Colorado Springs Real Estate Investing Podcast

He started working with Envision Advisors to find his first rental, a 3Br 2Ba cash flowing condo in East Denver in October 2020.   He decided that his 2021 goals were to get another cash-flowing condo in Denver as well as expanding and diversifying his portfolio into the Springs. Many parts of this blog post are in Alex’s own words.

I don’t spend too much time thinking about specifics like exactly what age I want to retire at. Who knows where I’ll be at in the future in terms of family, life and work.  I just know I want to make smart decisions now to set myself up for as much financial flexibility in the future as possible.

— REAL ESTATE INVESTOR ALEX S.

I have quite a bit invested in cryptocurrencies as well as sports collectibles, but real estate has quickly become by far my favorite investment vehicle.

— ALEX S.

Colorado Springs has been appreciating like crazy. With the growth and strong business coming to the city, I don’t see it slowing down.  Just in terms of my own experience at work where I work for a large tech company and being from San Francisco, I’ve already started to see remote work becoming more integrated into our daily lives. Many people are packing up from the big cities and choosing places more centered around nature.

— Alex S.

Because I bought the property as a rental at 15% down, there was roughly an extra 3% fee in loan costs (~$8k).  Something to keep in mind if thinking about going with this strategy.

Alex still intends to accomplish his goal of acquiring another property this year – – a cash flowing 3Br 2 Bath condo in Denver. After that….

Beyond that a little up in the air.  I just elected to stay fully remote after offices open up. So will be taking advantage and moving to New York for 3 months in August.  Definitely still plan on being an active Real Estate investor, but will most likely hold off on any future plans until I see how it goes in the big apple!

— Alex S.

The home inspection may seem like a perfunctory phase in the home buying process, but according to Mark, smart investors and sellers can use the inspection process to their advantage.  

For investors, there are three key parts to the process that are often underutilized:

Sellers also have the potential to use the home inspection to their advantage.  Before going on the market, they can have a home inspector go through the property and discover what issues will come up when the prospective buyer has their inspection.  This way, the seller can decide whether or not to make repairs in advance, or let buyers know that up front what issues are non-negotiable.  

Home inspections provide a wealth of information about a property and when used as both informational and negotiating tools, buyers and sellers can benefit.  

The Colorado Springs area is full of unique geographic, weather, and historic features that affect the ways homes are built.  Below are some of the most common items that come up during home inspections: 

Colorado is full of bentonite soil, a type of soil that becomes heavy and expansive when wet.  Bentonite soil is so strong it can easily push through concrete flooring and move the walls of a home.  To prevent this movement, many homes are now built with floating walls in basements.  Floating walls are walls that aren’t built all the way up to the ceiling, giving them the ability to move up and down.  The weight of the house is calculated and a structural column with footer is placed in the basement to prevent the grade of the house from shifting.  If the walls do not have the ability to move and down with the soil, they can be pushed into the ceiling joists of the floors above them, causing cracking and bowing throughout the entire home.  

Before 1992, homes were not required to be built with floating walls, so older homes often have walls with some movement.  Most of the time, the heaving has already taken place and as long as the grade is still good, a little movement is not an issue.  Home inspectors will look for active cracks that are a sign that movement is still occurring.  

Newer homes that have floating walls will often have movement around the structural column.  Because all of the weight of the house is going into the column, the bentonite soil can’t move the footer but will move the floor around it.  The movement in the floor is not structural and is not generally an issue.

Sewer lines in Colorado Springs tend to have unique patterns and issues due to the age of most homes and the soil in which they’re built.  Home inspectors can perform a sewer scope that will run a camera through the sewer lines, mapping out the exact route of the line and finding existing and potential problems. 

The closer to downtown Colorado Springs a home is, the higher the likelihood of the sewer line having a strange route.  Many older homes were built before indoor plumbing, meaning the sewer lines were added later.  Often times, the sewer lines can run out of the back of the home and through neighboring properties.  It is also common for there to be two lines: one for plumbing and one connected to the kitchen and used as a grease trap.  

The bentonite soil commonly causes cracking, slipped joints, and bellies.  Cracking can cause leaking and root intrusion that can be costly and disruptive to repair.  Slipped joints occur when the soil separates junctions of the sewer pipes and causes leaking.  Bellies are formed when water leaks from either the cracked pipes or through the slipped joints and creates a cave into which water and debris fall. 

Having a video of the sewer scope is helpful both for knowing the state of the sewer line and for homeowner’s insurance.  Top Choice Inspectors can perform their own sewer scope or use their partnered plumbers for a more in-depth look.  

