Today’s episode isn’t your typical deal analysis. We’re zooming out to look at the big picture: going over different transactions that make up an investor’s journey. Our guest is Ken Hobbick, who connected with Chris about three years ago and stayed in touch as he grew his portfolio. He’s talking to us today about how he progressed from investing out of state and why he’s testing out different rental strategies in Colorado Springs.
- Listen to the podcast “#92: Over Out of State Investing? Bringing the Capital Back to Colorado” 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 Challenges of Out of State Investing
Ken’s first exposure to real estate investing came when he moved out of Colorado and rented out his primary residence. He had a feeling he’d eventually like to move back into his Denver home, so got a tenant and hired a property manager. That experience got him interested in real estate investing, and he started scoping out areas to invest in.
In 2015, he bought his first rental property in Indianapolis. That was followed by a property in Jacksonville in 2017. Both properties had a lot of similarities: he purchased them for $120K and rented them for $1200 a month. Unfortunately, they similar problems, too. Both properties had evictions within the first few months, required expensive maintenance, and saw high turnover even though they’d been rehabbed.
Ken found that the hardest part of out of state investing was being entirely dependent on a property manager. He didn’t have the ability to check out the properties in person and determine for himself the best course of action.
On paper, they looked like solid investments, but the reality proved different. After a few years, Ken realized the performance wasn’t going to get any better, so he decided to sell them and do 1031 exchanges. He sold his Indianapolis property first between the end of 2020 and the beginning of 2021, and the Jacksonville property later in 2021.
Pivoting to Investments in Colorado Springs
1031 exchanges can be stressful, so it’s important to get everything lined up as much as possible ahead of time. I helped Ken coordinate the purchases, and we stayed in close communication as soon as he listed the properties for sale. Both properties sold for $170K, and we hit the ground running looking for good replacement properties in Colorado Springs.
The first property we found was a single family residence that had great tenants. We found it on a part of the MLS that people normally wouldn’t search in for that property type. It was fairly new construction and had no inspection issues.
The second transaction occurred about 6 months later. This was a little more stressful because the Jacksonville property being sold was older and had some inspection issues that caused it to fall out of contract a couple of times. Once it went under contract the final time, we started looking at townhouses in the Springs right away.
We found a townhouse under construction that was a great fit for Ken in the Security-Widefield area. Significant construction delays caused it to fall out of contract when it was at 60% completion, and we anticipated that the time it would take to complete would work for the 1031 exchange timeline. He bought the townhouse for $273K and put 25% down.
Testing out Medium Term Rentals in Southern Colorado Springs
As Ken was closing on the property, he came across medium term rentals. The strategy appealed to him because it would boost his cash flow but wasn’t as labor intensive as a short term rental. One of the reasons he moved back to Colorado was to self-manage his properties, and the extra work didn’t seem overwhelming.
He approached the strategy with the idea of, “What’s the worst that could happen?” The worst thing that could happen is that it would go unrented and he’d have purchased extra furniture for the property. That risk was low enough for him to test out the strategy on the townhouse in southern Colorado Springs.
He purchased furnishings, found a few different marketing platforms to attract tenants, and got to work managing the property. He rented the townhouse for $3400 a month and calculated that with vacancy, it averaged out to $2800 a month. In the end, that amount of income compared to the long term rental pro forma wasn’t worth it.
Southern Colorado Springs is great for long term rentals, but medium term rentals in that area don’t perform as well as he’d hoped. That area doesn’t have as much corporate businesses or hospitals, so he wasn’t able to attract the medium term tenants he’d been hoping for.
He decided to convert that property into a long term rental but learned enough through the experience that medium term rentals in the right area are worthwhile.
Balancing a Mix of Medium and Long Term Rental Strategies
Once he converted the townhome into a long term rental, he saw returns he was happy with. The cap rate was 5.9% and it easily cash flows for $6500 a year. The hassle factor is another big benefit. Because the tenants are renting on a long term basis, he doesn’t have to worry about the constant turnover and advertising the property. He enjoys having a mixture of stable, long term rents and some medium term rentals in his portfolio.
Ken decided to focus on finding medium term rentals in northern Colorado Springs. That area has more business travelers and healthcare workers who are seeking medium term stays. He tried finding properties that better fit what these renters are looking for. Most medium term renters want units with 1-2 bedrooms, which also have the benefit of a lower purchase price.
However, he ended up finding a 3 bedroom townhouse that was worth the extra space because of its great location. It’s close to hospitals, universities, businesses, and the Air Force Academy. Even though he bought it as interest rates are increasing, he’s able to push cash flow with the medium term rental model. Since it’s a larger property, he also underwrote it as a long term rental to give himself more options.
Advice for Investors Looking Out of State
While Ken doesn’t regret investing out of state, he learned some lessons through the experience. The great thing about real estate is that it offers a lot of options and tends to be forgiving over the long term. He learned that relying so completely on a property manager means you have to find one you can really trust.
A lot of people think investing out of state is more lucrative, but the reality is different. Trying to wade through property managers trying to sell you something is difficult, and your options and control are severely limited. It makes a big difference being able to see the property yourself and test out different strategies.
Connect with Ken
If you want to get in touch with Ken to learn more about his strategies and outlook, contact him via:
If you’re interested in performing similar transactions or want help analyzing your next move, reach out to us for a free investment consultation.