Deal Analysis: Return on Equity on a 3 bed 1 bath Single Family Rental in Colorado Springs

This is not our typical deal analysis, in which we analyze a recently purchased property.  Today, we are going to look at a rental property I’ve owned for a few years and see how it’s performing by using our Return on Equity spreadsheet.  This spreadsheet takes into account the current factors of a property and loan and runs different scenarios to help you figure out your best option.  Clients often come to us not sure how they should keep a home they’ve owned for a while, sell and exchange, or refinance, so this is a great way to lay out their options.

Property Overview

This is a 1970s 3 bedroom 1 bathroom single family home in central Colorado Springs.  I purchased it in 2017 for $110K.  Currently, my loan balance is $116K because several years ago I did a BRRRR on it.  

In today’s market, I think it could sell as is for around $235K.  If I were to put $15K-$20K into a cosmetic rehab, it could likely sell for around $280K.  

I’ve been self-managing the property and have a long-term tenant in place who pays $1100 a month.  This rate is well below market, but the tenant has been great and this property only requires about five minutes of my time a month.  If this tenant were to leave, I could probably rent the property at $1250 as is or $1450 after rehab.  

How does our Return on Equity Spreadsheet Work?

We use a Return on Equity (ROE) spreadsheet to run analyses for our clients on properties they’ve owned for a few years.  ROE is a way to measure a property’s performance and how much return you’re making from its equity.  After a few years of ownership, the initial analyses we perform are no longer up to date.  

The spreadsheet runs four scenarios:

• Keep it: hold onto the property and don’t change anything 
• Maximum cash out refinance: this is a type of refinancing that allows you to take out as much as 75% of the loan to value ratio
• Safe cash out refinance: this is a type of refinance that takes out less money and keeps in more equity 
• Sell it: sell the property 

Running the Numbers

We ran all of the scenarios to see what’s my best option moving forward: 

Rental Property Analysis

Looking at these outcomes, I don’t see a clear winner since none of the options come back with particularly large variances.  If I had to choose, I would have to decide if I wanted more cashflow or if the other benefits of real estate, such as debt paydown and appreciation, were more important to my current needs. 

Generally, if you can find a new property that will have a higher cap rate than your current property, it is probably worth either doing a refinance or selling the property in order to get the higher performing cap rate.  

Keep in mind, though, that refinancing and selling both require effort.  In my case, this property has a great tenant and requires very little of my time, so I’m not sure that it would be worth the mental load to change anything.  The difference would have to be more substantial in order for me to commit the time and effort of changing anything.  

At this point, I’m going to keep the property as is for as long as my tenant wants to live there.  If he were to tell me he wants to move out, then I would likely put in the money to rehab the house.  I may consider doing the maximum cash refinance option if I could get a lower interest rate, though the likelihood of that is slim.  

Is a HELOC Worth it?

Chris asked me if I would consider doing a Home Equity Line of Credit (HELOC) for this property.  I’ve done a HELOC on a similar property before, and my credit score went down as soon as I took out the money because it’s considered a revolving debt.  Before making any moves that could affect you, make sure to talk to at least one lender to see what the effects would be and what steps you would need to take. 

Conclusion

If you have a property that you’d like to analyze, reach out to us and we would be happy to walk you through your options and give our advice.  Sometimes the best move is to sell and buy a new property, but oftentimes a refinance or doing nothing is the better option.  Our main goals are to build long-term relationships and help you optimize your portfolio.

If you would like more information on analyzing Return on Equity, check out our free online Investment Property Analysis Course which walks you through the four ways you make money in real estate investing. Module #3 covers Return on Equity.

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Deal Analysis: Return on Equity on a 3 bed 1 bath Single Family Rental in Colorado Springs