The dynamic in Colorado Springs rent vs. buy

13 Replies

As an example of the dynamic here, I currently have 67 people looking for rentals for $1,000 or less. There are 21 homes in the MLS.

Oh that I had the capital to buy homes -- instant demand. 

Rob

Yes, great demand here. But I've found is hard to find cash flowing properties right now. Seems people are still willing to pay more for investment properties than what they're worth, and we're still competing with a lot of primary buyers.

Demand doesn't translate into profits.  Lots of demand here in our area, too.  But few, nearly zero, deals that you could buy and use to satisfy that demand and make a profit.  I haven't looked closely at your market, @Rob Thompson   but I suspect is much the same.

@Brad Starling -- I agree.  It's hard to find cash flowing properties that take deliver the returns needed to make it work.  

@Jon Holdman -- unless I had the cash to buy them out right or with significant downpayments, I agree. 

Paying cash doesn't make a bad deal turn good.  It may result in positive cash flow, but the cash on cash return is too low to be attractive.

IMHO we're now in a purely speculative market.  Buyer's are snapping up whatever they can find assuming prices will rise.  So negative cash flow is OK.  I also suspect there are many new investors jumping in who do not really understand the business and buy the "this cash flows, rent is $1500 and your payment will only be $1200, that's $300 a month in cash flow!" malarky.

"Paying cash doesn't make a bad deal turn good." 

I don't disagree with this, either.  

"It may result in positive cash flow, but the cash on cash return is too low to be attractive."  

I don't necessarily disagree with this, either; however, that's also a measure dependent on the particular holder of said cash.  

Absolutely.  A friend and fellow landlord once told me "don't try to compete with people satisfied with low returns."   Seems like that is pretty much exactly where we are now.  Along with newbies buying deals that aren't nearly as good as they think.

"Don't try to compete with people satisfied with low returns."

 Good advice that could be taken several different ways. 

"Along with newbies buying deals that aren't nearly as good as they think." 

That's a recurring theme in your responses.  

Specific to your post above, I agree that that $300 margin doesn't account for property management, any expenses, etc.  

"Along with newbies buying deals that aren't nearly as good as they think."

That's a recurring theme in your responses.

Yes, it is.  Because I think we're moving into something of a bubble.  Everybody and their brother thinks buying rentals is a good investment.  So they jump in without really understanding the business.

I'm ready, willing, and able to buy.  But with the deals that are available here, I've been considering buying elsewhere.  For that matter, I've been considering selling my properties here to take advantage of the runup in prices.  But I think they're still a good long term investment.  And I just don't know where else to put my cash. 

@Jon Holdman, what would a good investment look like for you?  (Legitimately curious.)

What if I told you 45 mins south the rental demand was triple that and the buy prices were 50% less. Would that spark your a geoghraphical investment thinking?

@MattRosas, you're talking about Pueblo?  I personally want to keep my investments local though I recognize there's a cost for that. 

Originally posted by @Rob Thompson :

@Jon Holdman, what would a good investment look like for you?  (Legitimately curious.)

 Rob, I would self manage a property in the Springs and probably even in Pueblo.  So, I would not factor in property management expenses.  So, instead of 50% being allocated for expenses, capital and vacancy, I would use 36%.  That makes 1% deals profitable with today's low interest rates:

purchase: $100,000.00

rehab $0

down percentage: 20%

down payment: $20,000.00

loan: $80,000.00

rate: 5%

term: 30

payment: $429.46

total rent: $1,000.00

rent % 1.00%

exp, cap, vac% 36%

exp, cap, vac: $360.00

NOI $640.00

cash flow: $210.54

cash flow, annual: $2,526.51

cash on cash return: 12.6%

Notice I'm saying move in ready so no out of pocket rehab expenses.  Trying to do a rehab in CO Springs or Pueblo while living in Denver is problematic and more expensive than if it was close.

I would also look hard for anything that's going to drive the expenses or acquisition costs up.  Shared heat in multis, for one.  Immediate sewer line replacement for another.  Things like that.

If property management had to be added in, I'd want rents more like $1200 for that $100K house.

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