In this article, I want to walk you through a purchase I made in 2017 here in Denver, Colo. I’ll show you how it fits with my overall plan, and I’ll explain how I found this (off-market) deal, how I analyzed it, and how I financed it. Then, I’ll walk you through the most important qualitative determinations I had to make.
My Overall Real Estate Plan
My major real estate goal is to purchase one property at increasing scale every 12-18 months within the city limits of Denver. I believe that after 7-10 years of executing this strategy effectively, I will be able to accumulate a portfolio valued somewhere between $3-5MM with $1-2MM in equity. Done correctly, this should give me plenty of surplus cash flow to live an enjoyable life and set the stage for the accumulation of truly significant, abundant wealth down the line if I should choose to pursue that. I desire to be able to achieve this result on the side, as a “hobby business”—not truly dedicating full-time effort. But I also constantly self-educate and network, and I run my operation professionally on that part-time effort.
I do not limit myself to wealth creation solely in Denver real estate, and while pursuing this strategy, I also invest in outside investments like stocks (index funds) and crowdfunding—and I may try my hand at a turnkey property or two in the near future while preparing for my next Denver purchase.
I finance my properties the old-school way—I save aggressively. My goal for the next 12-18 months is to try to put myself in position to purchase a $300,000-$500,000 property with 25% down, to purchase a property double that size with a partner, or to house hack.
I am leaning towards another house hack next year. If I do house hack, I will be able to put down significantly less than 25% and thus may get more aggressive with investments out of state or in other asset classes, as I can deploy my liquidity in alternative investments.
The point of telling you this is to show you how this purchase fits in with my overall plan and was not some random purchase of a great deal. This is part of an intentional process that I am following.
Setting Up to Buy
Prior to purchasing this deal, I accumulated over $100,000 in investable after-tax liquidity (read: cash savings, accumulated after-tax—BUT I kept that cash mostly invested in index funds, which I then liquidated prior to the purchase). I had a several hundred thousand dollar net worth and a savings rate of over 70%. I also went in on this deal with a 50/50 partner. Between the two of us, we were fairly conservatively capitalized to purchase a property in the $400,000-$600,000 range with a 25% down payment. We could have purchased a much larger property. This accumulation of cash took about three years of hard work and was an amalgamation of my other real estate investments, income from my job, and returns from the stock market. I embrace a fairly hardcore approach to frugality through house hacking and biking to work, and I earn a good income.
The point is: I believe I was investing from a position of financial strength. This property will not make or break my financial position, and I do not depend on it performing to continue building wealth or to support my lifestyle.
Towards the end of April of 2017, I began the search for this property in earnest. I have my real estate license, so I scoured the MLS to look at all recent transactions. I also began to follow the progress of relevant property listings that were of the type that I was interested in acquiring.
Furthermore, I began meeting with dozens of individuals over a 3-month period. These folks were investors and real estate professionals focused on the Denver market. Each time, I would try to add value somehow by helping them with their strategy, connecting them with someone in my network, or simply talking through their situation.
Related: Case Study: How I Made $40,000 on My Recent BRRRR Real Estate Investment
And each time, I would mention that I was in the market for cash-flowing real estate deals within the city limits of Denver.
After three months of active searching, I got an email from an agent that I had met with as part of this process. I had a previous relationship with this agent, as he worked at the same brokerage I had for a year or so.
The funny thing about this email is that I had just gotten back from a 4-day vacation with my girlfriend to Cancun, Mexico. I took the vacation as a reward for the grueling (yet totally rewarding) process of writing a book (Set for Life). I must have landed at around 4:30 p.m., gotten home at around 5:30 p.m., and then seen the email.
The email read as follows:
Another opportunity just came across my radar. 4-Plex in S Barnum, maybe a bit farther south than you imagined but a prime investment! $339K
Gross rent per month is $3,125 ($800 x 3 + $725). The $725 per month tenant has been there 14 years I believe and always pays so he hasn’t been as aggressive with her rent increases.
Water: $200 avg. (can be billed back to tenants on future leases)
Taxes and insurance: $325
Monthly NOI = $2,520 – $200 for miscellaneous expenses = $2,320 per month x 12 = Annual NOI =$27,840
Cap Rate of 8.2% and annual cash on cash ROI of 11.9%
These are from the actual financials from last year and actual rent rolls. You will get all the official docs, but I don’t have them yet. The owner just took these off his profit and loss.
Roof is 4-5 years old. Windows were replaced in last couple years. All units other than the 14-year-tenant unit have been turned (updated) in the last 3 years—one was just newly updated this month. The appliances have all been replaced over the years.
Let me know your thoughts/questions!
Goes on the market on Wednesday (tomorrow)! No showings without an accepted contract.
As soon as I saw this email, I knew that this was a prime prospect. I knew that based on my months of looking and based on its location that I was unlikely to find a better deal in Denver anytime soon.
As tired as I was from traveling (yes, I know—poor me tired from my vacation to Mexico, right?), I went immediately to drive past the property. It’s about 7 minutes from where I live.
This was not my top location in Denver, but the numbers on this property just made more sense than anything I’d looked at previously. The structure from the outside seemed reasonably well maintained, with no immediate red flags. I conferred with my partner, and we decided to move forward with a full-price offer. We wanted to scoop the deal up before it hit the market, and in my estimation, would likely receive multiple offers.
I called up the agent that sent me that email, thanked him for sending me the deal (and several other solid off-market properties, as well, prior to and following this one!), and asked if he would represent me on the transaction (even though I have my license) as a thank you for bringing me the deal. We submitted an offer by 9:00 p.m. that night.
