This analysis was featured on a live episode of Drinks and Deep Dives. You can find the podcast for this blog post within the episode #298: “Out of State” Investing an Hour Away From Denver & Market Trends in Denver and Colorado Springs.
Tune in Wednesdays at noon MT to join us live for the next Drinks and Deep Dives show.
- Listen to the podcast “#40: DDD: “Out of State” Investing an Hour Away From Denver & Market Trends in Denver and 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.
Investor Profile
My clients are a couple looking to invest in Colorado Springs while living in Denver. These clients have previously worked with Chris and Preston up in Denver but were attracted to the Springs because of the lower price of entry and similar returns.
Long Term Real Estate Investing Goals
Their focus is on long term wealth building, so they look at the potential equity of a property over immediate cashflow.
Strategy for Achieving Goals
Their strategy is to break even on cashflow when purchasing a property while having a tenant help pay the mortgage.
Investment Property Details
Deal Overview
This is a 3 bedroom 1 bathroom single family home in the Springs. All of the houses in this area are cookie cutter; since I actually own 2 rentals on the same street, I was able to answer all of their questions about the neighborhood and house.
Appealing Features of the Property
This is a solid rental area that has increased in value and desirability over the past few years. Rents are steadily going up as more people want to live in this area.
Sourcing
We found this property on the MLS.
Property Contract Details
Contract
The house was listed at $260K, and the clients offered $25K over ask at $285K.
There were multiple offers on this property, and the owner was initially hesitant about selling to investors. Leah, the agent for this transaction, pointed out to the listing agent that tenants need a place to live, too. The investors aren’t going to keep the home empty but are instead going to give someone a great place to live. That resonated with the owner and the offer was accepted.
Inspection Issues
During the inspection phase, some structural issues came up. Things got a little tense and the clients thought they might have to walk away. The clients wanted $7500 to take care of the issue, but due to lending requirements could only get $5700 in seller credit, so the difference came out of the sale price. For investment properties, seller credits can be up to 2% of the mortgage balance.
The first phase of a contract includes the due diligence; this is when professionals come in to do the home inspection, check for radon, and perform a sewer scope. That leads to round two of negotiations and is the most common time for deals to fall apart. Luckily in this case, the seller agreed to the clients’ request.
Property Financing Details
Stabilization: Plan v Reality
When I first bought properties in this area a few years ago, rents were at $875 a month. My estimate for the current rental rate $1400, but the clients were able to get it rented at $1450.
Interesting Points
While they haven’t yet repaired the structural issue, they did put in about $3500 to get it ready to rent. This included removing pet stains and replacing the bathtub.
Spreadsheet Analysis
Properties are not appraising for what the market is demanding, so the clients had to put in an appraisal gap. While their accepted offer was $283K, the appraisal came in low at $270K. Their loan is for $202K, or 28% down.
Property Operating Expenses
Despite being an hour away, this couple has never actually set foot in the home they purchased. Leah was able to take care of everything during the purchasing phase, and they quickly hired a property manager to take care of everything else. This is really a best of both worlds scenario, since they’re close enough to drive down if something major happens, but they don’t need to make the trip on a regular basis.
First Year Returns
With a cashflow of $480 a year, they are just breaking even on this property.
Immediate Goals and Plans for the Property
They are going to continue renting out the home while relying on a property manager to take care of the day-to-day issues.
Exit Strategy / Long Term Plan
This is a good example of investors who are in it for the long run. They bought a solid property in a growing area that will see appreciation in the years to come. As a young couple with a family and full time jobs, they are focusing on long term goals. They don’t plan on looking at the numbers for the property until the five year mark, when they’ll evaluate the equity and decide if they should tap into it. They were able to buy a property that won’t require a lot of time or money on their part, are breaking even on it, and will still reap all of the benefits of owning real estate in the years to come.
When we look at the projected numbers at year 5, we can see that the cashflow will be just under $2K a year and they’ll have a total equity of $180K. This includes their down payment, but means they’ll have an additional equity of $100K, giving them the option to pull out cash or do a 1031 exchange.
Conclusion
Knowing your long term goals is key to being successful in real estate investing. If you need help figuring out your goals, or you already know them and need some assistance in finding the right property to meet them, reach out to us and we’re happy to help.
