Deal Analysis - Denver Single Family Renovation and ADU Build ⋆ Denver Investment Real Estate

Located in Denver’s Sloans Lake neighborhood, the brick home featured in this Deal Analysis was built in 1906 and had plenty of opportunities to add value. The property was dated but with great outdoor space. It was clean and in desirable U-TU-C zoning. The upside achieved by improving the interior and building a secondary unit offers several attractive exits.

This property closed Q1 – 2017.

Two Learning Options!

Listen to the podcast “#254: Deal Analysis – Denver Single Family Renovation and ADU Build” on the Denver Real Estate Investing Podcast
Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast.

Investor Profile

Kevin & Mycah
Long term Buy & Hold
House Hackers and a bit nomad

Deal Quadrant: MLS

Real Estate Deal Analysis Quadrant — The majority of Nomad™ and House Hacks are found on the MLS

Read about the deal quadrant and finding Denver Investment Properties.

MLS overpriced in summer of 2016 ($725,000)
Withdrew in December and relisted in January at $599,000
Went under contract at $567,000 and closed at $559,000

Investment Property Details

Type: Single Family Home with Two Unit or ADU zoning
- 5 bedroom, 2 bath, no garage
Location: Sloans Lake Neighborhood
List Price: $599,000
Purchase Price: $559,000
Why we liked it:
- U-TU-C Zoning
- Location location location
- better functional space for our growing family

Denver real estate map — Denver Single Family and ADU Build near West 26th Ave and Lowell Blvd

Property Contract Details

Finding the Property: We moved to West Highlands in Fall of 2015 and did a live-in flip. While the property met requirements on paper, we hated it. We continued to check the MLS late at night and eventually took the family on a walk to the house. From there we reached out to the listing agent (who may have had a contract that was about to expire) and worked with him as a transaction broker.
Under Contract: learned the value of hiring an agent. We were experienced but didn’t know what we were doing.
Inspection items
- retaining wall with a heavy lean
- roof
- patio railing
- dated electric
Outcome: 8,000 price reduction – lesson alert! Should have used an agent to help negotiate

Property Financing Details

Lender: National Bank
Loan Type: Conventional, 4.375%
Appraisal: Above $568,000
Seller Concessions: No
PMI: yes
Interest Rate Buy Down?: No

And then…..

Construction: Refi into construction loan (Single close)
Interest only construction period: 10/1 ARM 3.875% for $729,000 (tough to get appraisals for ADUs – – not many comps)

Refi to Conventional With

1st for $575,000 at 3.875% $3192
2nd HELOC up to 90% LTV- $167,000 drawn for payoff (10 year draw, 20 year AM {prime +1% or 4.25% now. }) Can do interest only at approx $800 or principal and interest at $1348/ month. Variable rate with option to lock
Total Mortgage expense: $3992- $4510/ month

2020 Actuals

ADU AirBNB income ($5500 in August!)

September – October: $28,872 gross NOI $19341

Both units rented in September for $3250 + $2250

2021 Proforma

$66,000 in Gross Rent

NOI $28152/ $980k = 2.9 CAP! BOO… but

Option 1:

$5500- $4520 (debt service) = $990 – $370 (PM Maintenance) = $620 cashflow

Option 2:

$5500 – $3992 (debt with no principal on HELOC) = $1508 – $370 = $1138 cashflow

The Good

HELOC!

$100,000 in line of credit available to help us invest
Can control cashflow on interest only on HELOC for the next 10 years

Not currently using property manager (maybe the ugly?!)

2019 depreciation $202,000 while residing there

Airbnb super host

The Bad and the Ugly

Took 2.5 years – a whole lot of interest only payments

2 construction lenders, 2 builders, 3 submissions/revisions with the building department

Contracted Xcel to remove a pole hopefully 12/1/2020

Appraisals were tough. 5 total across all financing activity ranging from $875,000 – 980,000

Exit Options

Rent then sell in 3 years at > $1M leverage to capital gains exemption on about $280,000
Hold and continue to leverage the equity in line of credit to acquire more?