8% cap rate, but will typically end up purchasing in the 5.5%–6% range.
  • Appreciation vs. cash flow. The lower cap rates in Denver mean investors won’t see as much cash flow as investors in Cincinnati, where lower population growth is reflected in its higher cap rates. However, the potential for appreciation is much higher for Denver investors. 
  • Population growth. While Cincinnati is seeing both rent and population growth, the rates don’t compare to Denver, which Sarah says is projected to beat the national average in population growth for the next five years. 
  • Raising rents and increasing property value. Sarah points out that in lower cap rate markets like Denver, incrementally raising rent by even a small amount can result in a big multiple when it comes to adding property value.
  • Three things that will help you succeed in any business. Sarah believes mindset, focus, and follow-up are key when it comes to making it in real estate. That means having the right attitude and perspective, being able to limit your options enough to put all your energy into one pursuit, and following up in order to discover unlikely opportunities. 

Sarah May | Real Estate Background

  • Co-founder of Regency Investment Group, which owns and operates apartment communities. Their business model is to buy older properties that are in need of renovation and/or improved management.
  • Portfolio: 
    • GP of five properties with over 450 units in Colorado, LP of 1,200+ units
  • Based in: Denver, CO
  • Say hi to her at:
  • Best Ever Book: The Go-Giver by Bob Burg

Greatest Lesson: Grit. Stick to it and amazing things will happen. Approach problems with the mindset that there IS a solution and I’m going to find it. Don’t give up even if we haven’t won a deal for a while. Good things are just around the corner.

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Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I'm Slocomb Reed, and I'm here with Sarah May. Sarah is from Denver, Colorado. She's the co-founder of Regency Investment Group and they GP value-add apartment syndications. They currently have five properties in their portfolio with just over 450 units, all in Colorado. They're also LPs of 1200 plus units. Sarah, can you start us off with a little more about your background and what your current focus is?

Sarah May: Sure, I just wanted to say thanks so much for having me on, Slocomb. I really appreciate being here. I got started out probably like a lot of the listeners that have a W2 job. I'm originally an aerospace engineer working for a large company and just discovered real estate, reading that little purple book Rich Dad Poor Dad. Got really fascinated by it and so slowly started buying rental properties while working a W2 job. I was successful with that and wanted to learn how to go bigger, faster, and found out about syndication. After getting mentors and coaches, joined a mentoring program and started our syndication company, Regency Investment Group. As you said, we have five projects, about 450 doors from moderate to more heavy value-add deals, and always looking for new properties that we can outperform for our investors.

Slocomb Reed: Nice. You were just telling me before we started recording that you just went full-cycle on a deal that closed last week?

Sarah May: Three days ago.

Slocomb Reed: Three days ago. Nice. So this week. It's currently March of 2022. Tell us about that deal. What were you projecting going in, what happened, and then what did you end up selling at?

Sarah May: Sure. We bought it in May of 2017. It's a really nice C-class property, maybe B-class, in a good part of town here around Denver, 100 units. Our business plan was to renovate all the unit interiors; they were mostly original, or lightly upgraded [unintelligible 00:05:34.25] We told our investors that with our business plan we could about double their money, maybe slightly over. I think we projected a 1.2 equity multiple... No, that's not right. Anyways, 100% gain on their original investment. So if they invested 100,000, we were projecting 200,000 by the end of our five-year business plan. We just sold this week, and are getting about a 3X multiple on their money; maybe a little bit better, actually. It was a great property, the market definitely helped us out here in Denver. It's been a hot market and cap rates have compressed, as they have elsewhere, and we're excited to [unintelligible 00:06:13.14] for everyone involved.

Slocomb Reed: Sarah, what did you buy it for, and at what cap rate? And then the same thing, what did you sell it for and at what cap rate?

Sarah May: We bought it for 150,000 a unit, and that was about close to a six cap at the time, and maybe a 5.7 cap rate...

Slocomb Reed: That was in 2017?

Sarah May: That was in 2017. And that was a high price in 2017, or so we thought. But now we sold it for about 228,000 a door, and that was about a 4.5 half cap rate on trailing numbers.

Slocomb Reed: Gotcha. So you buy this in 2017, projecting a five-year hold, of course not knowing that COVID was going to happen. It sounds like this deal would have been a solid return for your investors without COVID. But then, with the pandemic and with what's happened to the economy and the real estate industry since then, even better returns. Frankly, everyone I know who was investing in real estate in 2017 and before has a similar story to tell, which is great. The people who were investing before the pandemic are seeing great returns as they should.

