Tag Archives: apartments in colorado springs

Why I’m Moving from Apartments to Notes

In the last year, opportunities to buy apartments at a reasonable cap rate pretty much disappeared from my Colorado Springs market. This was mostly due to all the cash coming from Denver brought down by investors who had been priced out of the Denver market.

Last fall I bid on a 30-unit over-55 property. It needed new windows but was otherwise clean and full. My bid was rejected and it sat for a couple months. Late in the year it went under contract, but fell back out in March. My broker called to tell me it was back in play and to ready a proof of funds letter. He said only one other investor had been told about it. When I called in the next day, it was already under contract for more than the asking price, all cash.And just last week, a 60-unit apartment in my buying area was bought by an out-ot-state investor for all cash. Tough to compete with that!

I had already been training in notes for several months, and this apartment sale was the final tipping point for me. I decided to go full time into buying, selling and creating notes.

One of the big problems with this field is that hardly anyone, even long-time real estate investors, has any idea what notes are, much less how to leverage them into a great investment. There is fantastic training available from note pros who have been operating under the radar for decades, but it’s my job to in turn educate my investors so they feel comfortable in the note space.

To that end I have created a new company and new website dedicated to telling the note story to investors looking for a strong return backed by cash-flowing real estate. I am now working with a few of these to help them build a portfolio of notes to diversify their investments. I’m putting them into performing notes, ones that have a strong and ongoing record of on-time mortgage payments. You can learn more here: The Riverstone Fund.

Colorado Springs Apartment Sales in 2013

Here is a list of the 32 apartment properties sold in Colorado Springs in 2013. I’ve sorted them by dollars per square foot and have separated out the two outliers that were built in this century.

The remaining sales were mostly of the 60s and 70s vintage and made up most of the transactions in the city last year. Among the older stock, the average price per square foot was $64, with a range from $30K to $124K. The average price per unit was $46K, with a range from $23K to $80K.

If you click on the little arrow at the top right of the chart, it will open into a bigger version that should be easier to see and print. Data are from reliable sources but are not guaranteed.

How to Evaluate an Apartment Property in 5 Minutes or Less

An active real estate investor may have multiple offers cross his or her desk in any given week. Since time is our most precious resource, we need to have a method to quickly eliminate those deals that have no chance to become part of our portfolio. Here’s how I do it.

The most critical number needed to rapidly evaluate a property’s potential is the Net Operating Income, or NOI. This is simply the difference between the gross annual income and the expenses paid to operate the property that year. Mortgage payments are not included in calculating the expense total, nor are capital expenses, those large one-time outlays, such as a new roof or heating system.

Getting accurate numbers from the seller can be problematic at times, but I generally take what’s offered at face value. If I decide to move forward, confirming the income and expense values is an important part of the due diligence process. However, we can learn a lot from the actual numbers they give us.

The NOI combines with the going local cap rate to determine the sale price. You can poll your local commercial real estate brokers to get their take on the going cap rate for each class of apartment. You can also monitor sales yourself and figure the range of cap rates that apply to recent sales (or offering prices) in your chosen category. In the examples that follow, we’ll assume that C class apartments in Colorado Springs are selling in the 8-9% cap rate range.

Sample Deal #1

  • 16 units, all 2-beds
  • Asking $759,000 or $47,400 per door
  • Income $98,634
  • Expenses $51,493 (52.2%)
  • NOI = $98,634 – $51,493 = $47,141
  • Cap Rate = 47,141/759,000 = .062 = 6.2%

This cap rate is obviously way below the market rate. Changing it to a more reasonable 8.4% creates a sale price of $559,000, or $200,000 below what the seller is asking.

Besides being overpriced, the property, built in 1962, still has the original windows and kitchens (including the stylish turquoise and pink metal cabinets). According to the property manager, it also needs both flat roofs replaced. The out of state owner is out of touch with the Colorado Springs market and is unlikely to sell anytime soon.

Sample Deal #2

  • 12 units, all 1-beds
  • Asking $464,900 or $38,700 per door
  • Income $60,240
  • Expenses $20,024
  • NOI = $60,240 – $20, 024 = $40,216
  • Cap Rate = 40,216/464,900 = .082 = 8.2%

The cap rate is reasonable, but the expense percentage is on the low side, especially considering the owner pays for all the water and trash. This probably indicates that the owner has not put much into the upkeep of the property. Again, original windows from 1967. Also, since fewer people are looking for a 1-bed apartment, it’s not as easy to raise the rent as much as with 2- or 3-bed units. We’ll pass on this one.

Sample Deal #3

  • 22 units 1 3-bed, 4 2-beds, 15 1-beds and 2 studios
  • Asking $1,075,000 or $48,900 per door
  • Income $119,760
  • Expenses $24,109 (20.13%)
  • NOI = $119,760 – $24,109 = $95,650
  • Cap Rate = 95,650/1.075,000 = .089 = 8.9%

The expense percentage is too low to be believed. If we double it to $48,000 and bring it to a more reasonable 40% expense ratio, the NOI drops to $71,760 and the cap rate moves to 6.7%, way too low for the market.

Changing the cap rate to a more reasonable 8% moves the price to $897,000 (71,760/.08).

Two other factors working against this one are the less than desirable location of South Nevada Avenue and the fact that the owner felt it needed to be enclosed by a high fence and security gate.

Sample Deal #4

18 units 16 2-beds, 1 1-bed, 1 studio

Purchased for $800,000 or $44,400 per door

Income $124,577

Expenses $52,648 (42.3%)

NOI = $124,577 – $52,648 = $71,929

Cap Rate = 71,929/800,000 = .0899 = 8.99%

This one has a good unit mix, expenses just about where they should be and a cap rate that indicates we got a good price. In addition, within the last five years, both roofs were replaced, new windows, doors and kitchens were installed, and 16 decks had been rebuilt. Oh, and it was full.

As these examples have shown, once you know a full year’s income and expenses, you can use those numbers with your knowledge of the local cap rate to analyze a property in less than five minutes. Then you only spend real time on those worth pursuing.