Executive Summary
What do you need to know about Pueblo
- What Strategies are working in Pueblo?
- 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
- Market Stability and Growth:
- Population growth in both regions has been impressive, with a 50% increase from 2000 to 2021.
- Low unemployment rates in both Pueblo 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:
- Pueblo has also experienced rent growth, with rates ranging from $653 to $1,174.
- Experiencing 8-17% year-over-year price increases since Q2 2017.
- Great Economic Development in Pueblo
- Creation of a vacant house registry and vacant property tax to reduce the number of vacant homes.
- Pueblo Economic Development Corp (PEDCO) offers tax incentives for businesses and energy companies.
- Ongoing revitalization projects like Watertower Place and Holmes Hardware food hall and apartments.
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
Pueblo Market Overview
Key Messages for Homes
As prices rise in areas like Colorado Springs and Denver Metro, we see more activity in the Pueblo region. Prices have been increasing at 8-17% year over year since Q2 of 2017. The past twelve months have seen incredible appreciation, and sale count continues to grow as well. Pueblo´s very strong sellers’ market has begun cooling off, with more modest price appreciations vs last year and pullback in sales count.
Data source: PAR MLS, Shorewood Analysis
Pueblo Market Overview
How Affordable Are Rents in Pueblo?
In 2015, the median monthly rent for a 2-bedroom home in the Springs was $924, compared to $653 for Pueblo. By 2020, the Springs grew to $1243 while Pueblo went up to $861. Over time, both areas are becoming less affordable, though not excessively.
Is the Population Growing in Pueblo?
Pueblo has seen population growth over the past 20 years at a steadier pace than Colorado Springs. The population growth in Colorado Springs is outpacing the availability of housing, potentially causing a spillover effect in Pueblo.
Pueblo Market Overview
What is Happening in Pueblo?
- What Natural Resources Does Pueblo Have That Are Helpful for Development?
- Pueblo City has an abundance of water. Currently, there are about 170K people in the county, but it has enough water for a population of just under half a million. This makes Pueblo a great place for new builds.
- What Are Some New Public Policies in Pueblo That Will Benefit Investors?
- At one time, 7% of all housing in Pueblo was vacant. The city created a vacant house registry and the police department started fining property owners whose houses were in disrepair. The vacant property tax would benefit investors, since property owners who don’t want to pay the tax will look to sell their properties. Decreasing the number of vacant homes will boost the Pueblo real estate market and make it more attractive to buyers.
- Pueblo is transitioning to becoming the most business-friendly town in the state. One-stop shop: all paperwork can be done in one building, starting to shift to fully online.
- What Attracts Businesses to Pueblo?
- Pueblo has PEDCO, Pueblo Economic Development Corp, which is funded by a continually renewed half cent sales tax.
- It helps set up businesses and incentivizes them for staying in the area for a certain number of years and hiring a specific number of local residents.
- PEDCO offers tax incentives for buying certain property
- The city is also offering incentives to energy companies. Pueblo is in a constant fight when it comes to energy, and the nearby power plant employs many local people- want to have a seamless transition for those employees.
- What are Some of the Revitalization Projects Happening in Pueblo?
- Watertower Place is a great example of a successful revitalization project- mixed use office/retail/food.
- The Holmes Hardware is now a food hall on the first floor and affordable apartments (household income limits) above it.
- Check out the PEDCO website for more projects
Deal #1: Long-Term Rental: Duplex in Pueblo
Overview:
It’s located just outside the Mesa Junction neighborhood, a great area full of large Victorian homes. The 1990s duplex gives the client the best of both worlds: the beauty of a historic area without the problems that come with a historic home. The client is getting three sources of income by renting out the two units plus the detached garage. This is one of the best performing long term rentals we’ve come across in a long time. Usually to see numbers like these, clients are using more time consuming strategies such as medium term rental or rent by room strategies. Don’t let today’s interest rates deter you: this property shows that with the right deal, you can still get strong returns.
Investor profile:
- First-time investor, his strategy is cash flow with the intent to accumulate properties over the next few years.
- Based on capital, interested in Pueblo as it fit those boxes (capital outlay, cash flow opportunity, lower price points for easier accumulation).
- Actually ended up partnering on this deal, and was able to preserve personal capital while buying a great property! More capital left over for the next purchase.
- Didn’t want to self-manage, hired a property manager.
Investment Property Details:
- Type: Duplex (up/down), 1990s build.
- Config: 3 bed/1 bath unit and a 2 bed/1 bath unit both with attached garage space.
- Location: Pueblo, CO (Mesa Junction area)
- List Price: $250,000
- Purchase Improvements needed: $20,000- needed to replace deck and stairs
- Concession: $0
- Purchase price: $255,000
Why we like it:
- 8.2% Cap Rate on a LONG TERM RENTAL!
- Cash on Cash return is estimated at 7.6% with Property Management in place
- Newer build (compared to a lot of Pueblo properties!)
- Near the Riverwalk area
Deal #2: Long-Term Rental: Duplex in Pueblo West with a DSCR Loan
Overview:
Located in Pueblo West, is a 3 bed 2 bath on each side (nicely updated). Investor used a high interest rate (8%) DSCR loan, and is expected to cashflow over $200/month with property management in place!
Investor Profile:
- Investor owns several other rental properties, but this is the first one in Pueblo.
- Didn’t want to self-manage, hired a property manager.
- Plans to purchase additional properties this year, heavily leaning towards Pueblo due to returns in the current rate environment.
Investment Property Details:
- Type: Duplex (side by side, townhome style).
- Config: Each are 3 bed/2 bath unit with garages.
- Location: Pueblo, CO (Mesa Junction area)
- List Price: N/A
- Purchase Improvements needed: $0
- Concession: $0
- Purchase price: $420,000
Why we like it:
- 6.8% Cap Rate on a LONG TERM RENTAL!
- Over $200/month in cash flow anticipated. Planning to keep a watchful eye on rates to see if a Refi is possible.
- Newer build (compared to a lot of Pueblo properties! 1994 build)
- In Pueblo West, with a huge lot
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