Executive Summary
What do you need to know about Colorado Springs
- What Strategies are working in Colorado Springs?
- Long-term rental properties may not cash flow unless a substantial down payment is made, typically around 30% to 40%.
- Non-owner-occupied Short Term Rentals in Colorado Springs can be challenging to manage
- Room-by-room, Medium Term Rentals, and House Hacking seem to be the best options for Colorado Springs rental strategies
- Market Stability and Growth:
- Population growth in both regions has been impressive, with a 50% increase from 2000 to 2021.
- Low unemployment rates in Colorado Springs indicate economic stability and potential for rental demand.
- The limited on-base housing for military bases in the region may drive demand for rental properties.
- Substantial Rent Growth:
- Rental rates in Colorado Springs have seen substantial growth, ranging from $920 to $1,456, making it an attractive market for investors.
- Great Economic Development in Colorado Springs
- In 2022, the Chamber closed 10 projects, creating 2060 jobs and $750M in capital investment. The ‘Deal Closing Fund’ also generated 1300 jobs and $122M in payroll.
The city attracts tech companies and tourists with attractions like Pike’s Peak and Garden of the Gods, boosting its economy and desirability.
Table of Contents
Learn the Lingo
Learning the lingo for rental property investing is paramount, as it allows you to effectively communicate with your agent and understand the components of real estate transactions to determine how a property is anticipated to fare.
CapEx– Capital Expenditures- Costs incurred through property ownership for major repairs and replacements for deteriorated components over time or events (i.e. roof, furnace, etc). Investors are instructed to place portions of monthly cash flow aside to save up for these events.
Vacancy– The estimated yearly cost of the property not being rented, as a percentage of gross rent. Investors are instructed to place portions of monthly cash flow aside to save up for these events.
Net Operating Income (NOI)– The sum of the properties’ total revenue less expenses, not including debt service. Once you subtract out debt service, you get your cash flow calculation.
Cap Rate= NOI / Purchase Price and is a way to determine the rate of return on real estate, assuming the investor did not leverage (use debt).
1031 Exchange– Under Section 1031 of the tax code, a taxpayer may defer recognition of capital gains and related federal income tax liability on the exchange of certain types of property.
Buy, Renovate, Rent, Refinance, Repeat (BRRRR) – A popular method by which investors aim to minimize their
cash in a property through a combination of forced appreciation (rehab), and creative financing methods.
Cash-on-cash return– The ratio of pre-tax annual cash flow to the total amount invested (generally down payment + closing + rent-ready costs)
The Four Returns of Real Estate
There are Four Returns in Real Estate Investing
Real estate investing, unlike many other investments, has four ways to earn a return.
- Appreciation
- Cash Flow
- Debt Pay Down
- Tax Benefits (Depreciation)
These returns are absolutely imperative to understand, through analyzing investment purchases. We will go through a topical understanding of each in the following slide.
The Four Returns of Real Estate
Appreciation is how much the property value increases over time.
- According to Case-Shiller, real estate has appreciated at about 3% a year at a national level over a 100+ year time frame.
Cash Flow = Rent – Expenses – Mortgage payments. If you have a property that rents for $1800 (rent) – $500 (expenses) – $750 (mortgage payment) = $550 is monthly cash flow before taxes. You will also need to budget for contingencies (CapEx, maintenance, vacancy), and we will discuss this later.
Debt Pay Down is the principal reduction that, in theory, your tenant is paying each month as a result of paying the investor rent and then the investor takes that rent money to pay their mortgage payment. Think of a loan amortization table, and consider that two components: principal and interest, principal is going towards your total equity position each month.
Tax Benefits (Depreciation) – we will have an in depth discussion on this in a later module, but for now, just know that depreciation is an accounting method to allocate the cost of an asset over a useful life, as defined by the IRS (27.5 years for residential real estate, 39 years for nonresidential real estate and STRs, various components within real estate have other schedules such as 5 and 15 years, and land is NOT depreciable).
- It is a non-cash or ‘phantom’ expense- meaning, you can have net cash flow positive results but a tax loss, thanks to depreciation.
What other investment vehicle has the potential to earn a return in 4 different ways?
Assumptions Used in Southern Colorado Property Analysis
Financing Methods for Investors
Financing is generally less favorable to investors (vs an owner occupant) in terms of rates and terms, but there are many different financing instruments that investors can use, such as:
- Hard Money Loan (HML)
- Debt Service Coverage Ratio (DSCR, sometimes referred to as non-QM) Loan
- Conventional (investment)
- ARMs
- Owner Occupied- a great option for the House Hacking strategy.
- FHA/ FHA 203K
- Conventional
- VA
- USDA
- Down Payment Assistance/Grant Programs
- 2/1 Buy Down Program
Real Estate Investment Strategies
House Hacking
Traditional Buy and Hold (Long Term Rental/LTR)- These are your traditional rental properties, that often are leased for a year or longer and come unfurnished.
