Can you get this to CF?

27 Replies

Ran across this deal on the MLS. Side by side 2bd/1ba, B location in West/Central Denver, listed at $450K. I did a quick analysis and cannot even get it to CF. I ran it as owner occupied 3.5% down financing, and assumed each side could rent for $1,200 so $2,400 total. Even assuming an aggressive 28% total expenses (no Management Fee) I can barely get it to break even after P+I, let alone return any meaningful Cash on Cash.

On top of this, while functional looking, the interior could use an update.  The exterior looks a little sadder, and the roof looks like its well into its useful life.

Does anyone care to add their $0.02? Do you have better assumptions?

@Mitch H.

I'm finding similar sub-par deals here in Denver. At this point, I'm 98% sure I'm taking my $0.02 elsewhere. 

I'm reserving the remaining 2% just in case a 2%er falls in my lap, but I'm not going to wait for it.

Yes and it'll likely sell. At $225 per side each unit would be priced at the bottom of the market. You might get $1,400 per unit for rent. There is a garage. I can't tell if it has a private yard or not. If each unit had it's own yard then it might be do able to rent each at $1,400. One bed units in the area are pushing $900 per month so a two bed so you could have a roommate is doable at $1,400. Rents are crazy as well and it beats the apartment buildings for living.

Medium rre 1to1 small sizeBill S., Reliant Real Estate, Inc. | 720 207‑8190

Take a look at duplexes in good parts of California and tell me about making any sense. I have bought and sold 2, 3 and 6 unit properties in California and made great money, but I was betting on appreciation, an apparent BP no no.

You're right, it won't cash flow. It's not you, it's the purchase price, and therefore the market. Denver is a very hard place to get to cash flow. I live in LA and same issue here (although even worse). I've always bought properties out-of-state for that reason. I know more Denver investors than LA investors stick to Denver still, versus buying elsewhere, but look for something that actually will cash flow. Or at least better than this one (which is major negative)

Medium hipsterinvestment logo black300dpiAli Boone, Hipster Investments | [email protected] | 310‑957‑2101 | https://goo.gl/x52ZKJ | CA Agent # 01911993

The possible move on this type is getting your foot in the door and getting what translates to discounted rent maybe if you lived in one side. My guess is if you could vrbo that otherside, like they do in LA, you might cash flow IDK. Keep in mind CF is one element to REI. 3% rent appreciation and 5% equity appreciation 10 years later puts you nearer 1 million in value from 450k than almost any straight up cash flow market ever could. That is why a real estate investor will pay 450k for that by next week I imagine.

I am not saying buy that one but keep your eyes out for that Denver deal. You are living in a top 5 US market for real estate investing. That is a good thing not a bad one. If you want just cash flow, check Pueblo, CO as you could find one by Friday but there is a reason for that.

Good luck with your search!

Thanks everyone for confirming my sanity and someone elses insanity.  I want to meet the guy who ends up on the other side of this deal.

In reality Im not that cynical, just doesn't fit my criteria.

Originally posted by @Mitch H. :

Thanks everyone for confirming my sanity and someone elses insanity.  I want to meet the guy who ends up on the other side of this deal.

In reality Im not that cynical, just doesn't fit my criteria.

 Yes, definitely follow what happens to this over the next 12 to 48 months. Does this guy break even in cash flow and gain 200k equity to what amounts to 4k a month gain....or does it only go up 50k for a 1k a month gain or the shiat hits the fan and its worth 350k for a 2k a month loss? Keep us posted:)

Originally posted by @Chuck W. :

Take a look at duplexes in good parts of California and tell me about making any sense. I have bought and sold 2, 3 and 6 unit properties in California and made great money, but I was betting on appreciation, an apparent BP no no.

Chuck that is awesome. I get what your saying.

Was there a long history of appreciation in those good parts already? Did it feel like you were betting or investing based on supply and demand fundamentals? 

In my view, just because this property won't cashflow doesn't make it a bad deal, or even a bad investment.  This is NOT the midwest, and if you don't at least acknowledge the fact that Denver is a growing city, you will miss opportunity.  

