All Forum Posts by: Jeremy Norman

There are tons of threads about it on the site so I will just say the 1% (or 2%) rule has many serious limitations.  Anecdotally, I've noticed that a $100/unit number requires somewhere between .8% and 1.3% depending on the exact submarket in Pueblo (which is a relatively small city compared to Colorado Springs and North)... Actually to be completely honest, there are some areas of Pueblo where I think 2% would be needed once actual operations start.

In my experience, it's always necessary to completely underwrite the property to estimate cash flow here. A % doesn't work. Hard $'s per month are real. Pueblo and Colorado Springs, for instance, cost about the same to fix everything, but the house prices in one market are half of the other. I'm not a fan of "10% for repairs" when the rents are 500 vs 1500 but the same roofer (or whatever) fixes both locations. Denver and Colorado Springs have a less exaggerated, but similar problem. Honestly, after you've done enough underwriting it's a matter of seeing it and the rule is just "know it when you see it." Seems like I can only create rules as simple as a % rent vs price at a street or neighborhood level.

Rules aside, there are properties that cash flow on the Colorado front range (and even some BRRRRs, in Pueblo at minimum, maybe others). The market here is so hot though, even now, properties often sell for negative cash flow or break even if they make it to the MLS. However, it's not always the case and so the persistent bird gets the worm. Generally, small multifamily (2-4) have better odds of cash flow... in fact I got a listing from Colin Smith earlier this week that cash flows ~$50/unit as is in Colorado Springs, if I recall. (I recommend him, btw, if you are looking in the Springs)

Now, after all that... I agree with @Steve K.... The real power in any deal along the front range is that there is a lot of growth without enough supply to cover it. That means that a lot of appreciation is happening both in equity and cash flow. 

I'm at a stage in my journey where I can't buy a house every month anyway, so I'm just picky and wait for the property that can cash flow the amount I want and then also get all the goodies that an appreciation market brings too. They seem rare, but they happen. Increasingly, it's getting hard to find cash flow out of the gate, but that's a problem I want - the harder it gets, the more my existing acquisitions (where I locked in my cash flow) are just going to get better and better.

@Todd Nagel - For sure. It's not all doom and gloom. I bought a 4 plex there in the beginning of the year, so obviously I think it's a worthwhile market. But, as you said, yes, you need to know it. People have absolutely lost their shirts there and I don't want to be one of them. 

For instance, I have HOURS of video of me just driving up and down streets at different times of day and week making verbal notes about where I am and what I'm seeing. I also leaned heavily on others for real day to day experience. I usually gut check what I think I'm seeing with my realtor and some people who are familiar with the area. My tenants have offered lots of opinions about parts of the city they like and they don't (and I've often driven to the areas to determine if they were right). After all of that, there are only a few slim areas I'm running numbers, just because I know them well enough to feel comfortable and there are enough deals that I can be that picky.

--

@Joshua Zapin - One of the reasons I like Pueblo is that it has (had?) a lot of growth engines for such a small town. 

One of the more interesting in the area is that people are selling in the Denver area and moving down to Pueblo West where they can build brand new for less than they sold for and still keep a nest egg around. That seems to be attracting empty nesters and the like. While that alone is pretty good, it also fuels healthcare in Pueblo (proper) and secondary services like restaurants and the like. It's also worth noting that Pueblo's hospital system has a pretty decent feed zone between highway 50 (east/west) and southern I-25. You can see the impact this is having on northern Pueblo near the hospital where it is gentrifying (quickly). Also, north and north-west Pueblo is very nice (near Pueblo West), as you can see on the map @Sam Dangremond shared. 

Another is CSU-Pueblo. Belmont (and especially the stuff right next to the campus) are pretty nice. They definitely are drafting some of the money coming in there - between student housing and staff housing as well. Aside from the college, there is a lot nearby that is attractive (eating, shopping, etc), etc. Walmart, target, and home depot are all nearby over here.

There are definitely some people who are commuting to Colorado Springs from Pueblo, one of my inherited tenants was one. I think that as prices go up in the Springs and the supply keeps being strained that will be the case. It doesn't hurt, but I don't think I would count on this as what keeps the economy humming.

There are also a handful of other primary industries around. There is a steel mill that has been around forever. In spite of its reputation it's actually only something like 700 jobs. It is no longer the largest employer in town even though Pueblo's website said it was as recently as last year. Trane (Nothing stops a Trane) has manufacturing in the area. There's even farming - pueblo is locally known for its chiles throughout southern Colorado (and yes, they are pretty good). There's even a pretty reputable water filter company down there, I hear. 

Like I said earlier, I think Pueblo is going to get hurt more than Denver and Colorado Springs, only because, even though it has a lot of primary industries, they are less recession resistant than are available up north (I mean, Denver has the state capital and Politics are always in season, it seems). However, it's hopefully less boom-bust as it was in the past when steel was it's life-blood.

--

After all that said, as @Rick Wade said, I think it is tricky too. There's a lot going on and its not as easy to find some services as you might in larger cities up north on I-25. Honestly, I personally like that too because it's a barrier to entry. Once you find people you trust, you have an unfair advantage. I'm not sure if that's what he's referring to, but that's been the tricky part of my experience.

I want add a quick extra note to my mini-dissertation. 

We used @Jason Levinson for our first Pueblo property. I would recommend him as well.

@Joshua Zapin - I have been studying and looking in Pueblo seriously for a little while now. I recently bought my first investment property in Pueblo.

