While writing this guide, a great opportunity popped up to partner with an agent in Colorado Springs. Her name is Jenny Bayless. She’s an active investor in the Springs and a CPA turned investor-friendly Realtor. Long story short, we had just enough time to add a module on Colorado Springs to this guide to highlight some of the differences. If you’re interested in the Springs market, make sure you keep an eye on our podcast and sign up for our Colorado Springs Deals email list as Jenny and I will be doing a deep dive into the market!
This module covers:
- What’s the best location in Colorado Springs?
- Central and southeast Colorado Springs
- Westside and downtown
- Northern Colorado Springs
- Colorado Springs house hack example
- Order the book on Amazon or grab a copy from us
- Listen to episode “#218: UHHG – #15 House Hacking in Colorado Springs” on the Denver Real Estate Investing Podcast
- Watch the YouTube video (at the bottom.)
- Read this blog post, which is from the book.
If you want to connect with Jenny to ask her questions or explore the Colorado Springs market, just go to www.DenverInvestmentRealEstate.com/consult.
Here’s Jenny’s contribution:
Just an hour south of Denver, Colorado Springs presents an amazing opportunity to house hack your way to growing your wealth through rental properties. Colorado Springs is home to multiple military bases, large tech employers, and many beautiful natural landmarks such as Pike’s Peak and Garden of the Gods—all of which contribute to a healthy and strong economy. It is quickly becoming a city to watch as it consistently places high on many lists. For example, US News and World Report ranked Colorado Springs as the #1 Most Desirable Place to Live in 2018, and Realtor.com rated it as #5 Hottest Housing Markets in 2019. Not to mention—this might come as a surprise to the Denverites reading this—but Colorado Springs’ growth rate in home values was almost double that of Denver’s from 2019 to 2020, at 7%! Furthermore, Colorado Springs’ median sales price for single-family homes was $360,000 in June 2020, which many house hackers may find to be a more affordable entry point.
What’s the Best Location in Colorado Springs?
What is the best area to house hack in Colorado Springs? As the rest of this guide has echoed: it depends!
Colorado Springs offers the same house hacking options and strategies as Denver. Where in the city you should focus your search will depend on what your investment goals and preferences are. This section highlights house hacking in Colorado Springs, but there are plenty of other opportunities in the surrounding metro area such as Woodland Park, Peyton, Falcon, Monument, Fountain, etc. These areas are not covered in this guide. Additionally, it is important to work with your lender as discussed previously because the conforming loan limit is different for El Paso County than for Denver and surrounding counties.
The following suggestions are merely a starting point using generalized information for your house hacking journey in Colorado Springs. The strategies are not exclusive to the areas and options below, but they are a good place to begin your search. For instance, if a client wants to live in a certain part of town, we would suggest the most optimized house hack strategy based on location. Conversely, if the client had a particular strategy in mind, we’d share the areas of town with the most opportunity to successfully perform that house hack strategy.
Central and Southeast Colorado Springs
Generally speaking, the central and southeast regions, as well as some parts of the airport area of Colorado Springs, lend themselves best to the room by room strategy of house hacking. The reasons are two-fold: first, the price-to-rent ratio purely based on bedroom count is better than most other parts of Colorado Springs, and second, with the homes being older, there is usually room to better utilize space. I have noticed that, in this area of Colorado Springs, there are a lot of homes with basements or rooms that are not being efficiently utilized.
A simple yet effective strategy for increasing value and cash flow is the addition of a bedroom and bathroom. This method does not have to be complicated, or increase the footprint of the home through an addition or anything difficult and cost-prohibitive, rather a house hacker can simply look for poorly utilized existing space in a home. By closing off a room or converting a powder room into a full bath, you can greatly increase the value of the property as well as its rental potential for just a few thousand dollars. For example, I have one rental property in southeast Colorado Springs that was purchased as a 3 bed/1.5 bath for $165,000. The main reason I bought this property was because I saw in the basement there was a rec room tucked away next to a half bath (which was conveniently located next to the utility closet). By spending a few thousand dollars to convert the rec room into a bedroom (by adding a wall, door and closet—it already had an egress window) and the half bath into a three-quarter, the home was re-appraised at $240,000 about one year after purchase. I am not saying that by adding a bed and a bath you will realize $75,000 in added value, but this is an option to explore, and your real estate agent can help you determine if there is room in the comps to utilize this method to increase value.
By employing this strategy, the house hacker has a lot of options! They can stick to the room by room method and rent out the new additional bedroom for supplemental monthly income. This also means that, once the house hacker moves out of the property, they can command higher rents for a 4-bed vs. a 3-bed, even if they rent by the house and not by the room. Also, the house hacker could potentially use one of the return on equity analyses discussed in this guide to potentially re-deploy the increased equity created.
