Denver, CO Triplex Deal Check Request
Hey BP members,
I need a quick sanity check on the math here just to make sure I'm not biting off more than I can chew. I'm currently under contract for a triplex, which I will be occupying one unit (2 BR, 1 BA) for a year before renting it out. A little backstory on the property: It was built in 1880 and last sold in 2004. The seller has not changed rent prices for years, resulting in the previous tenants staying for more than 5+ years and paying way below market rents. Based on my research of Craigslist, Rentometer, and Padmapper, 1 BR / 1 BAs go for $1,100 - $1,500 and 2 BR / 1 BAs go for $1,400 - $1,900. A current tenant on a month-to-month lease pays $900 for the 1 BR / 1 BA.
**The following analysis assumes that I move out and have all units being rented out.
Denver, CO (Baker) Triplex
List price: $620,000
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INITIAL INVESTMENT: $129,780
ANNUAL PRE-TAX CASH FLOW: $7,100
CAP RATE: 5.13%
CASH-ON-CASH RETURN: 5.47%
IRR: 12.85% per year (30-year hold assumption, 3% increases in rents / expenses)
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INCOME**
Gross Rental Income UNIT 1 (1 BR / 1 BA): $1,150
Gross Rental Income UNIT 2 (1 BR / 1 BA): $1,150
Gross Rental Income UNIT 3 (2 BR / 1 BA): $1,600
Vacancy (6%): $234
TOTAL INCOME: $3,666
EXPENSES
Prop tax: $517 ($6,204 annual)
Insurance: $110
Maintenance & Repairs (10%): $390
TOTAL EXPENSES: $1,017
NET OPERATING INCOME (NOI): $4,683
DEBT SERVICE
Loan Payment: $2,058
TOTAL DEBT SERVICE: $2,058
MONTHLY CASH FLOW: $591.47
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Am I missing anything for my analysis? I know some people factor in property managers in their analysis.
Couple of things:
Your ROI is at 5.5% - (average for the stock market is 7% and this can be a lot less work than owning a home)
There is no break out for utilities - does the land lord in Denver have to cover anything. I am used to paying for Water, Sewer and Trash. Electric and Gas are on the tenants.
Are you always going to self manage or will you get a property management company - budget on the high end at 10% until you find one and see what they are actually charging.
Insurance seems low to me, I would have figured about $140-160 after you have moved out and its purely an investment property. While you live there it should be higher still. Have you contacted an insurance company to see or is this an estimate from a 3rd party real estate plate form?
Maintenance & Repairs - are you combining the Maintenance and Capex at 5% each. If so, that old of house (unless it was gut rehabbed recently) will require a larger Capex. Cast iron plumbing stacks/sewer laterals, lead or galvanized water lines, fuse boxes/knob & tube wiring, roofing, windows - and if your in a historic district they city/neighborhood will have a lot to say about what you can do and its never the cheaper option. Here in St. Louis, the Cultural Resources Office will make you put in historic looking wood windows that can cost $800-1,500 each vs. vinyl at $400. Also the Repair % will depend on the tenant quality, college students will tend to tear a place up while young families not so much. Also if the house is full of plaster the repair costs can go up because it can unravel from a golf ball size hole to a whole wall if your not careful (I live in a house from 1886)
Not trying to discourage, just laying out some items that I didn't see and don't know if you had factored in.
Originally posted by @Nathan Zierer:Couple of things:
Your ROI is at 5.5% - (average for the stock market is 7% and this can be a lot less work than owning a home)
There is no break out for utilities - does the land lord in Denver have to cover anything. I am used to paying for Water, Sewer and Trash. Electric and Gas are on the tenants.
Are you always going to self manage or will you get a property management company - budget on the high end at 10% until you find one and see what they are actually charging.
Insurance seems low to me, I would have figured about $140-160 after you have moved out and its purely an investment property. While you live there it should be higher still. Have you contacted an insurance company to see or is this an estimate from a 3rd party real estate plate form?
Maintenance & Repairs - are you combining the Maintenance and Capex at 5% each. If so, that old of house (unless it was gut rehabbed recently) will require a larger Capex. Cast iron plumbing stacks/sewer laterals, lead or galvanized water lines, fuse boxes/knob & tube wiring, roofing, windows - and if your in a historic district they city/neighborhood will have a lot to say about what you can do and its never the cheaper option. Here in St. Louis, the Cultural Resources Office will make you put in historic looking wood windows that can cost $800-1,500 each vs. vinyl at $400. Also the Repair % will depend on the tenant quality, college students will tend to tear a place up while young families not so much. Also if the house is full of plaster the repair costs can go up because it can unravel from a golf ball size hole to a whole wall if your not careful (I live in a house from 1886)
Not trying to discourage, just laying out some items that I didn't see and don't know if you had factored in.
Thanks for your response and for digging into the numbers! I don't find critical feedback discouraging at all--I appreciate the insight from the BP community.
I did see that the cash-on-cash return is fairly low, but this will be a long-term buy-and-hold, so IRR would be a more accurate measure in my opinion. I believe I pay for water, but I have to double-check. Good point about the maintenance. Should I ballpark 15%-20%for repair, maintenance, and capex? The roof will be replaced by the seller prior to closing.
I'm just about 100% I saw this place a few months ago. Is he also selling the duplex next door? Hopefully your inspection went ok. We decided to pass on it due to what we saw. My client was concerned with the structure itself. I did think there might have been a 4th unit upstairs at some point, but who knows.
I didn't see CAPEX in your numbers. Those old places can be money pits once you start going down that road. How confident are you in your rental figures. Again, assuming it's the place I'm thinking about, it would need some work to get those numbers.
Originally posted by @Matt M.:I'm just about 100% I saw this place a few months ago. Is he also selling the duplex next door? Hopefully your inspection went ok. We decided to pass on it due to what we saw. My client was concerned with the structure itself. I did think there might have been a 4th unit upstairs at some point, but who knows.
I didn't see CAPEX in your numbers. Those old places can be money pits once you start going down that road. How confident are you in your rental figures. Again, assuming it's the place I'm thinking about, it would need some work to get those numbers.
Yep! That's the one. We have our inspection next week. The units need new carpets, paint, appliances--a ton of work. But $900 for rent for a 600 sq. ft. apartment as-is...is still fairly cheap for the area. When you say your "client was concerned with the structure itself", do you mean you had a foundation guy out there? Or was the building too old for your client's tastes?
@Paul Lee, I wouldn't go so far as 20% unless there is a lot of deferred maintenance but a combined 5% for general repair and 10% for capex would be advisable. Other things to look at are appliances - will they need to be replaced in the near future. I suggest that if you have washer dryer hook ups, have your tenant supply the those. They tend to be the most finnicky with the variable of if the tenant knows how to maintain them, make sure to have your exhaust cleaned after every tenant move out because tenant do tend to clean out their lint filters regularly from my experience (this will prevent lint fires).
Originally posted by @Paul Lee:Originally posted by @Matt M.:Yep! That's the one. We have our inspection next week. The units need new carpets, paint, appliances--a ton of work. But $900 for rent for a 600 sq. ft. apartment as-is...is still fairly cheap for the area. When you say your "client was concerned with the structure itself", do you mean you had a foundation guy out there? Or was the building too old for your client's tastes?
We didn't have an engineer out, but she was uncomfortable with it. It wasn't too old, we just had concerns about how much work was needed at the price point. We didn't spend too much time there, and she ended up buying an off market quad that I got her for $100k more.
$900 is more in line with what I was thinking. In your first post, I saw $1150.