Best Ever listeners, this is a shameless plug for the Best Ever conference. I've met Sarah and her partner at the conference. In fact, we sat across one another on the bus, on the way to the Best Ever party at one of the bars in downtown Denver. It was supposed to be a 30-minute drive, the driver took a couple of wrong turns and it ended up being 45. This means that I spent 45 minutes peppering Sara with questions about Denver, and their syndicating, their deals, and what did the market look like. First, I will say that it is at the Best Ever conference that you have the opportunity to get stuck on a bus across from someone like Sarah and have these kinds of conversations.

So if you want to meet people like Sarah, or like any of the thousand other people who came to the Best Ever conference in 2022, if you want to meet those people in 2023, the best way to get stuck on a bus with them is to go to the Best Ever conference. But the other thing that I want to do while getting to know Sarah and getting to know the Denver market - those 45 minutes of questions were really about me trying to figure out how to compare Cincinnati, Ohio where I'm from, which is a cash flow, higher cap rate market, to what's happening in Denver. I've had a lot of time to muddle over some of the things that we discussed... Basically, I want you to have the opportunity to hear part of the conversation that Sarah and I had on that bus.

Let's start here, Sarah... Part of the conversation that we had was just cap rates. In the interest of helping our Best Ever listeners understand the differences between the opportunities available to then, investing in MSAs like Denver and MSAs like Cincinnati - tell us, what your cap rates look like right now in Denver? The deals that you're interested in buying, the LOIs that you're writing, at what kind of cap rate are you looking to purchase, and then what are you currently projecting as an exit cap rate?

Sarah May: It's definitely more competitive now than it was even a year ago. After COVID, the market skyrocketed and got really hot here in Denver. So as far as cap rates now, it does depend a little bit on if there's value-add or not, but a little bit counterintuitively. If the property is old, and needs a lot of work, and there's an upside, it will ironically sell for a lower cap rate, because there is that upside, even if the property's kind of beat up.

There was a 100-unit deal we were looking at in Colorado Springs in Metro South of Denver, and they want to sell it at a three cap. There's some value-add that needs to be done, some improvements that need to be made. If you look at enough deals, there are levers to pull and things that you can do to make the property more attractive, and the financials more attractive. But buying it at three cap is tough. So it ranges; kind of these B and Colder deals that we look at, from a three cap up to about 4.5 cap.

Slocomb Reed: That's based on actuals, that's based on current performance. That's the performance you're paying for when you buy a value-add deal. Man, my stomach is turning in knots hearing about the idea of buying a three cap because I think Cincinnati, and ain't nobody doing that here. What would you consider a good operating cap rate to be? Let's say you bought one of these deals, it worked out for you, this is a deal that you want it to buy... After you have the opportunity to add value, what are you expecting the cap rate to really be when it's all actually stable and performing at market?

Sarah May: We want to see above a six cap still on value-add, ideally; or at least close to a six cap in this market. Some of that's through a combination of putting in better property management, renovations, and the general market appreciation, everything's going up. So around a six cap, and then we model around a five cap on the exit; maybe slightly below or above, depending on the sub-market, where it's located. That's kind of the game that you play. If cap rates stay at 4% like they are now, that's just a bonus on the back-end.

Slocomb Reed: Gotcha. So based on your purchase price, do you want to get it up to performance at a six cap, with the opportunity to sell between four and five.

Sarah May: Right.

Slocomb Reed: Gotcha. And you were telling me before we recorded that the deal you just sold, after going full-cycle, you sold for a four and a half cap.

Sarah May: Right. I think we've modeled six cap on exit, so the cap rates help surpass investors' returns.

Slocomb Reed: It was in 2017 that you modeled a six cap model.

Sarah May: In 2017 yeah.

Slocomb Reed: Yeah, totally. A lot of things made more sense then than they do now. I'll say, in Cincinnati, people are very excited when they can buy a seven cap currently. Not all people, the Cincinnati homies like me, the people who were investing here five years ago. Historically speaking you want to see an eight cap in Cincinnati because that's when you see really a cash flow, and again, most people are coming to Cincinnati for cash flow more than appreciation. But right now, your purchase cap rate in Cincinnati for apartments, if you're focused on B areas, you're probably going to end up with a purchase in the 5.5 to six cap range. What makes that interesting to value-add investors, eight cap is really our benchmark. You said that you want to get up to six, in Cincinnati, we want to get up to eight.