I'll repeat; Unlike rust belt cities, Denver is growing.  In fact, it's BOOMING.  Go walk around and talk to folks.  It's amazing how many people are moving here after college or from each of the other 50 states.  They are moving here in the hundreds of thousands - they are young, and they are educated.  The market is taking this into account and responding with enormous buildings going up all over town, rising rents, and rising prices.  Hell, the government is even responding and pouring billions and billions into infrastructure projects like light rails and new parks.

This particular property is sandwiched between two excellent parks, is just a few blocks from one of the largest and best maintained highways in the country, and is less than 5 miles from the heart of one of the fastest growing cities in the country.  

Even if the Denver market is absurd right now, it seems like a pretty safe bet that land in that particular neighborhood will at worst hold value, and will most likely continue to increase in value at impressive rates over the next few years as Denver continues to boom. Do you think that folks will want to live there five years from now? I do. 

Also - keep in mind that Denver has limited room to grow - at least going West.  It's pretty expensive to live in the mountains, and as much as people like to talk about how much they love mountains, remarkably few people actually live there.  Land West of Denver, especially within a few miles of downtown, is probably a decent look.  

I'm not saying that I would buy this property personally.  But I am saying that I am happy to consider low cashflow properties in awesome parts of town, ESPECIALLY if I plan to live there as a house hacker.  

It will be interesting to see who's laughing in 5 years when this property sells.

See number 2 below. I think most people on BP would suggest you not accept negative cashflow in the hopes of future appreciation of rents and/or values. Especially when you can buy properties elsewhere that start with positive cashflow AND built-in equity. I'm not suggesting Denver property values won't climb, but it always seems the value of investments can't ever fall - until they do. Investing is also about risk management, that's the other side of the coin that many investors don't want to turn over.

speculation

?speky??l?SH(?)n/

noun


  1. 1. the forming of a theory or conjecture without firm evidence.

    "there has been widespread speculation that he plans to quit"

  2. 2. investment in stocks, property, or other ventures in the hope of gain but with the risk of loss.

    "the company's move into property speculation"

See number 2 below. I think most people on BP would suggest you not accept negative cashflow in the hopes of future appreciation of rents and/or values. Especially when you can buy properties elsewhere that start with positive cashflow AND built-in equity. I'm not suggesting Denver property values won't climb, but it always seems the value of investments can't ever fall - until they do. Investing is also about risk management, that's the other side of the coin that many investors don't want to turn over.

speculation

?speky??l?SH(?)n/

noun


  1. 1.

    the forming of a theory or conjecture without firm evidence.

    "there has been widespread speculation that he plans to quit"

  2. 2.

    investment in stocks, property, or other ventures in the hope of gain but with the risk of loss.

    "the company's move into property speculation"

See number 2 below. I think most people on BP would suggest you not accept negative cashflow in the hopes of future appreciation of rents and/or values. Especially when you can buy properties elsewhere that start with positive cashflow AND built-in equity. I'm not suggesting Denver property values won't climb, but it always seems the value of investments can't ever fall - until they do. Investing is also about risk management, that's the other side of the coin that many investors don't want to turn over.

speculation

noun

  1. 1.

    the forming of a theory or conjecture without firm evidence.

    "there has been widespread speculation that he plans to quit"

  2. 2.

    investment in stocks, property, or other ventures in the hope of gain but with the risk of loss.

    "the company's move into property speculation"

Uhg sorry for the 3-peat. BP page load errors I swear!  :-)

Again along the lines of @Scott Trench 's statements. I think the person buying that property will not look at it from a cash flow perspective but the fact that they get to own $450K of RE for the price of owning $225K property. Live in one side and rent the other and their tenant is paying for half of their "investment". Just like buying a home where it's not really an investment but a place to live that tends to go up in value.

Medium rre 1to1 small sizeBill S., Reliant Real Estate, Inc. | 720 207‑8190

The property in question:

At $299 per square foot that duplex seller looks to be priced near the top end of what is available in that market. As some others have pointed out, I believe you could achieve slightly more than $1,200 per side, possibly up to $1,400 with some surface interior updates. My quick calcs show this property essentially breaking even each month with a 6% down payment for owner occupied. With a larger 20% down payment an investor might be slightly positive on the CF but yield a very small ROI (4%). It does seem the vacancy rate in this area would be very low given the population swelling in Denver.

