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- #5: BRRRR in Colorado Springs
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. As a result, I wanted to outline a methodology of a delayed BRRRR that I am beginning to utilize.
Background- Types of real estate investing:
- Buy and Hold (Rentals)
- Wholesaling/Assignments
- Fix and Flips
- Vacation Homes
- Syndication
What is a BRRRR?BRRRR is a repeatable “Buy and Hold” strategy to acquire rental properties for little to no money down
- Buy: Purchase property in need of repair under current market value
- Renovate: Fix up property to excellent rental condition
- Rent: Rent out property for positive cash flow
- Refinance: Cash-out refinance at a higher appraised value to receive back most or all of your initial down payment and renovation costs.
- REPEAT!
BRRRR (By the Numbers)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), loan: $90,800 (HML, purchased early 2017)
- Renovate: Full House Rehab of $25,000 (closing fees, holding costs, repairs)
- All In: $138,500 ($47,700 personal funds)
- Rent: Initially Rented at $1200/mo. Currently Rented at $1300/mo.
- Initial Positive Cashflow of $300/mo (before contingency expenses)
- Refinance: Appraised at $175,000, New Loan at $131,250 (75%)
- Received back $40,450 during cash out refinance
- Total cash in home: $7,250 (4% of appraised home value)
- Compared to putting down $35,000 (20%) to purchase a fully renovated home at $175k
- Repeat!
Today, this home is now worth $230,000
Benefits- Risk Mitigation: Value of home increases at a greater rate than improvement costs (not dollar for dollar)
- This protects your investment if there is a potential market crash
- Improved Property: Low risk of any unbudgeted short-term or repairs to fix poor workmanship
- More Liquid Funds: Less cash in the property allows for larger reserves or funds for additional investments
Risks- Ultimately, this could result in less cash out than planned
- (e.g., Lower appraisal, increased time and costs of renovation)
- Time to recoup funds:
- Lender-specific loan seasoning timeframes
- Weak appraisals
- Rehab can go over budget
- Expect the unexpected
- Requires more upfront costs
Current State of BRRRR in Colorado Springs- Previous Experience: From 2016-2018, we BRRRR’d 8 properties in Colorado Springs
- Initially invested as a true BRRRR, pulling out 100% of initial cash
- By the end of 2018, we were only partially BRRRRing (not pulling out all initial cash) due to lower margins between purchase price and ARV because of higher demand
- Currently, the Colorado Springs market is in a severe seller’s market due to increased demand and decreased supply, ultimately leading to increased prices and lower margins between After Repair Value and purchase price
- This all equates to not making it a conducive BRRRR environment.
- As a result, I have adopted my strategy to what I am calling the “Slow-BRRRRn”.
Slow-BRRRR(n)- 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 three of which were originally BRRRRs,
- 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.
Slow-BRRRR(n) Example- In the previous example, 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, kept it in great condition, and simply waited 3 years.
- “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 a couple 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- Don’t bank on 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. You must make sure you are cash flowing, before and after the BRRRR!!
- Don’t overleverage!
- 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.
- Don’t 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 market is very tight, making these opportunities more difficult to find for a part time investor.
- Capture the highest probability for success!
- It is often mentioned that 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 in Colorado Springs currently. In a market like this 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 $21.6k.
YouTube Video: BRRRR in Colorado Springshttps://youtu.be/LScn1jZh4PE33 min - #4: Colorado Springs Real Estate MLS Market Stats - October 2020
The Colorado Springs MLS trends data for October 2020 is out. Comparing year over year (October 2019 to October 2020) is better than comparing the previous month, because we have defined seasonality trends.
Key points for homes in the Springs in October ’20 vs. October ‘19- Number of new listings +6% (whew! We needed it!)
