We have a different kind of deal analysis today: a fourplex in Colorado Springs that’s being run as four medium term rentals. Leah helped our buyers find not just an investment property, but a business, as well. This is a great example of how to pivot when the market shifts.
- Listen to the podcast “#90: AMAZING Cash Flow Even at 6% Interest Rates in Colorado Springs” on the Colorado Springs Real Estate Investing Podcast
- Watch the YouTube video (at the bottom.)
- Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast or video.
The buyers in this case are a family that invests all over the country; this is their first property in Colorado. They’re experienced investors who bring a lot of knowledge to the table. It’s always fun to work with clients who know more than we do because it’s a great opportunity to learn from them.
Investment Property Details
This is a particularly interesting investment because the buyers aren’t just investing in a property, but a business, too. The property is a fourplex that’s being run as medium term rentals. Medium term rentals have leases over 30 days and come fully furnished for tenants. These types of properties are often run as corporate rentals.
Appealing Features of the Property
This is a fourplex located on the north side of Colorado Springs. Each unit has 2 bedrooms and 1 bathroom and comes fully furnished and stocked with toiletries.
It’s a very in-demand area, both as a place to live, and for corporate rentals, too. Preston and I did a deal together last year for an 8-unit apartment building in the same complex as this property.
Property Contract Details
The buyers offered $1MM in cash, making it the most expensive fourplex an Envision Advisors client has ever purchased in Colorado Springs so far. The sellers were attracted to the all-cash offer and accepted.
While the building is generally immaculate, there were some areas with damaged siding. The buyer and seller split the repair cost for the siding, at $1750 each. It’s on the schedule to be fixed shortly.
Property Financing Details
I used the Rental Property Spreadsheet to run the numbers on this property.
While the buyers offered cash, they’re using delayed financing to take advantage of leverage. They are financing $600K, essentially making their down payment 40%. If you have the capital available, delayed financing is a great way to make a competitive cash offer and then reap the benefits of leverage.
These buyers are also using an Adjustable Rate Mortgage (ARM) with a 5.25% interest rate that’s fixed for 5 years of the 30-year amortization. I don’t typically recommend an ARM for newer investors, but it’s a great option for these seasoned investors.
ARMs generally have a fixed rate for 5 or 7 years, after which the interest rate increases. There’s a lot of nuance to these types of loans, and it’s critical to read the fine print. Often, there is a yearly cap on how much the rates can increase or decrease after the initial fixed rate period. After that, there’s a variable rate which usually has a maximum increase limit. If you’re using an ARM, you want to make sure you fully understand the worst-case scenario and what exit strategies you have.
As interest rates climb, though, this can be a powerful tool for those who can handle it.
Rents on this property are currently $3100 a month for 3 of the units, and $2500 for one that’s a legacy renter. He plans on vacating soon, so the buyers will have the opportunity to rent out the fourth unit at market value. We’re running the numbers as they stand currently.
Property Operating Expenses
Medium term rentals are run quite differently than long term rentals, so we’ve updated the spreadsheet to reflect that.
Since medium term rentals have more turnover by their nature, we run vacancy at 20%.
The utility costs come directly from the seller’s profit and loss statement, so we know these are the true numbers from 2021. The reason utilities only cost the owner $3252 for the year is because tenants are separately billed $125 a month for utilities. The seller pays the difference.
Each unit comes fully furnished and with toiletries. The restock fee covers the replacement of any worn out or broken items, as well as toiletries.
The property manager is paid a flat fee of $14,400 per year. The PM worked with the previous owner and does a great job of taking care of the property. She handles everything: coordinating maintenance issues, leases, collecting rents, and is the point of contact for tenants.
This property is run so smoothly and efficiently, the new owners plan on keeping everything in place. In that sense, they are investing in this business as well as the fourplex itself.
First Year Returns
Looking at the returns, it makes sense why the buyers were happy to purchase this despite the high list price. Even with the lower rent in one of the units, they are set to cash flow $27K per year, have a 6.6% cash-on-cash return, and have a 6.7% cap rate.
These are some of the strongest numbers we’ve seen lately, and shows how different strategies can help boost returns.
We know that rising interest rates and condensing cash flow have investors in the dumps these days, but this deal analysis shows how adjusting strategies can still pay off. While the medium term rental model is essentially its own business, the returns tend to be considerably higher than long term rental models. If you feel confident using an ARM, that’s also a great way to get cash flow in a tight market.
Connect with Us
If you have any questions about these strategies, or want help formulating your own strategy, reach out to us. We love talking to clients and figuring out how to get them closer to their goals.