Tag Archives: Colorado Springs

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┬áthat 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.

Colorado Springs Apartment Rents Continue Upward Trend

The Colorado Springs apartment market continues to show strong growth through the third quarter of 2013. Not only has the vacancy rate stayed at its 12-year low of 5.4% (down from 6.1% a year ago), but the average rental rate set a record at $830.34 per month, breaking the previous record of $807.21 set during the previous quarter. That makes 15 quarters in a row that the Colorado Springs apartment rental rate has increased over the previous year.

English: Centennial Plaza Apartments, 516 E Ki...

Centennial Plaza Apartments, 516 E Kiowa St, Colorado Springs, CO (Photo credit: Wikipedia)

The average rent for a one-bedroom apartment is now $730.54, and two-bed, two-bath units are commanding an average of $1005.40. Three bedroom apartments are renting for an average of $1192.17.

In further promising news, although Denver has now returned to its pre-recession rental rates (adjusted for inflation), Colorado Springs still has a way to go. Therefore, there is still room for rental increases just to get  back to what folks were paying here in 2001-2002.

You can read the full report at the Colorado Division of Housing site.

Good News for Colorado Springs Apartment Investors

Stories from three different areas point out the continuing investor interest in Colorado Springs.

2012 was a very good year for apartment sales in Colorado Springs. In fact, the $198 million total was the largest volume of sales since 2007, at the start of the recession.

Apartments are a strong investor magnet nationally, and for several reasons. First of all, the returns operators are getting are high enough to attract institutional investors, such as insurance companies and pension funds, who might otherwise invest in stocks and bonds. They also like the relative stability of well-run assets compared to other commercial real estate categories. In addition, apartments remain one of the easiest commercial types to obtain both equity and debt financing.

Apartment Building

Apartment Building (Photo credit: Wikipedia)

Colorado Springs is now getting on the radar of investors who have shopped in Denver, but found the competition there has driven prices way up recently. In fact, a great majority of apartment sales here have been brokered by Apartment Realty Advisors of Denver, which doesn’t even have an office in the Springs.

Prices paid for apartments here have been rising as well, boosted both by competition and rising rental rates. Most of the recent sales were of 1980s product, and they averaged over $120 per square foot.

Read the complete story here.

In more good news for Colorado Springs, WallSt24/7.com recently compiled a list of the best- and worst-run cities in the country. Of the 100 largest cities studied, Colorado Springs came in 14th, just ahead of Portland and Omaha. Factors that helped our city rank so well include its low crime rate and excellent credit rating. They also noted that our housing values stayed basically flat from 2007-2011, when those in the rest of the country was declining by an average of 10%.

Here’s the complete report.

It’s always flattering to be highly ranked in some national survey, but it may mean even more when someone is willing to bet real money on the future of the city.

For instance, billionaire Ray Kroenke, who owns the Denver Nuggets, the Colorado Avalanche and the St. Louis Rams, in addition to vast real estate holdings, recently purchased two Colorado Springs shopping centers for $31.5 million.

Uintah Gardens is a popular 215,00 square foot center on the west side, anchored by a King Soopers and includes a Walgreens, Petco and Big 5 Sporting Goods among others.

Academy Place is on north Academy at Union Boulevard. The Kroenke group bought all the retail shops between the Safeway and Target anchors.

Another Kroenke enterprise, THF Realty, is planning a 350,000 square foot retail mall on the south side that will be anchored by a Wal-Mart Supercenter and a Sam’s Club store.

Local commercial brokers believe it’s a real vote of confidence for the local economy that an investor of Kroenke’s clout (he’s on the Forbes Top 100 list) has turned his attention to Colorado Springs.

Here’s more on his local activities.

As you can tell from all this good news, many are feeling bullish on the Colorado Springs apartment market. However, with the deep pockets of institutional investors starting to buy up local properties, it’s getting harder for smaller investors to locate a deal that makes sense.

Deeper Analysis of a Potential Apartment Purchase

After using a property’s annual income and expense data, combined with the local cap rate to determine value, most offerings will be set aside as the unrealistic dreams of a deluded seller. Occasionally, however, a property will pass our first scan and deserve a second look. So what are the next steps to determine if we’ve really found a keeper?

The first step is to dig more deeply into the financial reports released by the seller. The critical thing to watch for here is to separate the actual figures from the pro forma numbers. Every seller, with the help of their broker, will attempt to paint the rosiest picture possible. You’ll do the same when it’s time for you to sell.

As an example, I’ll use information pulled from the most recent offer to cross my desk via Loopnet, a 28-unit C class apartment in Colorado Springs, offered at $1.3 million.

