Is the juice worth the squeeze?

11 Replies

This is a quad in the north Denver market. Four 2/1 units. All units occupied, 2 on year leases and 2 on MTM, current rents are about $100 below market.

Right off the rip your CapEx, Vacancy and Maintenance seem low. I see some veterans here use a 21-23% combined on them. I would use a 25% and if I have some extra cash at the end of the month that's great.

Also, is a 3.5% rate realistic on a commercial property? Mind sharing how you get that rate, I would love to have access to that as well. Please and thank you!

This looks like a decent deal depending on the condition of the property and the area it’s in/street it is on. You’ve only got $5k for rehab so assuming it’s in excellent condition (if not, pad that out a bit more). If it’s on one of the streets over towards Federal with a bunch of C- quads I’d pass but if it’s in a nicer part of Westminster I’d be in. Also depends on your strategy. Long term buy and hold makes sense I’d say. In a few years with rent increases you’ll have decent cash flow. I have a quad not too far from there that I picked up for a little under $600k two years ago, put $30k in and it just appraised for $750k. @Gaspare U. this is a quad so qualifies for residential financing, commercial is 5 units and up. 

@Steve K
Originally posted by :

this is a quad so qualifies for residential financing, commercial is 5 units and up. 

When I meant commercial I was referring to a non-owner occupant. In the North East they seem to charge a lil more (in my experience) for non-owners occupants as they feel this is a business. So you feel 3.5% rate for the term and down payment the OP reported was accurate? If yes please, can you list 2 or 3 sources I can reach out to for financing. 

Last home I bought was a 2 Fam and that was 5 years ago. Thanks for any info you can share.

 

@Steve K.  Thanks for your comments. It is in South Westminster near 72nd and Raleigh, halfway between federal and Sheridan. So this might be the C-quad area you’re referring to, as it’s definitely a working class apartment neighborhood. However it’s 0.5 mi from the Westminster new light rail station and there’s lots of development along both Sheridan and federal and 72nd. There’s a high school at the end of the block. 36 and I-25 are close by. All of those fundamentals got me intrigued for the probability of low vacancy and potential to raise rents over time. 

@Gaspare U. it does qualify for residential financing. I have typically done 30 year fixed in the past but I am looking at a 7-year ARM for this rate because it is 1.25%+ better than the best 30 year I could find and I plan for either 1) I will refinance in 7 years and even if rates are higher then I will have much more principal paid off when I do or 2) I will look to exit between years 5-7

Originally posted by @Seth Levey :

@Steve K. Thanks for your comments. It is in South Westminster near 72nd and Raleigh, halfway between federal and Sheridan. So this might be the C-quad area you’re referring to, as it’s definitely a working class apartment neighborhood. However it’s 0.5 mi from the Westminster new light rail station and there’s lots of development along both Sheridan and federal and 72nd. There’s a high school at the end of the block. 36 and I-25 are close by. All of those fundamentals got me intrigued for the probability of low vacancy and potential to raise rents over time. 

The C- area I was picturing is actually a little ways north of there, closer to 36. My concern up there would be that the surrounding buildings would limit the ability to improve, raise rent, ad value. I don't know if that's a concern for this property, it could be you're in a better area even though not far away... maybe solid C class depending on the exact block. You're closer to the gentrification happening to the south. I do see the upside potential for that whole zone for the reasons that you mentioned. Hopefully the changes happening to the south will continue in that direction. It would be nice if the high school had a better reputation but maybe it will improve over time. 

How's the condition? Considering it's a 1962 build, if it's not already fully rehabbed with newer roof, windows, electrical, plumbing, mechanical, etc. you might bump up your Capex quite a bit (currently $1854/yr. which will cover something small like a water heater or two but not a roof, windows, parking lot, sewer line, furnace, etc. or even several of these in the same year, perish the thought). Repairs you've got $3,090/yr. which is pretty fair, maybe a little on the low side though. Vacancy rate at 5% is lower than the Denver Metro average but probably fair considering the location. I use 10% in my analysis but all my properties have performed closer to 5% over the past few years.

I spoke to a long term Denver investor earlier this week who has over a hundred units. He considers anything priced at $150k/unit a buy right now and is confident in the Denver market long term. That's a little over what I've paid for most of my units purchased in the last few years and doing great with those. Obviously it would be nice to get this for $600k or under but that might be wishful thinking. I think you're in the range you need to be in, maybe just a little towards the high end of the range depending on condition.  

@Seth Levey not sure what you have done with the rent verification but in addition to the other comments I would add that as an item to dig into. On older properties sometimes getting market rent can cost you in vacancy. In reality with just a few units you either have 0% vacancy or 8% vacancy on a unit. 8% being one lost month of rent. Obviously this is offset if you have multiple units. If you miss the price point with your advertising (the market really punishes you for getting this wrong) or get a tenant that you just can't show the unit until they move out then your expenses go up.

Personally, I don't look so much at the price per unit as I do the quality of tenant I will be dealing with. The lower the tenant quality the better the deal has to be for me. Lots of headache in the bottom of the tenant pool.

@Seth Levey  

Residential financing for non owner occ properties and commercial financing are right around the same interest rates right now, mid to high 4's is what we're seeing. 3.5 is even low for an owner occupant rate. I would guess 3.75 is attainable. 

Your maintenance and repairs are a bit low, but that might be offset by the fact that your insurance may be a tiny bit high (or may not be).

Regardless of all this- the cash on cash returns on this property are WAY too low. Low returns like this may be worth considering in a low market, where you can confidently expect significant appreciation... but in a market like 2019's, you're not safe to assume that. 

I would strongly recommend entering a different market if you want to be a cash flow investor in this market phase.

OR, sell stuff. Or short term rentals. Some sort of alternative strategy. 

The rental upside you describe helps, but I honestly think you should be shooting for 15%+ returns. I aim for 20%+ personally just to be safe.

I'd like to thank everyone for your comments. My lender threw me a curveball after going under contract and the 3.5% rate did not work out. I considered other ways to make the deal work, but it was a stretch and only would work out in a best case scenario so I pulled out of the deal. On to finding the next, better deal. Your comments and insights were very helpful and I wish you all great success!