Welcome back to our three-part State of the Market series.  Today in part two, we’re discussing where and how to invest in rental properties.  Jenny Bayless joins me to discuss strategies in Denver, Colorado Springs, and Pueblo.  We’re looking at six examples of where to invest: $50K, $100K, $115K, $150K, and $250K. 

Understanding the Market: Are We in a Bubble? Will Prices Drop?

A lot of clients are reaching out to us asking if we’re in a bubble and if prices will drop.  Jenny agrees with my assessment from last week—it comes down to supply and demand, and supply isn’t likely to outstrip demand any time soon.  We simply haven’t built enough houses along the Front Range in the past 10 years to keep up with jobs and population growth, neither of which are slowing down. 

Charts graphing the housing supply paired with properties under contract for both Denver and Colorado Springs show that we have more properties under contract than active inventory.  The same is true for Pueblo, though we don’t have a graph for it. 

What Happens to Housing Prices in a Recession?

There have been six previous recessions for which we have real estate pricing data.  During five of them, housing prices weren’t affected.  In fact, during that time properties continued to see price appreciation. 

Colorado Springs in particular has shown a lot of resiliency during these downturns, likely thanks to the diversity of the economy and the strong military and government presence.  During the 2007 housing-induced recession, the Springs’ pricing only went down 3.8%. 

The main takeaway here is that recessions don’t always cause housing prices to decrease.

How Is the Rental Market Affected by Rising Rates?

As investors, we complain about the low supply of properties, but renters are facing the same issue, too.  There are more tenants than available properties. 

Denver and Colorado Springs have the lowest vacancy rates in history, which is driving strong rental increases.  Last year, both areas saw double digit growth, and Pueblo is not far behind.  So far this year, we’re seeing similar trends, though we don’t expect the rate of growth to be quite as high.

To sum up the market: prices are going up and will continue to go up.  Interest rates are going up and will continue to go up.  Rental rates are going up and will continue to go up. 

So, what should you do?  Don’t bury your head in the sand; look for new opportunities to invest in rental properties.  Remember: the trend is your friend.

What Strategies Should I Try to Invest in Rental Properties?

Because the market is changing, strategies to invest in rental properties that worked before won’t necessarily work now.  Here are some strategies we’re exploring:

Lowering Rates with Adjustable-Rate Mortgages

Over the last couple of years, we’ve only talked about 30-year fixed rate loans because the rates were so low.  Now that rates are up to around 6% as of this publishing, we’re starting to look into Adjustable-Rate Mortgages (ARMs). 

ARMs are typically .75%-1% lower during the 5, 7, or 10 year fixed period.  This option gives investors a lower down payment and interest rate during the initial fixed period. 

Jenny just closed on a fourplex in the Springs with an ARM.  She looked at her portfolio objectively and saw that it fit her risk profile.  The ARM allowed her to put down 20% with a 5.375% 7-year fixed interest rate with 1 year recast. 

For experienced investors looking for cash flow, ARMs can be a good option. 

One thing to keep in mind: during recessions, the government often drops the interest rate to stimulate the economy.  Some investors are looking into a potential strategy of buying now and refinancing into a lower rate later.  We can’t guarantee this will happen, but if the numbers work for you to invest in rental properties now, you may have the option to refinance later.  While you can refinance your mortgage, you can’t refinance your purchase price.

Pivoting to a New Rental Model

While long term rentals are the most common rental strategy, it’s getting harder to find properties that cash flow.  Investors are getting creative with room by room and self-management strategies, as well as trying out short and medium term rentals.

To learn more about short and medium term rentals, check out our Step by Step Short Term Rentals course.  This course shows you everything you need to know to maximize profits and minimize headaches for your short or medium term rental.  There is a cost for it, but Envision Advisors clients get it for free! 

Also be on the lookout for our Self-Management Strategies course coming soon.

Six Deals for Every Price Point

Where should you invest $50K, $100K, $115K, $150K, or $250K in Colorado?  We’re looking at six real deals that we’ve recently closed on with clients and updated for today’s conditions, or are currently under contract. 

Deal 1: Invest $50K in Pueblo

Jenny recently bought an attached single family home in Pueblo.  We did a Deal Analysis with the real numbers, but we’re updating it for today’s market conditions.  Now, it would cost $220K with a 6% interest rate, making her all in cost $65K.  It rents for $1500 a month and has had no vacancy. 

