Closed on a 6 unit yesterday

19 Replies

Stats on the property. 6 units in the hot Denver Colorado Market. Purchase price $515,000. I added $15,000 onto the price to pay myself a commission. I dropped the ball on financing and didn't start rounding up money soon enough. I was turned down by two banks and two other banks had too long a lead time for the appraisal by the time I got them involved. My mistake was that I started with a mortgage broker who is a friend who said he could get it done but he was not experienced enough in multifamily and didn't know enough to help me along. That was three months ago. I ended up having to use a hard money lender and used 3 other properties as collateral. When I closed I got the Sept rent and Security deposits as well as the commission check so I have some funds to do the fix up. Right now I'm all in at about $545,000. 

The place is rented section 8 except for 1 unit which has a tenant that pays their own way. Rents are less than $800 per month for 2 bedroom units and the landlord pays all the heat and the electric on two units. In that area there only one or two 2bd units renting for less than $1,200 per month in the adjacent area on Craig's List. Granted the place will need some sprucing up to get market rent but there is a lot of room there. It's the worst looking property in the area. It's a great location. 3 blocks to light rail. 5 blocks to Sloans Lake. One block to the Lakewood Gulch trail which takes you to downtown 2 miles away.

The plan is to refi in a year with conventional financing and take out the hard money loan. 

I found this property through my direct mail marketing.

The bonus with this property is, that the 6 units sit on 15,000 square feet of land. I am listing the land for sale at $1,000,000 today. It's probably a bit on the high side but if I don't sell then I'll have a nice rental property. If I sell then I'll have a nice chunk of change to figure out what to do with. I think I could reasonably fire sell the land for $650,000 if I wanted to. I was able to secure the hard money loan based on the cross collateralization of multiple units with equity.

Now comes the hard part. Making it all happen. I'll try and keep this post updated as I make progress.

Saturday I am going to the property to let the tenants know the new rules for paying rent. One tenant is 2 weeks behind. The current landlord makes several trips per month to the property to collect rent. That's all going to end one way or another. There is a bank about 4 blocks away that I am going to open an account at. They will be making their rent deposits there. The rest of the rent will come via Section 8 which I plan on phasing out over the next few months when the leases expire.

Planned upgrades include exterior gutter replacement. Repair/lifting of a sagging concrete porch and paint. Remove all of the unused TV dishes on the roof. There are at least 9 dishes on the roof for 6 units. Trim out some bad trees and spruce up the landscaping. Building fences for the units so they can have pets (I love pet fees and pet rent). Get rid of the garbage collection eye sore. Light rehab of each unit on turn-over to increase rents about $200 per month ($1,000 per month new rent). Back charge tenants for heat and hot water which should save about $300 per month on an average. Charge tenants a flat rate for water to recover those costs. The improvements will be paid for with the RE commission check and the extra cashflow from increased rents and lowered expenses.

There is some risk that the money I spend on fixing the place up will be wasted if I sell the land but at the same time I don't want to have only one plan for the property. If I sell for my asking price it's a home run and the money I spent on rehab will be gone but it is a relatively small percentage of the overall profit and it gives me options. I always like to have multiple options.

Nicely done Bill. A little complicated deal, but you've got some nice options set up. I may call you next time I'm down that way to check this place out.

Congrats on the deal @Bill S. !! 

Are you saying the 15,000 sq ft could go for $1MM with or without the 6-plex on it? Wow!

And what an interesting predicament you've found yourself in: On the one hand you can hold the asset long-term as the land continues to appreciate, all the while collecting a decent return each year from the cash flow generated from the rental revenue. On the other hand, you can cash out now and re-invest in a property (or properties) with potentially greater returns.

Not a bad problem to have.

Why not hold off a month on the rehab and see if you get an offer close to asking price?

@Travis Sperr thanks for your help on this. Your knowledge of the area and knowing about your deal helped reinforce my own convictions to move this forward.

@Matthew Arnold as I said in my post $1M might be a bit optimistic at this point but I don't think I'm far off. Time will tell.

Hi Bill, 

Could you take me through your numbers?  I am not sure I follow.

Rent = 800 x 6 = 4,800.  They are section 8 and increasing rents can be difficult.

P& I for the loan would cost you 4782.77 @ 10%.  10% is really cheap for a hard money loan.

You have not covered: tax, insurance, up keep,  vacancy, and you said you will cover some utilities.

If I am looking at this correctly, you should fire sale the property at $650 and get out.  You could stand to net $75k after transaction costs.

@Lesley Resnick yes the numbers are horrible with my hard money loan. This is the classic BRRR approach. Buy, Rehab, Rent Refinance. Once I get past the hold your nose time of the first year that is when it looks ok. Actually pretty good for here. My plan is to move away from Section 8. These tenants are very high maintenance and are paying well below fair market rent and it is in the path of progress. Market rents is $1,100 per unit per month so total gross potential income is $6,600 per month ($79,200 per year). Move all expenses to tenants for water, heat, and garbage. Vacancy rate would be about 2.5% for this property ($2,000 annually). I actually manage most of my units at or near 0% by careful tenant selection, showing units while occupied and getting new tenants to move in on the heals of those that are leaving. Taxes and insurance run about $850 per month ($10,100 per year). Insurance is a bit high so I'm going to be shopping that to see if I can't save some money there. Figuring 25% of gross rents for maintenance, repairs and cap ex this would leave and annual expense of $19,800. Net annual rent I am expecting to be $47,000. This translates to a cap rate of about 8.5% which is about twice the local going cap rate in this part of the City. Rents have also been going up so there is potential upside on that front as well.

As I said, my plan is to refi out of the hard money once I get the property headed in the right direction. Locally I can get 5.25% amortized for 25 years with a 10 year balloon. That makes the loan payment about $3,300 per month. I need to season the property for about a year in order to do that. There is definitely risk there if the interest rate market turns or rents tank but I am ok with that risk.

I will definitely be feeding it the first year but I did take some cash out of the deal in order to fund some of those challenges. 

It's not a great deal when measured against other Bigger Pockets deals but it's MY deal and I'm happy with it. I think the biggest return will be the cash on cash return. If I am able to pull it off I should own the property with less than $25k of my own money in it. I think that is what makes me smile the most.

Bill, I think it's great. Have you considered just blowing the land right out to own the 6 unit free and clear? Forget the refinance. You literally are in a position where you can own a half million dollar piece of property that essentially you bought with someone else's money, you won't have to pay a loan, and it's going to pay you every month. Out of the park home run. 

Interesting deal for sure.  Anyone else who is based in Denver that can confirm that the OP can actually get 650k-1m for the piece of land?

If he can what a deal!

Originally posted by @Michael Noto :

Interesting deal for sure.  Anyone else who is based in Denver that can confirm that the OP can actually get 650k-1m for the piece of land?

 There is a 4 plex on a smaller lot that will move for about $700k in that area. I sold a triplex in that area for $500k, but that was 2 years ago. The same place would be quite a bit higher right now. Builders are going crazy and buying because these mcmansion townhomes are selling before construction is completed. He will do just fine. I would list it at $1mln to see if someone bites.

Nice work Bill!

Good Job @Bill S. , you used a lot of skills and put in a lot of work to get this deal done.  It took time to know the market, hard work and ingenuity to get it financed, and foresight to see the potential, and guts to pull the trigger.  Very impressive.

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