It will be interesting to see what the final sales price of the property is. I imagine it will sell to an owner occupied buyer who is looking to offset the cost of living as compared to buying a SFR, or even renting an apartment in that area, as opposed to trying to completely cover their mortgage or Cash flowing from afar.

My Philosophy:

My personal philosophy is to buy-and-hold properties which offer handsome monthly cash flow and are self sufficient through various market conditions, repair needs, and potential vacancies. When a property passes that analysis gauntlet and is purchased it will most likely experience additional un-accounted for benefits over time such as appreciation, rent increases, principle pay down, tax benefits. This is my favorite formula.

On the contrary, if a property costs the investor money each month to hold (negative CF), and costs even more money when things go wrong (repairs, vacancies, market downturn) it seems there is a limit to the size of the portfolio one can amass, while covering the costs with earned-income. I do realize that many people make boat loads of money buying properties based on (likely well analyzed) ‘speculation’ about equity growth. However, I feel that falls in a different risk category, similar to trading stocks or stock options. Position sizing is very important with that type of investing. Obviously the system’s wins must offset the losses AND the system must be able to survive a losing streak without running out of money. If an investor creates a portfolio of four $450,000 duplexes that CF negative $200 a month on a good month and negative $1,000 on a bad month, how many bad months in a row can one hold the properties? Can the investor make it 10 years down the road, to a point when the properties are worth $1,000,000 each to realize those long awaited gains?

Overall, I find it pretty cool that various folks can approach RE investing from different angles such as Cash Flow, Flipping, long-term equity, etc which all require viewing the property through a tailored lens. Through these varied methods, many folks are building impressive portfolios and personal net worth which is awesome! Just need to find a system that works for you and run with it!

Originally posted by @Scott Trench :

In my view, just because this property won't cashflow doesn't make it a bad deal, or even a bad investment.  This is NOT the midwest, and if you don't at least acknowledge the fact that Denver is a growing city, you will miss opportunity.  

Scott, I am just as bullish on the Denver market as you are, I think the fundamentals are good.  Where it might seem and be crazy for a few more years, I still think the mid term prospects are positive.  However,  like @Bill Bockwoldt notes, there is risk in "investing" in an economic boom, where that investment being a good one is highly correlated to the economy.

One of my general concerns with Denver is rent pricing. There is a lot of product coming on the market now and in the near future, and a deal that is hard to cash flow at inflated rents could wind up costing a lot per month if/when we reach an overbuilt scenario.  

Some really good comments here about a market that has gotten very interesting very quickly.

@Mitch H. I think you make a great point about rents potentially being a little inflated in the Denver area currently. As more and more apartments go up near downtown, rents may drop in the surrounding areas where a lot of young professionals are currently looking to rent. 

Are you looking to purchase this as an owner occupier? If so, I would suggest you check out an article by @Scott Trench that was featured in Time's Money Magazine http://time.com/author/scott-trench-biggerpockets/ and take a few of his points into consideration. Just because it won't cashflow doesn't mean it is not a better option than renting if that is what you are doing currently. It could give you valuable experience while you wait for the market in Denver to cool down a little.

Walker Hinshaw | [email protected]

@Walker Hinshaw and @Mitch H. have you looked at the price points of all those new apartments near downtown Denver? They are all priced over $2/ft^2 (rent). Not many of those units have a yard or a private/semi private garage to store gear in so I don't think the buyer will have a lot to worry about from the units currently being constructed. I would be more concerned if I was owner in one of those new complexes. They are all targeting the same class of renter which is incidentally the top of the food chain and one of the smaller demographics . Personally I don't foresee a lot of competition for the renter that would rent one half of that duplex. I own property near that property and the biggest cause for turnover is the tenants buying their own place not the price of renting somewhere else. My tenants wouldn't get caught dead in a big box apartment building. The threat comes when the age of units (7 years) passes the window for the construction defects clause or they change the law. They will then be sold as condos. At that point, it may be cheaper to buy then rent. You can get a nice sized mortgage with a $1,400 per month payment. That IMO is the greatest threat to rent prices in and around down town.