The most common issue with electrical panels in Colorado Springs is the presence of Federal Pacific Stab-Lok panels.  These panels are common in homes built between the early 1960s and early 1980s.  The panels lost their UL listing, a safety compliance standard, and can’t be certified by electricians anymore.  Although they are no longer deemed safe, they shouldn’t scare potential investors, as they simply need to be replaced or closed off and moved outside. 

Most buyers want to know if their prospective property is “up to code”, but Mark says the answer to that question is no.  Homes are a reflection of the period in which they were built, which means they weren’t constructed to today’s standards.  For example, a house built in the 1940s isn’t going to have electrical grounding that is required now because it simply didn’t exist when the home was built.  Instead, Mark says, it’s important to know that the home is safe and functional.  

It can be overwhelming to receive an inspection report full of findings, but keep in mind that all homes, especially older ones, will have some of these issues.  The important thing to do is hire a home inspector who can educate you on what the findings mean and how to fix them.  Not all safety findings entail a costly repair, and not all repairs need to be done all at once.  

With the current state of the market, a lot of buyers are waiving the home inspection or treating it as an obligatory step to go through in the buying process.  However, by looking at the home inspection strategically, buyers can use this step to their advantage as both an informational and negotiating tool.  It’s important to know the common issues that will come up when buying a home in Colorado Springs, and to not get overwhelmed by findings in the home inspection report.  

If you’d like to reach out to Mark and Top Choice Inspectors, you can contact him here:

No surprise; it was a spectacular time for the sellers!  Some high points…

Number of new listings in month (vs February 2020)

Number sold

Average price

Total active inventory

There is 12-14 days of inventory.

Source: The above executive summary is from Lon Welsh of Your Castle Real Estate.

This Gazette article outlines concerns over Colorado Springs’s rapidly increasing median and average prices and its impact on affordability.  With an 18.2% year over year increase between February 2020 and 2021, last month for the first time the city crossed $400,000 for the median price point.  

The article points to low supply and high demand being the main driver for the increased median price points and dives into some of the reasons behind each of these components.

Are you interested in building your rental portfolio by investing in Colorado Springs real estate? Not sure where to start? Then… Start here!

This quick start guide highlights the educational content to start with and lays the foundation for putting together a long term strategy for Colorado Springs real estate investing. If you have questions or want to start buying Colorado Springs rental properties, please set up an investment consultation with us.

Colorado Springs has a strong economy that allows for ample real estate investment opportunities. The city is home to several military bases (Peterson, Schriever, Ft Carson with limited on base housing), Air Force Academy, plus the current home of Space Force. This presents an opportunity to provide rental housing to military members, as most do not wish to buy when they know they will only live here for a couple of years.

Over the past several years, a lot of commercial companies have come to Colorado Springs as well, specifically in the tech industry. Tourism is also a large sector of the city’s economy. Pike’s Peak, Garden of the Gods, and numerous parks and trails all over the city draw people from all over to tour. Not only does this serve as a sector of the economy by providing as a source of revenue to the city and its businesses, but it also draws people to want to live here.

In comparison over the past several quarters as notated below, the basic summary of what is happening as of the time of this writing is: supply is extremely low, and prices are going up.

A balanced market is four to six months of inventory. Colorado Springs as of Q3 2020 is at 0.7 months of inventory, which translates to a severe seller’s market.

Extracting the data for March and April of 2020 (during COVID shutdown), showings per listing are higher than they have been in years. At over an average of 11 showings per listing, we are not even seeing signs of seasonality. Many buyers are all looking at the same few properties that meet their criteria.

The good news—it is still a good time to purchase rental properties in Colorado Springs. Compared to other metros in Colorado, the Colorado Springs real estate market still offers an affordable entry point for investors to purchase rental properties. The median sales price for El Paso County in June 2020 was $360,000. When looking for rental properties, I recommend shopping for properties that rent for $1,600 a month or less.

Here is my logic behind this: per the census, the median household income in Colorado Springs is around $60,000. If we back into the 3x rent rule for qualifying a tenant (the tenant’s monthly gross income must equal three times the cost of monthly rent), this would come to roughly $1,600 per month ($60,000/12 months= $5,000/3=$1,667), so you would capture most of the market share of those looking to rent.

However, it is important to note that home prices are increasing at a slightly faster rate than rent prices. For example, as of Q2 2020, rent prices in Colorado Springs increased by 4% year over year (Q2 2019-2020), compared to 3% national average. Further, home values increased by 7% year over year (Q2 2019-2020), compared to 4% national average. Colorado Springs outperformed the growth of the national average in terms of purchase and rent prices.

What does this mean for investing in Colorado Springs real estate? A house that was bought for $200,000 in 2019, would be bought for $214,000 in 2020, assuming a 7% price appreciation. That same house’s average rent is only increasing 4% per year, or what was $1,200 last year is only $1,248 today. If we were to buy an identical house in 2019 and 2020, the Gross Rent Multiplier (GRM) went from 13.8 to 14.2. If we project this out over 5 years, we are at 15.6 GRM. All this is to say: the deals are still there, rent is still great, but the longer you wait, the more you will lose to appreciation.