The Annual Property Operating Data (APOD) is a one-page summary of income and expenses. It calculates the Net Operating Income (NOI) as well as the cash flow before taxes. This particular APOD shows a cap rate of 8.79%, certainly within the current range of 8-9% expected for this class of apartment in this town in this year. It also lists the cash flow as $114,280 per year, or just over $9,500 per month. Assuming you paid the asking price of $1.3 million and put down 25%, or $325,000, the cash-on-cash return would be 114,280/325,000 or 35.2% So far, the numbers look promising.

But let’s look a little deeper. One of the easiest tricks to play is to merely leave some lines of the APOD blank. It’s easy to overlook something that is not even there. On this APOD there is a line for Management Services, but there is no number next to it. Even if you choose to manage it yourself, you should put a value on your time and effort. As it turns out, last year $8,300 went to this line item, which represents a 7.2% charge, reasonable in this market for this size property. Of course, underestimating your expenses, in this case by leaving one out, has the effect of increasing the NOI, which drives up the property value.

The other sin of omission occurs here by neglecting to include the annual debt service. Using the broker’s assumptions of 25% down and a 4.5% interest rate, the total mortgage payment is $60,800 per year. This is subtracted from the NOI to get the actual before-tax cash flow, which now drops to $53,480. This makes the actual cash-on-cash return 16.5%, definitely decent but less than half of what was shown on the APOD. Leaving out the management fee and the debt service has the effect of making this deal look much better than it actually is.

Now let’s look more closely at the income assumptions. The APOD has a note indicating that the current market rent for one-bedroom apartments is $495 per month. Since all the units in this apartment are one-beds, it’s easy to calculate the Potential Rental Income as $166,320 per year (495x28x12). However, in another part of the sales package labeled Income Summary, we find that less than $110,000 was actually collected in rent last year. Why the huge difference? Well, the current rent roll shows that 17 of the 28 units are paying $425 or less per month and only 2 are paying the full $495. What gives? Is the current owner asleep at the wheel, or is there something lacking in this property that prevents him from getting market rent? This is definitely something a potential buyer needs to explore in some depth. In fact, using actual numbers from last year, the cap rate at the asking price is only 4.7%!

Moving on from the financial analysis, we need to envision all the ways we can add value to the property. One of the easiest and most obvious ways is to improve the curb appeal. Potential renters won’t even slow down if the place looks like the owner fell asleep in the 70s and never woke up. A new top coat on the parking lot, well-trimmed and manicured landscaping and perhaps a new exterior paint job can make an apartment look like new almost overnight. Of course if the property has been a low-vacancy eyesore for a few years, changing the name and putting up new signage lets people know a new owner who actually cares for the property is now in charge.

Once you get a prospect inside, they will compare the perceived value to that of other apartments they’ve looked at. This is where your personal market research comes in. What amenities do other properties in your rental range have? Will you need new kitchen cabinets or will a paint job and new hardware be sufficient? Will you opt for new carpet or will you try the linoleum that looks like a hardwood floor? New lights in the kitchen and bathroom can add pizazz for very little cost.

Windows are a controversial topic among owners. If the residents are paying for utilities, it doesn’t directly help the owner to put in new ones, which is why you see so many older buildings with original windows in place. On the other hand, new double pane energy-efficient windows, along with uniform new blinds, can instantly improve the curb appeal. You can also tell prospects that their utility bills will be lower and their apartment quieter and more comfortable. It’s also one more thing the person who buys from you won’t have to pay to replace. In addition, there may be utility rebates available that lower your net cost if you choose to install them. Needless to say, all these expenses must be accurately estimated and still have all the numbers work. If a property has a lot of deferred maintenance, you must factor that into your offer or it’s not worth buying.

The bottom line for all this is how much can you raise the rents? Can you raise them enough to justify these expenditures? Can you buy it cheaply enough to allow these upgrades? You’ll definitely want an experienced member of your team to help you make these decisions when you’re first getting into this.

Finally, you need to look at the operating expenses to see if there are ways to reduce them. Running a more efficient, smarter operation can lower expenses. Do you need a full-time employee or can you outsource many of the operations? Can you charge back your residents for common area water, gas and electricity? Are they being charged for their share of trash pickup? Your market may put limits on how much of this you can do. You might also experiment with a lower rent plus these utility chargebacks versus a higher, all-inclusive rental figure to see which is more enticing to your prospects.

Once you’ve done your quick 5-minute evaluation of the numbers, most properties will be revealed as the duds they are. The ones that pass that first screening are ready for this more in-depth analysis. Once they pass this, it’s time to submit a Letter of Intent and let the negotiations begin. Have fun and good luck!

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.