Sarah May: Yeah, it's a totally different market. I think it's not really a trade-off, but the appreciation in the market like Denver can be a huge benefit on the back end. It's a little bit delayed gratification versus what you have in Cincinnati where you get that nice cash flow check every month which definitely is what a lot of investors want. In Denver, it's more of like a little bit of cash flow every month, but then on the back end, the game can be two or three times what you got from the cash flow while you owned it for five years. In this 100-unit property that we just sold this week, I think our total distributions to investors, 40%-50% of their original capital were paid out as cash distributions.

But now, on the sale, they're going to get another 250% back as cash distributions for the total equity multiple of around three. You don't get the cash flow but you get the potential for higher profits on the back-end, and in a market like Denver, population growth, employment growth, landlord and business-friendly, those are the things that we look for. I think Cincinnati has a lot of that too, but maybe just the more stable population. What are your thoughts on the market and Cincinnati versus Denver?

Slocomb Reed: We're not seeing the growth that you are, absolutely. It's reflected in our cap rates, to be frank. A couple of responses to what you just said. The first is, if you decide that your investment vehicle is the apartment syndication, then yes, you have to be more patient to make money in Denver. Because you're just not going to see cash flow the same way that you will at such a lower cap rate. To your point, what you're returning to your investors, Sarah, is not as much during the ownership of the asset. But upon sale, what you're able to deliver is much greater than what you would get at a higher cap rate.

However, if you're looking at real estate investing, and if you're looking at apartments as a long-term buy and hold, like an ideal hold period of forever, Warren Buffet style, I would say that is a time when Cincinnati looks more appealing as well because your cash flow is going to stay steady the whole way through. In places like Denver with lower cap rates, you will have the opportunity to do more cash-out refinancing or cash out more as the property increases in value, as appreciation just happens naturally in a market like that, by comparison to Cincinnati. But you're not going to have nearly the same cash flow through the duration of the ownership of the asset.

Sarah May: Yeah. When I was just getting started, while still working my engineering job, I didn't even model an exit. All I modeled was what's my cash flow going to be when I buy the property? That was over 10 years ago/ Back then, the crazy thing was if it didn't have 20% cash flow per year, we were going to pass on it. It's just funny how things have changed. But for people looking to get out of the rat race a little bit and get that financial freedom, that cash flow can be invaluable as well. Make sure you have enough money coming in every month to cover your living expenses and things like that. I don't think it's a one size fits all strategy by any means. But being in Denver, we take the benefits of being in Denver with the appreciation potential and make the best of it.

Slocomb Reed: Yeah, absolutely. Sarah, I've modeled out a couple of things for our conversation. I want to talk about a recent experience I had repositioning an apartment building in a C neighborhood of Cincinnati. You and I talked about this a little bit on the bus on the way to the party at the conference. I bought, in 2019, 24-unit in a C, C minus part of Cincinnati. I'm high on and I'm bullish now because I've already got 24 doors, so anything I add is just increasing scale to a portfolio that's already performing. If you were just pinging the reputation of investors in Cincinnati, this would be a low C part of town. After our reposition, to use some simple numbers that will be easier for the Best Ever listeners to follow along with, basically, we got this property, this 24-unit after all of our value-add was done.

By the end of 2020 to early 2021, we got it up to an NOI of $100,000 a year. We had difficulty with appraisals because that particular sub-market within Cincinnati was not proven. Remember, this is March of 2021, just a year ago, we appraised at an 8.7 cap. Our NOI of $100,000 got us a valuation of 1.1, basically. Only because I'm looking at the spreadsheet, I want to give you some other numbers. We know that we could sell it between a seven and an eight cap, at an eight cap it's worth 1.25 million, at the 4.5 cap that you just sold your property at, it's worth $2,222,222.

This means in order to buy $100,000 in NOI, in Denver at that 4.5 cap, you're putting out over $2.2 million. Whereas in Cincinnati, for that same $100,000 of NOI, if you're buying it on market and it's relatively stable, you're probably in the 1.4 to 1.5 range because you're paying a high six or low seven cap for that money. I use eight cap because that's kind of like the historic number, that's like the cash flow benchmark when you, Sarah, say that you want to get up to six during your operations, we want to get up to eight.