If you are still interested in investing in Colorado Springs real estate, we have identified different strategies and areas of focus in the next sections.

In this section we consider single family rentals (SFRs) as residential housing that includes condos, townhomes, and single-family homes (SFHs). This section aims to discuss the current SFR market for Colorado Springs and what this means to buy and hold investors.

Price and Sales Trends

I am often asked which type of residential real estate has seen the best growth recently. Year over year, single family homes have higher price growth than condos and townhomes. However, condos and townhomes also appreciated. From September 2019 to September 2020, condos and townhomes experienced a 14.1% growth in median sale price. Additionally, SFHs experienced an 18.8% growth in median sale price during the same time period.

In Colorado Springs, all types of residential real estate are currently experiencing extremely strong growth rates, well above historical (5-6%) and national averages (4% per year). Currently there is a lack of inventory in both categories, with less than one month for SFH, condos, and townhomes. This generally indicates there will be an upward push on sales price for months to come until inventory changes to meet the demand requirements.

Rent Trends

Overall vacancy rates for apartments in Colorado Springs is 4.5% for Q2 2020. Buildings with 9-50 units had the highest vacancy rates at 5.9%. Buildings with 0-8 units had the lowest vacancy rate of 0.0%. Historically, larger buildings have the highest vacancy rates.[1] 

This is in line with what I am observing within my personal rental property portfolio (consisting only of high-demand single families). My tenants either extend their lease year after year, or I am able to place a new renter within a day or two of the prior tenants leaving, with an effective portfolio vacancy rate of near 0%.

As of Q2 2020 in Colorado Springs, the average rent rate increased by 2% from last quarter, and only 11 new apartment units were added to the inventory levels. Also, during COVID, only 5% of renters in Colorado Springs were delinquent in making rent payments (though the actual collection rate is uncertain).[2] Colorado Springs has a strong rental economy but not enough supply, resulting in low vacancy and increased prices. This trend provides a unique opportunity for anyone interested in investing in Colorado Springs real estate.

[1] Source data: Apartment Association of Southern Colorado Q2 2020 Report

[2] Article by Rich Laden, “Second-quarter apartment rents reach a record high in Colorado Springs”

Underwriting Colorado Springs Rental Properties

1% Rule:  The 1% Rule states that the monthly rent should be 1% of the purchase price. You will rarely find properties that meet these rules in Colorado Springs. These rules do not equal great rental properties or long-term wealth building.

50% Rule: The 50% Rule states that 50% of your rental income will go towards the property operating costs (all the costs except for mortgage payments). In Colorado Springs metro, we typically see between 25% to 35% of rents going toward the operating costs—similar to Denver. We underwrite conservatively and realistically! Make sure you understand the underwriting numbers from listings and other agents. Below is an outline of ballpark estimates we use for underwriting properties, which we adjust based on additional known information.

Below are examples of the different types of residential rental properties we are seeing in Colorado Springs.

Example property: This is a 1 bed, 1 bath, 1 carport condo.

Example property: This is a 3 bed, 2 bath, 1 car garage townhome with no HOA built in 1986.

Example property: This is a 2 bed, 1 bath, 1 carport single family detached home with no HOA.

The following chart compares the different types of residential units (condos, townhome, and single families) to one another in terms of cash-on-cash return as well as cap rate.

The condo example has a better cap rate and cash on cash return than the townhome, with single family last. As we learned previously, SFHs have better appreciation than condos and townhomes. This likely contributes to the lower cap rate. In other words, the price of the asset is increasing at a faster rate than its performance in terms of rent rate growth. More specifically, rent rates are not increasing at the same rate that purchase price is. As a result, the single-family home prices are appreciating at median price increase of 18.8% from September 2019 to September 2020, which is far outpacing rent growth, and is still faster than condo or townhome appreciation of 14.1% in that same period.

There are still good opportunities for investors to purchase buy-and-hold property in Colorado Springs. However, if the current trends continue, the longer you wait to buy, the more likely you are to experience  rents not increasing at the same pace as prices. Condos, townhomes, and single-family homes are all experiencing large price increases along with very low supply. As a result, Colorado Springs is still a great market for investing in real estate.

For purposes of this section, multi-family homes consist of properties with two or more units—Duplex (2-unit), 4-plex, and so on.

Price and Sales Trends

As mentioned previously, the overall vacancy rate for apartments in Colorado Springs is 4.5% for Q2 2020. Buildings with 9-50 units had the highest vacancy rates at 5.9%. Buildings with 0-8 units had the lowest vacancy rate of 0.0%.

