Deal Analysis – 15 Unit Apartment Building Purchased via a 1031 Exchange in Denver

Our client was an of state investor with a small apartment building in Los Angeles, CA. He wanted to sell and 1031 the money to Denver for a better cap rate and future retirement plans of moving out to Denver. He has family in Denver who acted as ”boots on the ground” and to help manage the asset. We coordinated with the California agent, 1031 Qualified Intermediary, and all parties to get the transaction completed per the 1031 rules. There is significant upside in rents by upgrading the building electrical system and installing in unit washer/dryers and AC ductless mini-split systems.

This property closed Q4 2019.

Investor Profile

• Out of state investor
• Has experience with apartment ownership and management
• Looking to secure a legacy property for his family while adding to retirement cash flow.

Deal Quadrant: Networking

Read about the deal quadrant and finding Denver Rental Properties.

Investment Property Details

• Type: Multiunit
• 15 units
  • 1 bedroom,  1 bathroom
• Location: Denver
• List Price: $2,700,000
• Purchase Price: $2,615,000
• Why we liked it:
  • Great location
  • Solid construction with minimal maintenance and landscaping
  • Established rents
  • Upside to increase rents by adding in unit washer/dryers and AC units.

Property Contract Details

• Finding the property: After consulting with client to determine funds, timeline, and risk tolerance we reached out to network to find a property. Seller wasn’t planning to sell, but we brought the right deal to the table that made sense for everyone and was flexible for seller to conduct a 1031 exchange.
• Under contract:  Below original ask price
• Inspection Concerns:
  • Minor electrical
  • 3 old water heaters
  • 3 old furnaces
• Inspection negotiation outcome:
  • $10,000 credit

Property Financing Details

• Lender: CBRE
• Loan Type: Freddie Small Balance, non-recourse, 3 years of interest-only, 10 year fixed, 30 year amortization
• Appraisal: Above
• Seller Concessions:  $10,000 for inspection items
• PMI: No
• Interest Rate Buy Down?: None

Spreadsheet Rental Analysis

Property Operating Expenses

First Year Returns

Conclusion

The first three years of the loan are interest-only. The spreadsheet shows a cash flow of $32,989. It’ll actually be almost double that! The $30,454 labeled debt paydown is not going towards principal reduction. Rather, that’s extra cash flow. The plan is to use the additional cash flow to fund the building electrical upgrade (quotes were between $50,000 to $60,000) and installing in-unit W/D and AC ductless mini-split systems (~$3,000 (labor and materials) x 15 = $45,000.)

The estimated rent increases are $200 to $250 per unit ($36,000 to $45,000 annually). Since this is an income property, the increased rents and NOI could potentially increase the value between $500,000 to $750,000. Better cash flow and options for pulling out equity if desired down the road.

Video: Deal Analysis – 15 Unit Apartment Building Purchased via a 1031 Exchange in Denver