Short Term Rental (STR)- Furnished rental that is available from days to weeks to sometimes months at a time. Typically used as vacation rentals, and Colorado localities are becoming more and more restrictive on the allowability of these rentals.
Medium Term Rental (MTR)- A rental that is typically furnished, and is rented on a 30 day or more lease, commonly referred to as corporate or nursing rentals. This will typically result in higher rent rates, since the investor is allowing the tenant to rent a furnished space on a more flexible lease. Most jurisdictions consider 30 days or more to be legally a long term lease, so not subject to STR regulations (other than HOA or more specific regulations).
Room by Room- Investor will rent each individual room in a property on a separate lease. Generally results in higher cash flow than if the investor were to rent the property or unit on a single lease, along with more work on the investor’s part in managing.
We won’t be diving into Fix and Flip, Syndications/Funds, or Commercial Real Estate
Real Estate Investment Strategies
Very popular strategy used in expensive markets such as Denver and Colorado Springs. Why? More favorable lending (lower down payment and therefore lower cost to enter the investment space, and better rates and terms for an owner occupant).
Make sure to understand your occupancy requirements with your lender!
Variations of this strategy:
- Buy a duplex, triplex or fourplex; live in one unit and rent out the others.
- Buy a house, condo or townhouse; live in one room and rent out individual rooms.
- Use Airbnb or another service to rent out rooms or your property on a short-term basis. Make sure to follow the rules!
- Rent out the garage or RV parking pad for additional income.
- Have grandparents, parents and children all living in one property to save on living costs.
- Buy a house, live in it for the required occupancy period, then move out and turn it into a rental
Colorado Springs Market Overview
Colorado Springs has a strong economy that allows for ample real estate investment opportunities. The city is home to several military bases (Peterson, Schriever, Ft Carson with limited on base housing), and the US Air Force Academy. This presents an opportunity to provide rental housing to military members, as most do not wish to buy when they know they will only live here for a couple of years.
Over the past several years, a lot of commercial companies have come to Colorado Springs as well, specifically in the tech industry. Tourism is also a large sector of the city’s economy. Pike’s Peak, Garden of the Gods, and numerous parks and trails all over the city draw people from all over to tour. Not only does this serve as a sector of the economy by providing as a source of revenue to the city and its businesses, but it also draws people to want to live here.
Recent Highlights:
-In 2022, Colorado Springs Chamber closed on 10 projects, which created 2060 jobs and $750M in capital investment for the region.
-Launched the ‘Deal Closing Fund’ in 2022, and used $2.5M of the fund to create 1300 jobs and $122M in payroll.
-Challenge to growth: low unemployment (0.5 person per 1 open job position)
Colorado Springs, El Paso County economy ‘poised for smart growth’ by Jessica Van Dyn
Colorado Springs Market Overview
In the last twelve months, CO Springs homes prices pulled back slightly as the hot seller’s market cooled.
Inventory is up from historic lows, yet still fairly tight. About 40% of all active homes are under contract. Due to the sharp increase in rates, we anticipate a decline in the number of homes sold in the next 6 months.
Data source: PPMLS, Shorewood Analysis
The Colorado Springs income property market continues to experience double-digit appreciation. The COS market often lags the Denver market, so this might be the end of the appreciation cycle. Inventory has been growing significantly which is a relief for buyers. This resulted in an increase in DOM/marketing time.
*Data for properties of 2+ units. Keep in mind that low data-point count drives large swings in results.
Discussed rent rates, city wage data, and and population a few slides back.
Deal #1: Room by Room in Colorado Springs, CO
Overview:
Single-family home located in Cimarron Hills. Currently a 3 bed 3 bath, but plans to add 2 bedrooms. Room by Room rental property strategy, while preserving investors’ personal space by layout. High-interest rate, low down payment, future cash flow property after moving out.
Investor Profile:
- Second house hack, closed about 1 day after his previous 1-year occupancy requirement from HH#1!
- Plans to keep House Hacking each year until it is no longer enjoyable, while simultaneously purchasing additional RxR properties with partners.
- Self-manages- very proficient in the strategy.
Investment Property Details:
- Type: Single family detached home
- Config: 3 bed / 3 bath currently, Buyer plans to add 2 bedrooms
- Location: Colorado Springs, CO (Cimarron Hills area)
- List Price: $435,000
- Purchase Improvements needed: $15,000
- Concession: $12,000
- Purchase price: $430,000
Why we like it:
- Only paying $550 per month while living there. Estimated to be almost an 8 Cap upon move out, and $1,631 in estimated yearly cashflow with only 5% down and almost 7% interest rate.
- Property is eligible for STR license even as non-owner occupied
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