- Sales count +20%
- Average price +16%
- Active inventory at month end -55% (no new news there)
- Months of Inventory ended at 0.6 for homes
For condos- Number of new listings +20%
- Sales count +24%
- Average price +8%
- Active inventory at month end -46%
- Months of Inventory ended at 0.5 for condos
This market is being stimulated by the low rates. The mortgage rates are likely to drift up next year, perhaps as much as 0.5 to 1.0%. We’ll see the market slow down a lot when this occurs.
Source: The above executive summary is from Lon Welsh of Your Castle Real Estate.
Colorado Springs Housing Trends October 2020Here are the showing per active listing trends for Colorado Springs. VERY strong activity; unbelievable for this late in the year (and especially with the election as a distraction).
YouTube Video: Colorado Springs Real Estate Trends – October 2020https://youtu.be/7S31sHPv0wc24 min - #3: Reserves and Contingency Planning for Your Colorado Springs Rental Portfolio
We often hear a lot about real estate success stories, but I don’t often hear much about being on the defensive to ensure that your hard work of acquiring a substantial real estate portfolio does not get lost during turbulent financial times.
I felt as though it is important to highlight the ways to strengthen the protection of your real estate holdings to ensure your properties are preserved for generations to come. This episode aims to provide some insight into some of the safeguarding techniques I implement against my portfolio.
Three Learning Options!- Listen to the podcast “#3: Reserves and Contingency Planning for Your Colorado Springs Rental Portfolio” 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.
BackgroundWhen starting off investing, landlords typically have worries at what I would consider the micro level (What if I get 2am calls for clogged toilets? What if a tenant destroys the property?). Worries tend to evolve to a macro level as your portfolio grows, and those 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 portfolio, these are my top worries. As such, I have developed a three-tiered approach to diminish my uneasiness that I will discuss:
- Vacancy: What would happen if I had to rent at a lower rate to get someone in my property?
- Expenses: What would happen if I experience a lot of capex and repairs during a time of trouble?
- Equity: Lastly, what would happen if I had to liquidate my real estate holdings?
We’ve been in a period of growth for the past decade, and it is easy to get caught up in the idea that real estate is infallible.
This presentation will address how I am able to counteract these worries so that I do not lose sleep over this (I can lose sleep on other things instead!)
Vacancy- Vacancy is a profit killer!!! Every month your property is vacant, you have to absorb all the costs (mortgage, taxes, insurance, repairs, etc.)
- How low can my rent go?
- Can I sustain a 10% drop in rents to be most competitive? What about 20%? How low can I go? 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.
- These are all considerations when I purchase a property, as well as if I cash-out refinance a mortgage.
- During a cash out refinance, with all else being equal the interest cost will likely go up, as more is being financed.
- I consider this the first line of defense. If I have a qualified tenant paying all or most of my expenses, I won’t have cash flow, but at least I will not have to reach into my pocket to pay property costs.
Expenses- In times where rents are low and vacancy is high, Murphy’s Law would predict that is when several furnaces and water heaters will need replacing!
- We have a savings account that we maintain 6 months-worth of expenses per property. At no point, does this ever dip below our designated number. If it does, we refill using personal cash. This is for emergency use only!
- You may have heard us discuss in previous podcasts, that our expenses tend to come out to 33% of revenues (taxes, insurances, repairs and maintenance).
- Each month, we put aside 1/3 of our residual cash from rent collected minus mortgages (we don’t have escrow) 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 cash reserves.
- Clarification point: This is only for our real estate portfolio. My family also keeps 6 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.
Equity- As some of you know, I have utilized the BRRRR method to grow my portfolio at a quick pace, and in a couple cases, I have recently cash-out refinanced several properties we previously did a cash-out refinance on as part of the BRRRR to extract additional cash to reinvest into additional assets.
- However, we have a rule that not asset-specific, rather portfolio-wide, we want our loan to value ratio to be at 65%. This would warrant a 35% drop in value across the portfolio to become ‘under water’.
- Do not squeeze 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%.