Example property: This is a 2 x 2 bed, 1 bath, located in the West side.

Example property: This is a 4 x 2 bed, 1 bath, located in the central part of town. Owner pays sewer, trash, water.

It is worth comparing the difference between a duplex and a fourplex, since these types of units comprise 90% of the multi-families sold in the past year on the Colorado Springs MLS, so if you are in the market for a multi-family, chances are you will be looking through duplexes and fourplexes.

Both types have similar cap rates; however, I want to highlight the difference in price per unit. I would guess that there are some economies of scale here (sharing the same roof, same land, perimeter of the building). As you can see, multi-family rentals have, on average, a slightly better return than single-family rentals.

The multi-family segment of the market is seeing the same compression of cap rates as the single-family market, in that as of Q2 2020, average price per unit for multi-family properties increased 7% between this year and last year, while rents rose 4%. Rent rates are simply not keeping up with increased purchase prices. It is thought that the lower interest rates of recent times are causing an increase in demand for multi-family:  in other words, more bang for your (leveraged) buck.

Colorado Springs has given me the opportunity for BRRRR investing, and I have successfully completed 8 BRRRRs locally. I have noticed that over the past few years, BRRRR opportunities have become more of a rarity, as margins have been decreasing due to increased demand in properties here. This section aims to describe the current state of BRRRRs in the Colorado Springs real estate investing market.

What is BRRRR?

There are many different strategies to real estate investing, to include buy-and-holds (traditional rental properties), wholesaling/assignments, fix-and-flips, vacation homes including short term rentals, syndication, and more. BRRRR is a repeatable “buy and hold” sub-strategy to acquire rental properties for little to no money down.

BRRRR is an acronym that means:

Below is an example that I purchased in the Spring of 2017 and utilized the BRRRR method:

Buy—Purchased for $113,500 (20% down payment of $22,700).

Renovate—Full House Rehab of $25,000 (closing fees, holding costs, repairs).

Rent—Initially Rented at $1200/mo. Currently Rented at $1300/month.

Refinance—Appraised at $175,000.

Repeat!

For reference, as of 2020, this property is now worth $230,000 and growing.

BRRRR Strategy Benefits

There are several benefits to utilizing the BRRRR Strategy. The first one is risk mitigation. Generally speaking, the value of the property should increase at a greater rate than the cost to improve (it is not a dollar-for-dollar benefit). This is also known as ‘forced appreciation’ and will help to protect your investment in the event of a market crash if values drop.

The second benefit is that you now own an improved property. As a result, there is lower risk of unbudgeted short-term capex or repairs needed to fix poor workmanship (since in theory, you oversaw the contractor who performed the repairs).

Third, the BRRRR strategy results in more liquid funds to the investor. Since you are pulling cash out, you can utilize the funds for reserves or buying additional investments.

BRRRR Strategy Risks

Just as there are a several large benefits to utilizing the BRRRR strategy, there are also risks that investors must be aware of.

There is a time factor involved, where your cash may be ‘stuck’ in a property for longer than originally planned. It is important that investors use funds that they are not necessarily relying on for life needs, as the timeline of the BRRRR could take longer. Most lenders require a seasoning period (a set period of ownership) prior to being able to perform a cash-out refinance.

Another risk is that you may not be able to pull out as much cash as originally thought. Factors that can contribute to that include weaker than expected appraisals, rehabs that go over budget or take longer than anticipated, or a combination of both! Ultimately, this could result in less cash out than planned, or the investor’s cash remaining in the property longer than expected.

Current State of BRRRR in Colorado Springs

I have successfully BRRRR’d 8 properties in Colorado Springs from 2016-2018. One thing that I noticed was as time went on during this two-year period, my BRRRR turned from a ‘true BRRRR’ (100% cash out), eventually waning to a ‘partial BRRRR’ (only pulling out part of the initial cash invested). This was due to lower margins between purchase price and ARV due to the higher demand to buy property in Colorado Springs.

Currently, the Colorado Springs real estate market is in a severe seller’s market due to increased demand and decreased supply, which ultimately leads to increased prices and lower margins between after repair value (ARV) and purchase price. So, what does this mean? The Colorado Springs real estate market is not currently to conducive BRRRRs for typical investing purposes. This is not to say it is impossible, but it is a rare occasion to find something that fits this strategy in today’s market. As a result, I have adopted my strategy to what I am calling the “Slow-BRRRR(n)”.

Slow-BRRRR(n) Strategy

With the Slow-BRRRR(n), you will do the BRR (Buy, Renovate, Rent) almost immediately, and then you sit and wait for the last two R’s (Refinance and Repeat). Over the past several months, we have cash-out refinanced three of our existing rental properties, all of which were originally BRRRRs (meaning we had previously cash-out refinanced as part of the original BRRRR).

