Getting Started Guide: Single Family Rental Properties in Colorado Springs

For purposes of this presentation, we will consider single family rentals (SFRs) as residential housing other than multifamily, to include: condos, townhomes, and single family homes (SFHs). This presentation aims to discuss the current SFR market for Colorado Springs and what this means to buy and hold investors.

Trends

• Year over year, single family homes have higher price growth than condos/townhomes.  However, that is all relative!
  • Condos/townhomes experienced a 14.1% growth in median sale price from Sept 2019 to Sept 2020
  • Single Family homes experienced an 18.8% growth in median sale price from Sept 2019 to Sept 2020
  • To me, both are extremely strong growth, and well above historical and national averages
• There is still an ‘unhealthy’ months of inventory in both of these categories, with less than 1 month for SFH, condos, and townhomes
  • This generally indicates there will be an upward push on sales price for months to come until inventory levels out with the demand requirements

• Green areas indicated the greatest price increases during Q3 2020, and red/orange has the lowest growth
• Broadly speaking, I am observing the green areas being the best rental opportunities also.  All of my rentals happen to be located in a ‘light green’ section, and have seen a ton of growth over the last few years.
  • Not sure why green areas happen to be good for rentals.  It is most likely due to these areas still increasing in price and have not yet reached the median or above-median average price for the areas.

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*
  • This is in line with Jenny’s personal portfolio (consisting only of high-demand single families), in that she historically has tenants either extend their lease year after year, or places a new renter within a day or two of the prior tenant leaving, with an effective portfolio vacancy rate of 0%
• Average rent rate increased by 2% from last quarter, and only 11 new apartment units were added to the inventory levels.
• Only 5% of renters were delinquent in making rent payments (does not mention actual collection rate) ◇

Colorado Springs has a strong rental economy, but not enough supply, resulting in low vacancy and increased prices.

* Source data: Apartment Association of Southern Colorado Q2 2020 Report

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

Underwriting Colorado Springs Rental Properties

Forget about the 1% and 2% rules from Google and BiggerPockets! The rules state that the monthly rent should be 1% or 2% 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.

Forget about the 50% rule from Google and BiggerPockets! 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’re typically seeing 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.

Condo Example

Example property: This is a 1 bed, 1 bath, 1 carport condo, located in the Southeast part of the city.  This is the lowest priced type of property I have seen in a while here.

Townhouse Example

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

Single Family Home Example

Example property: This is a 2 bed, 1 bath, 1 carport single family detached home with no HOA located in the Stratton Meadows area.

Comparison Chart

The condo example has a better cap rate and cash on cash return than townhomes and then single family.  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, so 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/townhome appreciation of 14.1% in that same time period.

Final Thoughts

There are still good opportunities for investors to purchase for buy and holds in Colorado Springs.  However, if the current trends maintain, the longer you wait to buy, the more likely you will lose out to rents not increasing at the same pace as prices.  Condos, townhomes, and single family homes are all seeing large price increases, along with very low supply.  As a result, Colorado Springs is still a great market to invest in.

YouTube Video: Getting Started Guide: Single Family Investing in Colorado Springs