This deal analysis looks at a single family home in Colorado Springs recently purchased by an investor who specializes in room by room rentals. He joined us to talk about how he got started in this strategy and his method that makes it work, even from out of state. He has a unique outlook that helped him nail down his system.
- Listen to the podcast “#48: Managing a Room by Room Strategy from Out of State” 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.
Although he focuses on room by room rentals, Neil is not a house hacker. In fact, he lives in California and originally started investing in New Mexico where his brother lives. After watching his home values plummet during 2008, he vowed to never invest in real estate again. However, once he got married and had kids, he knew he needed to supplement his income and started researching real estate again.
Armed with more knowledge than when he originally began investing, he started buying foreclosures in New Mexico and doing BRRRRs to build his portfolio. The problem he ran into is that BRRRRs take time, and the market was drying up by the time he was ready to buy his next property.
He expanded his search to Colorado and decided to buy a house near the UCCS campus with the plan of renting out individual rooms to students. His worst-case scenario would be renting out the whole house on one lease which would still bring in more than the mortgage. He was pleasantly surprised when he quickly received applications from not just students but nearby professionals, too.
Investment Property Details
Sourcing the Deal
Neil worked with agent Leah to find a house that would fit his room by room rental strategy. His original strategy was to just rent to students, but the number of professionals who applied gave him the confidence to widen his search to other parts of town. As long as the home is in a central location, he knew he would be able to find good tenants to fill the rooms. Leah found this property, and Neil liked both the location and configuration.
Appealing Features of the Property
This was originally a 4 bedroom/3 bathroom single family home in central Colorado Springs. There was office space that Neil easily converted into a fifth bedroom. He liked the split of bedrooms on both the main floor and basement as well as the number of bathrooms.
Property Contract Details
The property was listed at $355K, and based on comps and the number of other offers, Leah decided that $370K was a strong offer. He beat out four other offers and went under contract at his offer price.
Neil isn’t daunted by cosmetic issues—he’s had a lot of experience fixing up homes to make them nice for tenants. Overall, this property was in pretty good shape: the roof is new, the structure is in great condition, and the flooring had been recently replaced. The Federal Pacific Stab-Lok electrical panel, commonly found in the Springs, required replacement, and the furnace also needed upgrading.
The only major issue that came out of the inspection was the sewer line. I always encourage my clients to get a sewer scope during the due diligence phase of contract negotiations, because sewer repairs can quickly become costly. The inspector found corrosion in the sewer line caused by trees, but luckily it just needed some cleanup.
They got a quote from the plumber and took it back to the listing agent who agreed to $7,200 in seller credits to cover the cost of all needed repairs and replacements.
Property Financing Details
Neil purchased this property with the proceeds of a 1031 exchange done on a home he sold in New Mexico. He put all of the money from that sale into this property with a 25% down payment.
This is Neil’s sixth rental in the Springs, so he knows well how to price rent. He usually checks Facebook Marketplace and Craig’s List to get an idea of rates in a particular area. He rents out four of the bedrooms for $600 and the master for $750. While the regular bedrooms are on a six-month lease, the master bedroom lease is for a year, since the tenant pool for that is a little smaller and he prefers to lock it in for longer.
All of the leases require 30-day notice before moveout, so he has plenty of time to fill the room. While he runs the vacancy rate at 5% to be conservative, he’s never actually had a vacancy.
Property Operating Expenses
Even though Neil lives out of state, he doesn’t pay for property management. Instead, he has a system he’s created that takes care of all aspects of running the property. He pays for hourly helpers who assist him in showing the property and interviewing prospective tenants. In addition, he’s found a trusted person who can perform basic handyman work on his properties, such as cleaning and repairing holes in the wall.
He buys a home warranty to cover big items that require more technical skills. He tried a few different companies and did some research to find one that meets his needs; for $450 a year, he has a warranty that is cost effective has a quick turnaround time for repairs. Instead of having to find someone to repair specific items, such as a furnace or appliance, he can simply call the company, pay $80, and they company does the legwork of finding and scheduling the technician. If the item can’t be fixed, they reimburse him for the cost of the replacement.
He has basic landlord insurance for all of his properties. Even though he’s doing a room by room strategy, all of his leases are considered long term and therefore don’t require any special type of commercial insurance.
First Year Returns
The cashflow on this property is a little over $12K annually, and he has a cap rate of 7.4%. Thanks to Neil’s system, he is getting solid returns on his investment.
How to Replicate this Strategy
Neil’s advice to anyone who wants to replicate this system is to make sure you have the right team to get started. He loved working with us as agents and appreciates our knowledge of this area to help him make the right decisions. He encourages everyone to go out and get properties now, because the interest rates are so low. It’s also important to want to visit the places where you invest. When Neil comes to Colorado Springs to check on his properties, he loves making the trip and having the chance to spend more time in the area.
Pursuing a room by room strategy from out of state may seem daunting, but Neil knows how to find tenants who will be a good fit. He’s lived with roommates for large portions of his life, so it’s easy for him to put himself in the shoes of potential tenants and ask himself if he could live in that situation.
He got a lot of calls about issues between tenants in his first two properties, so he’s learned over time what expectations to set and what questions to ask prospective tenants. He created house rules that all of the tenants understand before moving in, and they can call house meetings to resolves any issues among themselves. His tenants are either students or working professionals, so they have busy lives and mostly just want to rest when they’re at home.
Connect with Neil
If you’d like to reach out to Neil, email him at firstname.lastname@example.org. He’s happy to answer any questions and enjoys being a part of this community of real estate investors. He can even provide you with the “house rules” he created for his tenants.
Get Started Building Your Own Colorado Springs Rental Portfolio
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Managing a Room by Room Strategy from Out of State
Podcast (colorado-springs-real-estate-investing-podcast): Play in new window | Download (Duration: 41:58 — 48.0MB)
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