- 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 doesn’t predict future results. This is my final line of defense. This means if I am encumbered by vacancy to not be able to pay the bills and all my 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.
- Assumed 20% drop in value (based on national average during ‘07) plus 10% selling costs, I would still have a 5% equity amount in cash from closing.
Final Thoughts- So what if you have NOMAD/House Hack properties with just 5% down? You may want to pump up your cash reserves to balance it out.
- What if you have 2 years of cash reserves and extra equity? That may be too much, it’s important to understand your personal and market conditions, but this may be a little too conservative.
- Even in times of offense (building your portfolio), it is important to always ensure your defense (reserves, etc.) is strong. Don’t 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 don’t lose everything you worked hard for.
YouTube Video: Reserves and Contingency Planning for a Colorado Springs Rental Portfoliohttps://youtu.be/w15snzb4M0Y33 min - #2: Out of State Investing vs The Springs
This blog post chronicles the personal performance of two similar properties: one in a popular Midwest cashflow market, one in Colorado Springs. Both were ‘turnkey’/rent-ready and were held for ~2 years and then sold.
The purpose is to show why I transitioned from out of state investing to entirely in Colorado Springs. The is a self-reflection based on personal experience as a new real estate investor, and what works best for our personal investment strategy.
Three Learning Options!- Listen to the podcast “#2: Out of State Investing vs 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.
BackgroundMy out of state properties were in Indianapolis and Chicago in early 2016. My first Colorado Springs investment was in September 2016.
In mid-2017, I observed that my out of state properties had lower returns than the ones in Colorado Springs. By early 2018, I decided to sell our entire out of state portfolio and reinvest solely in Colorado Springs.
Indianapolis Pro Forma: Single Family Home (March 2016)Key Takeaways:- High vacancy rate (8%)
- Capex and Maintenance are higher than average (13%)
- Appreciation not taken into consideration (0%)
A cash on cash return of 14.2% AND a cap rate of 8.6% are extremely positive and strong
Colorado Springs Pro Forma: Single Family Home (March 2017)Key Takeaways:- Used 3% vacancy rate, standard for the area.
- Budgeted for property management, even though I self managed
- Price to rent ratio not at the 1% rule
A cash on cash return of 4.6% AND a cap rate of 6.2% are closer to average investments.
Indianapolis – 2 years of Operating DataRetrospective thought: I should not have relied so heavily on numbers prepared by others, and should have performed my own analysis. However, you don’t know what you don’t know.
Colorado Springs – 2 years of Operating DataRetrospective thought: I should have used higher capex and maintenance figure, this property was previously flipped but there was some deferred maintenance. Another aspect of me being fairly new to investing- I know more what to look out for now.
2 Years Comparative Data: Indianapolis vs. Colorado SpringsSales Data:Return on Investment Quadrant (ROIQ): 2 years of data:Final ThoughtsVacancy kills cash flow!- The Colorado Springs property had essentially a 0% vacancy rate over the last 2 years, whereas the Indy property was vacant for 3 months in less than 2 years. This is likely due to demand of rentals and lack of supply of reasonably priced rental properties in Colorado Springs and vice versa elsewhere.
Personal introspective look: I realized I like control!- By being able to be close to the property, even though I outsourced the majority of the work involved, there was a sense of control in that I could drive over to it, if need be which helped me to sleep better at night.
Strong economy = Strong performance!- The stronger growth economy of Colorado Springs helped significantly with the total return. Even so, my cash on cash was still better than the property in a ‘cash flow market’.
YouTube Video: Out of State Investing vs Colorado Springs Investinghttps://youtu.be/QAVEm2O-1Os45 min - #1: About the Colorado Springs Investing PodcastIn this intro episode, hosts Jenny Bayless and Chris Lopez talk about the new Colorado Springs Real Estate Investing Podcast. You'll learn about their backgrounds and what type of episodes you'll hear on the podcast. Spoiler Alert: It's about investing in Colorado Springs!14 min
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