This resulted in pulling out more cash than during the original BRRRR! We did this by slowly but effectively, managing our rentals and monitoring the market until calculating the best time to pull more equity out. To be clear, this is not betting on appreciation. The investor must make sure the properties are cash flowing both before and after the Slow-BRRRR(n).

Slow-BRRRR(n) Example

In the previous example of the BRRRR we did, we had a $131,250 loan outstanding on the property, and it was recently appraised at $230,000. Using 75% LTV requirements, this means we could hypothetically take out another loan of $172,500 utilizing a cash-out refinance. This would result in taking home another $41,250 (excluding loan/title costs). Originally, we had pulled $40,450 during the original cash-out refinance.

What did we do to the property to increase the value so much? Absolutely nothing. We managed the property effectively, monitored the market to know when to increase rents upon tenant turnovers, kept it in great condition, and simply waited 3 years.

This is a prime example of one of my favorite investing quotes: “Don’t wait to buy real estate. Buy real estate and wait.”

What am I going to do with the cash-out refinance proceeds I mentioned previously? I am simply going to invest 25% down on additional rent-ready properties, and then just sit and wait. I could do the BRRRR strategy on subsequent properties to propel our equity even further, but I am busy, and I am tired, and this method is still effective. By waiting 5 years with an assumed 5% growth rate each year, my property could be worth ~$320,000 and I could cash-out refinance and collect ~$52,000 in cash out proceeds (excluding loan/title costs), and then reinvest those proceeds in another asset.

Slow-BRRRR(n) Risks

I cannot emphasize this enough, but you must not rely upon appreciation! I realize that any type of appreciation is not guaranteed, and we are not advocating to bet on it. However, in a market such as Colorado Springs, it is safe to reasonably expect some type of moderate growth each year. If appreciation is slower than expected, then your cash outlays will be ‘stuck’ in the property, so you need to be prepared for this. Again, you must make sure you are cash flowing, before and after the BRRRR! Do not overleverage in terms of debt and your time and capacity.

Even though I mentioned we did multiple cash-out refinances recently, we still maintain a 65% LTV rate averaged across our portfolio for safety and risk management. This is in addition to ensuring our properties are cash flowing AND having adequate cash reserves. Do not forget to risk manage. I always advocate for maintaining adequate cash reserves for the “unexpected” as well as making sure the property is cash flowing, even after refinancing.

BRRRR vs. Slow-BRRRR(n) Comparison

There is no question that doing a BRRRR is going to be a better use of cash over buying something and putting 20-25% cash down on an identical property. However, as we previously discussed, the Colorado Springs real estate market is very tight, making these opportunities more difficult to find for part-time investing.

As a result, investors should capture the highest probability for success! Think about a bell-curve: we are not saying there are no BRRRR opportunities out there (the shallow part of the curve), but if you want to capture the highest probability for success, aim for something in the middle.

It is often mentioned that putting 20% down on a property is not good investing, and BRRRR is the best real estate strategy. While I do love BRRRR, it is simply not realistic to consistently execute as an investing strategy in the current Colorado Springs real estate market. In a market like Colorado Springs with consistently strong returns and appreciation, you will hopefully make up for the original down payment in the form of equity growth through appreciation within several years.

I wanted to put the expected first year returns on the example of the property we are buying with the Slow-BRRRR(n) cash proceeds from the refinance. In just one year, our total ROIQ is set to be 31.4% of the initial cash invested (remember- this is from a cash-out refinance, not something we actively saved for), or $21,657. If I waited around until I found something to BRRRR, I could have missed out on an expected $21,657.

All this is to say, BRRRR investing opportunities in Colorado Springs are rare finds in the current state of the real estate market. However, this just means the investor needs to look for other opportunities given the current conditions. Today, the best probability of success is to buy a cash-flowing rental property, manage it efficiently and effectively, and evaluate in a few years whether it is worth pulling out equity to reinvest at a later time.

We often hear about real estate success stories or failures, but rarely much “in between”, such as weathering a storm and getting some minor damage to your returns but still making it through. It is important to be on the defensive to ensure that your hard work of acquiring a substantial real estate portfolio does not get lost during turbulent financial times. As a result, investors must understand the ways to strengthen the protection of real estate holdings to ensure the properties are preserved for generations to come.

In general, new landlords have worries at what I would consider the micro level (What if I get 2 AM calls for clogged toilets? What if a tenant destroys the property?). As a landlord’s portfolio grows, these worries tend to evolve to a macro level and the prior worries are just realized as part of the business (What if there is a market crash? What if there is a surplus of rental units on the market?)