This property has break-even cash flow, a 5.3% cap rate, and 23.3% return on investment.  Need more cash flow?  With an ARM, the cash flow jumps to $1K a year.  Is that worth it?  That’s your call, but with a spread so small, it probably makes sense to stay with a 30-year fixed rate. 

Deal 2: Invest $100K in Pueblo

This is a deal so current it hasn’t closed yet.  The property is a turnkey duplex in Pueblo for which the investor is putting down 30% on a $265K purchase price and interest rate of 5.75%. 

Both units are rented for a total of $2200 a month, but there’s an opportunity for utility bill back.  Underwriting it with property management and no bill back puts the cash flow at nearly $4K a year, with a 6.2% cap rate and 23.4% return on investment.  With bill back, it jumps to almost $5K cash flow a year, and a 6.6% cap rate. 

Remember: you can always put down more money in order to cash flow when you invest in rental properties.  This is a great option for those doing a 1031 exchange. 

Deal 3: Invest $115K in Colorado Springs

This is a 5 bedroom single family home in Colorado Springs being rented using a room by room model.  It has a purchase price of $425K, and the investor put 25% down, with a 6% interest rate.  Each room is being rented at $700 a month except for the primary bedroom, which goes for $850.  Using our standard underwriting, it’s cash flowing $7K a year with a 6.9% cap rate. 

This property is in a good location and has a lot of bedrooms but is otherwise nothing special.  This is a great strategy to get strong cash flow.  In fact, the returns are so solid we don’t see a need to run the numbers using an ARM.

Deal 4: Invest $150K in Denver

Jeff White shared one of his properties with us: a 5 bedroom/3 bathroom single family home in Lakewood.  It has a $570K purchase price, 6% interest rate, and generates $4125 a month in income with a room by room model.  With standard expenses and self-management, it cash flows $6K a year with a 6.5% cap rate and close to 30% return on investment. 

Even if we run this as a long term rental of $3750 a month and 25% down, it cashflows $900 a year and has a 5.5% cap rate.  There are opportunities for big homes to cash flow as long term rentals, which is a great option for those who want a more hands-off approach for their rentals.

Deal 5: Invest $250K in Colorado Springs

Leah and Jenny are releasing an episode on this fourplex being run as a medium term rental soon.  The investor bought it for $1MM and it was already completely set up as a medium term rental business.  That buyer paid in cash if we analyze this property with 25% down and a 6% interest rate, it still cash flows $17K a year, with a 7.1% cap rate and 34% return on investment.

While it’s not easy to find a fourplex already set up as medium term rentals, this is a great option for investors to convert their fourplexes into this type of model. 

Deal 6: Invest $250K in Denver

This is another active deal, a three plex listed at $1MM that will likely close for a little less.  At an all-in cost of $265K and a 6% interest rate, and a gross rental income of $7K per month, it cash flows $2K a year, with a 5.5% cap rate and 16.4% return on investment. 

This is run as a long term rental that’s fully hands off.  It’s a very different business model than the medium term rental fourplex, and is an option for investors who don’t want to invest as much time.  Investors have the option to bump cash flow with an ARM, or look into running it as a medium term rental.  There’s a lot of optionality in this market.

So, Should I Invest in Rental Properties Now or Wait?

As always, this question gets our standard answer of: it depends!  Everyone has their own unique situation and strategy to invest in rental properties.  What we’re highlighting here is that the market has shifted, and investors should focus on new opportunities. 

What worked six months ago won’t work today, but there are still opportunities out there.  To get a better idea of how to adapt your strategy, listen to the 4-Step Framework episode. 

Connect with Us to Invest in and Analyze Your Rental Properties

At Envision Advisors, our goal is to provide clients with value that other brokers and agents can’t match.  That’s why we don’t just sell clients properties, we set them up for long term success.  We offer clients free, lawyer approved leases; our online courses; and an annual portfolio analysis using our exclusive portfolio analyzing software Property Llama. 

We want to optimize your time and money with a strategy tailored specifically to you. Reach out to us for a free investment consultation today.  

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State of the Market Part 2

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