Let's talk about one of your deals now. When you have an incremental rent increase, you decide, "Okay, it's time to raise rents." Or you're thinking, "For our annual rent increase this year, we're going to go from X to Y" What is X, what is that base rent that you're looking at, and how much is the increase right now?

Sarah May: On Denver properties, I would say an easy number to use for a one-bedroom would be $1200 a month in rent. But people are coming in $100-$200 under that and then we're bumping them as close to $1200 as we can just because that's where the market is at. For two bedrooms, anywhere from $1400-$1500, so it's a pretty high rent increase. One thing that's nice in these lower cap rate markets, which you've probably put two and two together as well, is every time you raise the rent by $100, to use a five cap for an easy estimate, you raise the rent by... What would that be? Let's say $1000 a year, that would be an easier number. If you raise the rent by $1,000 a year at a five cap, you've added $20,000 in value to your property. It's a big multiple every time you add that extra money onto your NOI.

Break: [00:19:57] – [00:21:53]

Slocomb Reed: First of all, let me say, for the Best Ever listeners to give them a point of comparison. $1200 is what Cincinnati investors are trying to get Section 8 to pay for three-bedroom apartments and houses in lower-income neighborhoods here. Just a point of reference. There are $1200 a month one-bedrooms in Cincinnati, but only in very premium locations.

Sarah, we stabilized in March of 2021, this 24-unit in Cleaves, the part of Cincinnati I was talking about earlier, that I'm bullish on. I would buy this thing again, for sure and I'd even buy it right now because I like the area. There's not a lot of apartment inventory there, which has been helpful for us because there are some major employers in close proximity, like Amazon. We don't really know what exactly market rents are in that area for our one-bedrooms because there aren't a lot of comps. When we refinanced, our base rent was $650 a month for a one-bedroom. We charged pet rent and there are other things. It's a neighborhood that ends up with some tenants who pay late fees, but the base rent is $650 a month.

We decided to try bumping it up to $700. Everyone stayed and it was still easy to fill up our apartments. We did that just recently, a $50 a month rent increase. Projecting as conservatively for increased expenses at an eight cap increases the value of our 24-unit by about $150,000, for that $50 a month rent increase. Yeah, Sarah, you can say "wow" but if it were in Denver at a 4.5 cap, it would go up by over $250,000 for that same $50 a month rent increase.

To your point, this is different from a lot of interviews for the Best Ever podcast, Sarah, because we're revisiting a conversation that we've already had to the benefit of our listeners, thankfully. We couldn't get all thousands of you onto the bus with us, but this is an important thing to hear fleshed out. Let's take a couple of minutes and you pitch Denver to your investors. Why should people invest in Denver and not Cincinnati? I will pitch why people should invest in Cincinnati and not Denver. Let's just see what happens. I'll go first since I just sprung this on you.

Sarah May: All right, cool.

Slocomb Reed: Speaking about $100,000 NOI in a building. As we were saying, in Cincinnati that's going to run you about 1.5 to purchase and you're going to get in around a seven cap or a little bit lower. Meaning that our cost of entry is much simpler, it's lower, you get more net operating income, and therefore more cash flow for your dollar. You come to Cincinnati because you want to know that your asset can, not only have cash flow, but remains cash flow positive if rent rates recede. Because our cash flow is so much higher, we can take a hit better than Denver can.

We are seeing rent growth, there is growth in Cincinnati generally, though it's not the same growth that you're seeing in Denver. We are projecting... Well, I won't say that we're projecting compressed or even the same cap rates. I think everybody should be expecting cap rates to go up a little bit right now. We are seeing rent growth, we are seeing some population growth, it's a solid stable place to invest, and you've got great cash flow. Your cash flow should increase and you've got to hedge if there's an issue because you're not going to go in the red if you have to reduce your rents a little bit.

Sarah May: All good points. I was trying to take a few notes on things that you said. I would just say, hearing Denver to Cincinnati, the reason people would want to invest in Denver is that it's a primary market. You get the best financing available from the lenders. Even though the cap rates are lower, your interest rates are lower too, so there's still a spread there to make money. It's also a great place where people want to live and work, lots of recreation, though that contributes to the strong job growth, strong population growth, with continued projections that is going to beat the national average for the next five years or longer.