Now that we have created a sizable rental property portfolio, these are my top worries. As such, I have developed a three-tiered approach to diminish my uneasiness that I will discuss:

We have been in a period of growth for the past decade within the Colorado Springs real estate market, and it is easy to get caught up in the idea that investing in this market is infallible. It is important to understand that it is a matter of ‘when’ and not ‘if’ these uncertainties become reality, and how an investor is prepared will vastly alter the outcome of the viability of their portfolio for the future.

Vacancy on a rental property is a profit killer! This is because every month your property is vacant, you as the property owner must absorb all the costs (mortgage, taxes, insurance, repairs). My first line of defense is making sure I buy a property that cash flows decently, so that in the event of an emergency, I can drop my rents and it still covers expenses, just not put anything extra in my pocket.

When I purchase a property, I underwrite at market rates. However, I also look to see “how low can my rent go?” Can I sustain a 10% drop in rents to be most competitive to get a good tenant in my property? What about a 20% drop in rents? In a time of crisis, I want to have the best property for the best price so that my property is the one that the (presumably) smaller qualified renter pool will desire.

This is considered not only when I buy a mortgage, but also when I do a cash-out refinance. During a cash-out refinance, with everything being equal, the interest cost will go up as more is being financed.

This the first line of defense. If I lower my rent and a qualified tenant still pays enough to cover all or most of my expenses, I may not have cash flow but at least I will not have to pay property operating expenses.

There might be periods of time in which rents are low and vacancy is high (meaning that rent is barely or not covering all operating expenses). Murphy’s Law states that is when several furnaces and water heaters will need replacing!

To prevent additional stress during these periods, we have a savings account that we maintain six months’ worth of expenses, per property. At no point does this ever dip below our designated number. If it does drop unexpectedly, we refill using personal cash (guess we are not going on vacation or buying something for fun).

For my Colorado Springs real estate investing portfolio, our operating expenses tend to come out to 33% of revenues (taxes, insurances, repairs and maintenance). As a result, each month we put aside 1/3 of our residual cash from rent collected minus mortgages (we don’t have escrows for insurance and taxes) into a reserve account to pay for operating expenses (expected expenses, and a little extra for Capex). In theory, at the end of the year, we should ‘end’ at our original 6 months’ expenses for emergencies.

This is our second line of defense. The way to shield against expenses with less (or no) income coming in is with cash reserves.

As a point of clarification, the above only pertains to our real estate portfolio. My family also keeps six months of cash reserves for personal expenses as an emergency fund also. These two emergency fund accounts (rental and personal) are in addition to our regular savings account (for more fun things, like saving up for a new rental property to buy or going on vacation).

I have utilized the BRRRR method to grow my portfolio at a quick pace. In a couple cases, I have recently cash-out refinanced several properties we previously already did cash-out refinances on as part of the BRRRR to extract additional cash to reinvest into more assets. The BRRRR method is an incredible way to scale your portfolio quickly. However, we have a rule that is not asset-specific, rather portfolio-wide: our loan to value ratio must be at 65% or less. As a result, this would warrant a 35% drop in value across the portfolio to become ‘under water’.

I highly recommend that investors do not get overly excited about low interest rates and rising values, as I do not recommend squeezing every bit of equity out into cash! For example, some of our properties are at 50% LTV, so the average of the portfolio is at 65% LTV.

The below chart reflects housing appreciation rates in three major Colorado markets and the national average within the last six recessions.

As we can see from the prior chart, historically, during the worst recession to date (which was caused by a housing mortgage crisis), assets dropped 3.8% in value in Colorado Springs, and 19.7% nationally. In all other recessions, Colorado Springs values rose. Of course, past performance does not predict future results.

Where I came this ‘rule’ of requiring 65% LTV across the portfolio, was based on an assumed 20% drop in value (based on national average during ‘07) plus 10% selling costs, so I would still have a 5% equity amount in cash from closing to walk away with a few dollars.

This is my final line of defense. If I am encumbered by vacancy leading to an inability to pay the monthly operating expenses and all my cash reserves are depleted, the economy would have to be in an even worse position than it was during the 2007 crash for me to walk away with nothing.

It can be scary to think of worst-case scenarios, but instead of hiding and ignoring them, they becomes less daunting when you feel (and are) prepared in the case of a financial issue.

Of course, one strategy does not apply to all. For instance, if you are utilizing the NOMAD/House Hack strategy with just 5% down, you may want to pump up your cash reserves up more than someone with a higher equity balance may want to. It is critical to evaluate your personal risk profile.

In conclusion, even in times of offense (building your portfolio), it is important to always ensure your defense (reserves, equity position) is strong. Do not overleverage your real estate both in terms of debt or operations! It is easy to get caught up in the excitement of your rental properties in good times, but you always need to make sure you are prepared to weather any bad times so that you do not lose everything you worked hard for.