Note that to an outsider, it looks like I made a nearly instantaneous decision to purchase this property. That is absolutely not the case. I’d looked at literally hundreds of deals over the preceding three years and intensively analyzed dozens of deals over the preceding three months! I had equipped myself to know a good deal when I saw one and to move forward decisively.
I ran the numbers through the BiggerPockets Rental Property Calculator in just a few minutes and came up with a model similar to this one. Because the deal has been closed, we have the privilege of using actual numbers in a couple of places, and I round in a few other instances.
Here’s the analysis:
Now, I know that many of you will look at this and say, “A 5.4% CoC (cash-on-cash) ROI (return on investment)!?! That’s crazy!”
And that’s probably coming from two perspectives:
1. The Denver Perspective
The Denver locals are thinking, “How the hell do you produce a 5.4% CoC ROI within the city limits of Denver—AFTER including “expenses” like property management, vacancy, and CapEx? That’s crazy high!”
2. The “Other” Perspective
And of course, investors from cash flow markets are thinking, “What a joke. I produce 2-3x that CoC ROI in my sleep in my local market! That return is crazy low!”
Perhaps because of my position here at BiggerPockets and the resulting absorption of lots of information, I seek a relatively high CoC return, but within my home market. I want this so that I can deploy my continually increasing knowledge to help increase returns through direct management. I chose to offer on this property for two reasons, in spite of what at first glance appears to be a low CoC ROI.
First, because of the property’s proximity to my personal residence (7 minutes), I felt that I could conveniently self-manage and thereby inflate the returns of this investment. As I self-manage, my effort eliminates that $320 expense, and property management thus far has not taken more than an hour per month, after the initial stabilization. I don’t make $320 per hour through other means—yet. Without the property management expense, my CoC ROI inflates to 9.1%.
Second, I believed that I could raise rents to $900+ and also charge a utility fee of $75 per unit over the next few years, based on the location and market rates.
The Inspection and Negotiation
After getting the property under contract, we ran an inspection. While the condition of the property was pretty good overall, with some minor structural things that we need to keep an eye on going forward, it became clear almost immediately that the property had some management issues.
- First, I learned that a murder had taken place on the property in one of the units. Lesson: Always Google the address of the property as part of the analysis. Whoops! While the details are still murky, it was rumored that the violence was gang-related. That unit had since been remodeled and re-rented prior to my offer.
- Second, I learned some unknown person had been living in the crawlspace.
- Third, I learned that one of the units was late on rent and was going through eviction.
I was certainly uneasy about all of this, but I rationalized that I could make it through this and that the reason I was getting this property off-market, relatively cheap was because of these management issues.
I reasoned that I could ensure in my screening that all future renters had verifiable income, excellent credit, and no criminal or eviction history—this would significantly lessen the probability of renting to a gang member who might become involved in violence. I further reasoned that we could lock the crawlspace to avoid having drifters living down there.
My big concern wasn’t the first two things. It was actually the ongoing eviction.
I did not want to close on a property with tenants who were about to be evicted. Based on my visual inspection of the unit, it was clear that it would need a moderate rehab with at least new appliances, paint, carpet, windows, etc. to get it rent-ready. I estimated about $5,000 in repairs.
That rehab didn’t scare me. What I was more concerned about were the piles and piles of stuff both inside the unit and out. I was not interested in the kind of work involved in removing what I imagined to be at least one full dumpster worth of tenants’ personal property, should they leave the (what to me looked like) junk after vacating.
So, I got on the phone directly with the seller, and we agreed that we would not close until the eviction was completed and the tenants’ personal property removed. We also agreed to a couple of minor concessions involving a water heater and some plumbing.
After closing, the tenants in the end unit had vacated, and my hypothesis was confirmed—the unit needed a decent amount of work to get it rent-ready. We immediately got to work, hired a contractor to completely repaint cabinets, re-carpet, install a bathroom vanity, fix various plumbing issues, replace two windows, and complete a couple of other minor tasks. I put in a new fridge, cleaned the place up, and then advertised it for rent.
After about $6,500 in rehab costs (a bit higher than my estimate), I was able to market this fourth unit for rent, and I have successfully placed a happy tenant who meets my criteria in there at a rate of $925 per month.
I’ve had a couple of issues with one of the inherited tenants, and I am looking forward to moving all of the tenants that occupy the property to my (in my opinion, significantly better) lease over the next 8-10 months. I expect to give each tenant plenty of notice and gradually, fairly, increase the rents over a period of two years to the $925/month rate of the most recently signed tenant. I also plan with future new tenants to charge a $75 utility fee in addition to the $925 rent, but having not done that, I am not factoring that into my cash flow expectations for the immediate future.
At that time, should I successfully execute, I will see a significantly increased cash-on-cash ROI, with tenants that are all on my lease, living happily. I plan to do my part and make sure that their needs are taken care of and they have a nice place to live peaceably.
This property is a solid single for me—and a nice addition to my portfolio as part of my plan. The big takeaways are that I am producing significant cash flow in excess of my expenses and that I believe that I can add value with proper management, convenient to where I live.
I prepared myself thoroughly to spot a good deal, knew exactly what I was looking for, and networked extensively to increase my odds of getting a solid deal. I had self-educated enough and experienced enough to confidently take on what was sure to be a management challenge. I also bought conservatively; this purchase by no means stretched me to my financial limits.
It’s still too early to tell if this property will perform as expected, but I am pleased with the purchase thus far, and I am grateful to my wonderful agent for bringing me not just this deal, but several off-market deals that approached my description of the ideal property.
What do YOU think of this deal? How does it compare to some of the multifamily investments you’ve analyzed or purchased in your market?
Leave your comments below!