Also, if you look at the real estate industry data, even though we've had some monumental years of rent growth, last year was 18% on average in the Denver Metro area. Even these conservative market data sites still say we're going to see above 10% rent growth in 2022 and just tapering from there, 8%, 7%, etc. Those numbers are something to get excited about. The market data is really strong and the other thing is, even though it's less cash flow, it's still cash flow in Denver. I think that's something important to keep in mind. We're not buying vacant properties, we're not losing money when we buy properties, we're making money from the very first day that we're owning a deal and that provides extra stability, and lower risk.

We do sensitivity studies on all our deals as well and usually, we could withstand a 40% impact on our ramps and still pay our bills. There are still some strong numbers, good cash flow, and great appreciation potential. One thing I learned recently is Denver is rated the number one airport in America. I don't know how they got that rating but there's tons of money going in for renovations and expansion. I think it's over a billion dollars. That will be good for the economy, transportation, jobs, and things like that. That's my take on Denver.

Slocomb Reed: Sarah, to both of our points, the Cincinnati airport is way easier to navigate than the Denver Airport.

Sarah May: I believe it. I don't like the Denver Airport either.

Slocomb Reed: The reason is though, that before the Great Recession, Cincinnati was the main delta hub for the Midwest. They have since moved it to Detroit, which means that we have almost twice the infrastructure we need for the volume of flights that we have. That's why CVG is so easy, flying in and out of Cincinnati is, because we have twice as much infrastructure as we need. Because Delta moved out, Detroit was growing faster. To your point, we do have population growth, we have rent growth, we have wage growth, we're attracting employers to Cincinnati, just not nearly at the clip that you are in Denver. But we have a very easy-to-navigate airport because it's too big for the flights that we're actually bringing.

In summary, I don't think we're surprising anyone, but I think it's helpful to flesh this out. A 3X equity multiple on a five-year hold, impressive. You can't even get that with COVID numbers in Cincinnati. At the same time though, if your focus is cash flow, when I was modeling out, to your point about being a primary market, you have some better debt options than we do. I still see our cash flow numbers. I was building out models, taking the different cap rates for the same NOI. Even with our lower debt structures, depending on the deal, I think your cash-on-cash return still ends up being five to 10 points higher in Cincinnati than it does in Denver. Just simply because the difference between interest rate and cap rate is still proportionately higher than Cincinnati.

If your goal is if you're underwriting to a whole period of a few years and looking to sell, Denver looks great. Cincinnati, that works, but if you're looking for long-term cash flow, if your kid was just born and you're wondering how well your property is going to be performing when you need to pay for college, Cincinnati has got that cash flow. Sarah, thank you. Are you ready for a Best Ever lightning round?

Sarah May: Sure thing, Slocomb.

Slocomb Reed: What is the Best Ever book you recently read?

Sarah May: I really enjoyed the book The Go-Giver by Bob Berg. It's written as a story of a young business person who wanted to get ahead and getting mentored. But really the gist of the book is that the more you want to get, the more you have to give. If you put your focus on giving as much as you can, you will receive more in abundance. I just really enjoyed that book, I highly recommend it.

Slocomb Reed: What is your Best Ever way to give back?

Sarah May: Right now, I am enjoying being involved with my church, their community outreach program, and also working on starting up a real estate meetup in Denver. It's still in the beginning phases there, but I want to spread the word about real estate and meet other great people in our local area.

Slocomb Reed: What is your Best Ever advice?

Sarah May: My Best Ever advice is to focus on three things for success in business. Mindset, focus, and follow-up. Mindset, have the right attitude and perspective, and also believe in yourself. Focus, be able to limit your options enough to focus on one thing, and put all your energy there. Tony Robbins likes to say "Where focus goes, energy flows," so be focused. Follow up, a lot of times great things happen when you follow up. Something that you used to think was a dead end and, all of a sudden, when you follow up, new doors open. Mindset, focus, and follow up."

Slocomb Reed: Awesome. Where can our Best Ever listeners reach you?

Sarah May: Thanks. Obviously, social media or our website. But really the best way to get a hold of me is to send me an email. My email is

Slocomb Reed: Awesome. Well, Best Ever listeners, thank you for tuning in. If you got value from this conversation with Sarah May about the Denver market, the Cincinnati market, and the comparison between lower and higher cap rate apartment investing, please do subscribe to our podcast. Please leave us a five-star review and please share this episode with a friend you think we can add value to through this conversation. Thank you and have a Best Ever day.

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