To make things short and sweet: we are not able to help if you are looking to fix-and-flip investing in the Colorado Springs real estate market. To be a successful flipper, you will need to treat it as a job, have multiple marketing streams to obtain properties at a steep discount, likely have a well-defined construction crew, and have access to short term funds to act quickly. I am sure as you have figured out from the rest of this article, our team is here to help you create long-term wealth, not short-term profit. Fix-and-flipping creates income, which is taxed in a completely different way than rental income (flipping produces ordinary income instead of a rental’s passive income, and requires a totally different strategy).

However, our team is here to assist with a “fix and list” strategy. The goal of this strategy is to take advantage of the appreciation that Colorado Springs has seen over the few years that the seller has owned their home and the IRC Sec 121 exclusion of gain from sale of principal residence (always check with your CPA to see if this applies in your individual case) and roll the proceeds into buying additional rental properties and/or house hacks.

The following is a recent example we helped a client succeed with a fix and list strategy, which they were able to roll into a NOMAD house hack as well as plan to purchase a standalone rental property! In this example, the home they wanted to sell was a single-family home that they had lived in for about 7 years.

We presented the client with three options with varying levels of repairs and upgrades made, and corresponding projected sale outcomes. Option A was to sell the home in as-is condition. Option B included repainting, recarpeting, new windows, and adding some curb appeal. Option C was Option B plus redoing the kitchen and bathroom. Given the recent sale comps, we assessed that Option B was the best option for the client, because this presented the best return on investment and it also matched this neighborhood’s price-profile best (we wanted to stay around the median price point to attract the most buyers).

I had projected that they would be able to sell the home for $315,000 with Option A as-is, and $350,000 for Option B. This client put in $20,000 worth of work to do Option B, for an estimated $35,000 additional sales price, or a 75% return on their improvement investment. However, we listed the home for $350,000 and received multiple offers, and the buyers sold the home for $373,000. In other words, the $20,000 input led to an additional $58,000 ($38,000 profit)!

Since this was their primary home and they had met the requirements of the IRC Sec 121 exclusion of gain from sale of principal residence, they were able to keep their gains (tax-free) and plan to purchase rental properties with their additional capital inflow. Not to mention, they purchased a property they plan to NOMAD in a few years. With the sale of this one property, they will likely be able to buy two to three properties and not pay capital gains tax!

Chris literally wrote the book on House Hacking, so make sure to check out The Ultimate House Hacking Guide for Denver: A Technical Guide to Building a Denver Rental Portfolio Through House Hacking. Some quick highlights of investing in NOMADs or House Hacking in Colorado Springs can be found below.

What’s the Best Location in Colorado Springs?

Colorado Springs offers the same House Hacking real estate investing options and strategies as Denver. Your investment goals and preferences will determine where in the city you should focus your search. This section highlights House Hacking in Colorado Springs, but there are plenty of other opportunities in the surrounding metro such as Woodland Park, Peyton, Falcon, Monument, and Fountain, which are not covered in this article. Additionally, it is important to work with your lender as discussed previously, since the conforming loan limit is different for El Paso county than for Denver and surrounding counties.

The below suggestions are merely a starting point using generalized information for your House Hacking journey in Colorado Springs. The strategies are not exclusive to the areas and options below, but they are a good place to begin your search. For instance, if a client wants to live in a certain part of town, we suggest the most-optimized House Hack strategy based on location. Or conversely, if the client had a particular strategy in mind, we would share the areas of town with the most opportunity to successfully perform that House Hack strategy.

Central and Southeast Colorado Springs

The central and southeast region as well as some parts of the airport area of Colorado Springs lends itself best to the room-by-room strategy of House Hacking. The reasons are two-fold: first, the price to rent ratio purely based on bedroom count is better than most other parts of Colorado Springs, and second, with the homes being older, there is usually room to better utilize space. I have noticed in this area of Colorado Springs that there are a lot of homes with basements or rooms that are not being efficiently utilized.

A simple yet effective strategy for increasing value and cash flow is the addition of a bedroom and bathroom. This method does not have to be complicated or increase the footprint of the home through an addition or anything difficult and cost-prohibitive, rather a House Hacker can simply look for poorly utilized existing space in a home. By closing off a room, or converting a powder room to a full bath, you can greatly increase the value of the property, as well as its rental potential, for just a few thousand dollars in expense.

By employing this strategy, the House Hacker has a lot of options! They can stick to the room-by-room method and rent out the new additional bedroom for supplemental monthly income. This also means that once the House Hacker moves out of the property, they can command higher rents for a 4-bed vs a 3-bed, even if they rent by the house and not by the room.