I think Pueblo is a great market overall. Since I don't personally live there, I don't know all of the neighborhoods as well as @Sam Dangremond seems to. I looked at his map, and for the most part, I would agree. My experience is that it's street by street, so dig in deeper in some of those areas and really get to know it.

One notable thing to be cognizant of is that there is a super fund (lead and arsenic contamination) in the middle of the city which is not on that map. I'm not going to say that it's necessarily an automatic no-go, but you should be aware that financing there is more difficult and you may have more legal disclosures/work to make sure you're doing it right. Might also be an opportunity for a pop once the government is done cleaning it up (some time in the next 2 to 20 years).

I don't know of any Pueblo specific REIA's inside the city. I've considered starting one, even though I live in the Springs. The REIA that normally is at 3rd space here in the Springs usually has a handful of Pueblo investors, so I'd encourage you to come visit sometime after all of this. I'd suggest that you even go to one in your area because, honestly, a very significant percentage of Pueblo is owned remotely from other cities farther north I-25 of Pueblo. You may find long distance investors in your area.

I will say that many of the major economic drivers for Pueblo are under attack with this crisis: Healthcare is suffering with non-elective procedures being forced to stop (and one of the two hospitals is perpetually in trouble even before this). The stock market crash is putting pressure on pensions and retirements, which is a non-negligible driver. CSU-Pueblo is in distance-learning mode (and based on national headlines, it seems likely that may continue for a while). And obviously, the direct short term issues we're all experiencing with the stay at home orders, etc will hurt significantly all on its own. I think some of these are more lasting than others and may take some time to rebound.

I often say that Pueblo is at the end of the whip of Colorado's economy - so it has higher highs and lower lows, relatively speaking. I think the lows are on the horizon and I'd be very careful to make sure that you have STRONG cash flow in the best of best areas if you're buying to hold and an amazing deal for flips. 

For example, where we owned in Aurora in 2012 has approximately doubled in value. In that same time frame, many of the areas of Pueblo we've been looking in have 3-5x'd.

If you have any questions, please reach out. I like talking about Pueblo.

@Colin Smith and Brent Bowers usually host an excellent meetup at third space. Once normal life resumes, I’d encourage you to visit. 

I usually see @Daniel Haberkost there too. In fact, last year he had an excellent presentation on House Hacking at the meetup.

Honestly, I am concerned about the next few months when it comes to appreciation and high end rents in Colorado Springs... but generally, rent by the room and other affordable housing should have stable cash flow in almost any scenario - so I think you’re setting yourself up for success with your plan.

Last, there are plenty of good realtors in the springs (many on BP too), but I also recommend Colin. You should always run your own numbers, but the stuff I get from him tends to match my own pretty well. He’s been a great help to me and I have not even bought with him... yet. 

Good luck, and welcome!

@Ryan Fisher

I think those are good areas to be interested in, as I am also interested in them. One of the fastest ways to learn is by leveraging the experience of other people nearby, so I suggest you visit a local meetup. There’s one at Third Space on Academy on the first and third Tuesday of the Month (tonight).

These have been very helpful for me as I’ve been starting in terms of mindset and understanding/learning through other people. They are also great for networking.

While I’ve always been conservative with money, One of the things that has surprised me is that I’ve started making better financial decisions after going because I can leverage other people’s experience who are building wealth (or better, already built it).

For instance, Dave Van Horn’s book specifically suggests not paying off student loans first. Instead you can buy a good investment that has higher percent yield to pay off the loan, meaning you can use less money to pay back your atudent loan. Student loans are usually one of the cheaper sources of money, so paying it off is effectively only investing at the low rate of return. Take that for what its worth in your situation though.

Hope to chat with you someday in person.

@Andrea Livingston,

I think your plan to keep the current tenants makes sense. However, once they are out, from what I'm hearing in the area from other investors, the rent by the room model is very, very strong in Colorado Springs. I don't have rentals in the Springs, so take that for whatever it's worth - but I think @James Carlson is right.

However, if you do go that route, there are even property managers that will do Rent by the Room in Colorado Springs for you. I'd wager the extra income it would make would more than pay for the property manager, too.

@Rick Wade,

In Pueblo, specifically, there is a lot of non-local money flowing into real estate because it’s cheap compared to neighbors. So the issue is that the wholesaler has the option to sell to suckers that see the price tag as cheap. I don’t think it’s unique to pueblo.

There are some wholesalers down there that seem to actually give good deals still. However, they either go fast or get bid up pretty high. 

I've not been successful with wholesalers down there yet. I have however seen a Brrrr on the MLS (sold in less than 12 hours for less than I would have offered) as well as a small handful of good traditional rentals.

Good Luck.

@Andrew Sauthoff I think that you are looking at pretty good neighborhoods. I'd love to chat with you in person some time about what you're thinking/seeing and compare notes. Right now I'm actually under contract for a 4 plex in Belmont (NE Pueblo) which will be my first rental. 

Right now I don't spend a lot of "free time" in pueblo (when I am in town, I am on a mission), but if you're ever up for coming up to the Springs there is a meetup at third space that I regularly attend (along with @Daniel Haberkost). The next one is on this Tuesday. It's a pretty large meetup and a few of us there are focused on Pueblo and a lot of solid advice/services can be found there. 

Congratulations!

I've grown up here in Colorado Springs, and I have to say I'm a bit envious! That may not be the "newest and shiniest" part of the city, but I definitely think you got a great deal. 

Another thing that is not so easy to see in numbers is that since it's from family that were already renting it, you will have a good support system and an easier time running it. Seems like a great head start into your first rental.