Westside and Downtown
The Westside, or more specifically, Old Colorado City and parts of downtown/Memorial Park areas would best lend themselves to multi-family and Airbnb house hacking options. In this part of town, you are more likely to find R-2 or R-4 zoning. What this means is that certain properties are zoned for duplex or multi-family units (R-2 allows for 2 units), which allows the house hacker to legally subdivide existing properties, or to live in one unit and rent the other unit(s) of a property that has already been subdivided.
Not to mention, this part of town is generally a tourism hot spot as it is just a quick drive to Pike’s Peak, Garden of the Gods, and local shops and restaurants. This can potentially lend itself to an Airbnb option while living in the property. It is important to understand that Colorado Springs recently underwent many legislative changes related to short-term rental housing as of late 2019, and could further evolve at any time. What I always offer as a suggestion to investors is to underwrite a deal NOT using Airbnb as a revenue source (only look at long-term rental rates), but if the laws allow for it, it is a good option to offer the unit as an Airbnb if currently authorized. In any event, it is best to contact your attorney to fully understand the short-term rental laws.
Northern Colorado Springs
If you drive down the Powers Corridor, you will see new construction homes at every turn. This part of town is not only very close to Peterson Air Force Base and many tech employers, but it is quickly becoming an alternative location to live for those who commute to Denver but want a more affordable cost of living and purchase price of homes. Not to mention, in general, Colorado Springs is seeing a higher appreciation rate than Denver this past year.
I mentioned previously that the room by room strategy works better in central and southeast Colorado Springs in comparison to northern Colorado Springs due to the price-to-rent ratio and ability to force equity by adding bedrooms. However, this does not mean that northern Colorado Springs does not allow for a house hack opportunity in general. The room by room strategy would still allow the house hacker to offset their mortgage and living expenses. An Additional benefit to purchasing a home in this area is that the homes tend to be new builds or only a few years old, which would mean that the investor could assume lower maintenance costs in the initial years of owning the home. Further, the houses tend to be larger in this area. If the investor values more personal space (such as larger bedrooms) but still wants to optimize revenue by renting by the room, these locations could offer this balance. Upon moving out of the home, the investor may typically realize break-even cash flow if converted to a single-family home rental, but as this guide highlights, there are other factors (tax benefits, appreciation, debt paydown) that will contribute towards a positive return on investment.
These houses also would allow for a great opportunity for a mother-in-law suite house hack. The houses are typically large in size (3,000 sq. ft+), which would allow a house hacker more personal space on the upper level of the house while possibly outfitting the basement to utilize a multigenerational house hack.
Colorado Springs House Hack Example
Let’s walk through an example house hack located in central Colorado Springs near downtown. This example property was found on the Pike’s Peak MLS (PPMLS) in Q3 of 2020, and the property already has a kitchenette and second entrance, lending itself to being an easy conversion into a second living space. It is zoned appropriately at R-4 (meaning multi-family residential is authorized) to allow for a two-family set-up. In this case, we have budgeted for $10,000 to properly convert the home from a 3/2, to a 2/1 and 1/1 duplex.
Let’s also assume the house hacker in this case does not wish to fully optimize their revenue and would prefer to live in the larger unit of this property for personal comfort and preference. While living in the property, the house hacker would have about $900 in rent from the smaller unit, plus a portion of utilities to go towards offsetting their mortgage and expenses. At the time this guide was written, it is reasonable to assume a 3.00% interest rate on an owner-occupied property, so we are looking at a mortgage principal and interest payment of $1,262 and estimated escrow for insurance and taxes of $220 per month. Excluding any additional expenses (such as utilities and landscaping) and repairs, our house hacker is now living for just shy of $600 a month, while owning a $315,000+ asset. Not bad! To optimize even further, the house hacker in this case could very easily rent the second bedroom in their 2/1 unit for $500 a month, reducing their total portion of the mortgage to about $100.
Let’s see what the house hacker could realize after Nomading™ out of the property:
At the time of writing this guide, the rents budgeted are conservative, considering the proximity to downtown. Each unit could easily get $100-150 more a month than budgeted. Further, we assumed the house hacker in this case doesn’t mind managing the property themselves. For reference, Colorado Springs has recently seen a 7% annual appreciation rate on home values and a 4% rent appreciation rate, in which we have conservatively underwritten 5% and 3% respectively.
This property is ideal for a house-hack-to-Nomad™opportunity. With only a 5% down conventional loan, there would also be some upfront costs to partition off the separate living areas and to add to the already existing kitchenette. Further, we assessed an 8% yearly repair/maintenance budget for this property, which is very conservative since the home has recently been fully remodeled. Assuming a self-managed approach both during the house hack and upon Nomading™, this is a solid deal.