Westside and Downtown

The Westside, or more specifically, Old Colorado City, and parts of downtown/Memorial Park areas would best lend themselves to multifamily and Airbnb House Hacking options. In this part of town, you are more likely to find R-2 or R-4 zoning. This means that certain properties are zoned duplex or multifamily (R-2 allows for 2 units), which allows the House Hacker to legally subdivide existing properties, or to live in one unit and rent the other unit(s) of a property that has already been subdivided.

This part of town is generally a tourism hot spot, as it is just a quick drive to Pike’s Peak, Garden of the Gods, and local shops and restaurants. This can potentially lend itself to an Airbnb option while living in the property. It is important to understand that Colorado Springs recently underwent many legislative changes related to short term rental housing as of late 2019 and could further evolve at any time. What I always offer as a suggestion to investors, is to underwrite a deal NOT using Airbnb as a revenue source (only look at long term rental rates), but if the laws allow for it, it is a good option to offer the unit as an Airbnb if currently authorized. In any event, it is best to contact your attorney to fully understand the short-term rental laws.

Northern Colorado Springs

If you drive down the Powers Corridor, you will see new construction homes at every turn. This part of town is not only very close to Peterson Air Force Base and many tech employers, but it is quickly becoming an alternative location to live for those who commute to Denver but want a more affordable cost of living and purchase price of homes. Colorado Springs is even experiencing a higher appreciation rate than Denver this past year.

I mentioned previously that the room-by-room strategy works better in central and southeast Colorado Springs in comparison to northern Colorado Springs due to the price-to-rent ratio and ability to force equity by adding bedrooms. However, this does not mean that northern Colorado Springs does not allow for a House Hack opportunity in general. The room-by-room strategy would still allow the House Hacker to offset their mortgage and living expenses. Additional benefits to purchasing a home in this area, is that the homes tend to be new builds or only a few years old, which would mean that the investor could assume lower maintenance costs in the initial years of owning the home.

Further, the houses tend to be larger in this area, which if the investor values more personal space (such as larger bedrooms), but still wants to optimize revenue by renting by the room, these locations could offer this balance. Upon moving out of the home, the investor may typically realize break even cash flow if converted to a single-family home rental, but as this book highlights, there are other factors (tax benefits, appreciation, debt paydown) that will contribute towards a positive return on investment. Caveat: Many properties in this area have covenants or HOAs that prohibited renting out rooms to non-family members, so make sure to find an area that allows for this method!

These houses also would allow for a great opportunity for a Mother-in-Law Suite, or ADU, House Hack. The houses are typically large (3,000 sq ft+), which would allow a House Hacker more personal space on the upstairs part of the house, while possibly outfitting the basement to utilize a multigenerational House Hack.

This deal analysis is for a turnkey single family home in the Northeast part of town.

This property closed Q1 – 2021.

The client was able to exchange an out of state property that consistently gave him headaches such as evictions and things breaking down and was able to utilize the gain he realized on the value of that property and 1031 exchanged it into a 3 year old, tenanted (with highly qualified tenants) property in a growing section of town.  He was able to do this with not much out of pocket (used the full gain) to procure this property, and now he has a cash flowing, stable asset.  I would make that trade any day!

For more Colorado Springs Deal Analyses including house hacks and multi family properties, check out our Colorado Springs Deal Analyses page.

This deal analysis is for a newly renovated duplex near Ft Carson.

This property closed Q1 – 2021.

Similar to my townhouse I bought, I used the proceeds from a cash out refinance on rental properties that we had bought a few years ago, to take advantage of the significantly low interest rates and equity growth on those properties.  As a result, we wanted to redeploy the cash out proceeds into additional rental property.  I am very pleased to get almost a 6 cap on a property that I didn’t have to put earned income into, rather was able to leverage equity from existing properties to redeploy.

For more Colorado Springs Deal Analyses including house hacks and multi family properties, check out our Colorado Springs Deal Analyses page.

New listings

Sales count

Sales price

Active inventory at month end

Source: The above executive summary is from Lon Welsh of Your Castle Real Estate.

Here are some charts reflecting the crazy level of activity in the Colorado Springs market.  As with Denver, it’s very much in the favor of the seller.

Here’s an article from the Gazette that speaks to the frustration of Colorado Springs homebuyers facing extreme inventory shortage.

It is definitely a seller’s market right now.  If you are interested in walking through an equity analysis to see if selling your Colorado Springs property is the best way to reposition your equity, please send us an email [email protected] or [email protected].

Even if we took out appreciation and looked just at certain or “more-certain” returns (cash flow, debt paydown, depreciation), it is a difference in ~$1,000 favoring Property #2’s numbers.  The only decreased ROI factor is cash flow, but a very marginal amount.  The debt paydown is higher, because the interest rate is lower (more going to principal each month), and the depreciation is higher due to the asset purchase price being higher.