Medium rre 1to1 small sizeBill S., Reliant Real Estate, Inc. | 720 207‑8190

I support all those that say Don't Rely on Appreciation. Denver is on fire and you may indeed make a great return down the line for appreciation BUT that is a risky investment strategy, especially if you are just starting out. I'm my feasibility analysis, I never include appreciation. The investment has to work day one and if you do get an appreciation factor, wonderful! 

Also wanted to mention- Denver is experiencing great growth and I do think it will continue to appreciate over the next 2-3 years. A colleague of mine purchased a home in the Highlands area in 2013 and just sold for a $100k profit. Days on market is ridiculously low. Denver's population has increased 124+% since 2000. That is all good news for appreciation but developers are bringing housing to the market in huge numbers so at some point 

1) inventory will catch up with demand

2) prices will soften with the increased inventory

If I was going to buy in Denver and it was even possible, my strategy would be to source an investment at least 20% below market value with the intention to sell in short term. Easily said but very hard in a market like this. 

@Bill S. Thanks for the insight. I have heard that Denver has defect builder laws that have really prevented condos from going up. Are you saying that after 7 years those laws are no longer applicable and the owners of those apartment buildings can turn their units into condos without the same risks as building and selling units as condos from day 1?

Walker Hinshaw | [email protected]

@Andrew Wydra I personally think the time line is much longer than 2-3 years and I have a couple of thoughts as to why.

1). It takes more than 2-3 years to deliver volumes of new homes. Large tracts take at least a year to get through the permitting process and then the infrastructure must be built. Typically the large tracts of land are schedule in 20 plus year spans. My contacts in the building community tell me that no one is going for large now. Everyone is taking small bites and mostly infill. There are no new Highlands Ranches nor Green Valley Ranches on the slate that I'm aware of. Water is in short supply and you must provide water if you are going to develop a large chunk of land.

2). Everyone wants to be near downtown. While that might shift, it won't shift in 2-3 years. 

3) Everyone wants to be near downtown and there is a very limited supply of suitable property and none of it is cheap. On top of that it must be assembled, permitted and built in very small chunks (compared to the acres and acres in the burbs) which is time consuming. 

Now I realize there are other factors at play. Perhaps the economic environment will change making home loans much less affordable. That would impact things. 

I think that the bottom line is, growth pretty much trumps all. Not sure what would slow that train down but I doubt it will stop over night. 

Medium rre 1to1 small sizeBill S., Reliant Real Estate, Inc. | 720 207‑8190

Originally posted by @Bill S. :

@Andrew Wydra I personally think the time line is much longer than 2-3 years and I have a couple of thoughts as to why.

1). It takes more than 2-3 years to deliver volumes of new homes. Large tracts take at least a year to get through the permitting process and then the infrastructure must be built. Typically the large tracts of land are schedule in 20 plus year spans. My contacts in the building community tell me that no one is going for large now. Everyone is taking small bites and mostly infill. There are no new Highlands Ranches nor Green Valley Ranches on the slate that I'm aware of. Water is in short supply and you must provide water if you are going to develop a large chunk of land.

2). Everyone wants to be near downtown. While that might shift, it won't shift in 2-3 years. 

3) Everyone wants to be near downtown and there is a very limited supply of suitable property and none of it is cheap. On top of that it must be assembled, permitted and built in very small chunks (compared to the acres and acres in the burbs) which is time consuming. 

Now I realize there are other factors at play. Perhaps the economic environment will change making home loans much less affordable. That would impact things. 

I think that the bottom line is, growth pretty much trumps all. Not sure what would slow that train down but I doubt it will stop over night. 

 All very true Bill. My comments are framed toward the initial post where appreciation would be the strategy in Denver. To comment on your points:

1) Per the ARA Q4 2014 report, there are a total of 18,698 units under construction in Denver downtown and metro as of Dec 31st, 2014. But the total units proposed is 5,885. The data is showing pull back from larger developers since, as you point out, it takes 2-3 years for these units to hit the market. 

2/3) Yes, I'm one of those people but at some point, the market is going to price me out. 

Again, I think the market will continue to be hot with great appreciation over the next 2-3 years. As with any market- it will balance itself out. I would want to take my profit by 2018 and see what happens after that. 

@Walker Hinshaw

It's actually 8 years according to my legal counsel, buy yes you are correct that the apartments can be converted after the statute of limitations expires.