Deal Analysis – Eight Unit Apartment Near Denver University

This property is an established 8 unit in a desirable part of town near Denver University. 6 of the 8 units were recently updated with mostly long-term tenants. A plus is brick construction with low maintenance. There’s potential upside in turning two units, charging for parking and storage, bringing in better management, and bringing some units up to market rent. The long-term goal is to refinance into a non-recourse mortgage after updating units and rents are increased.

This property closed in Q1 2020.

Investor Profile

• Repeat clients looking to add more to their portfolio.
• Long term goals are for retirement planning.
• Defined property criteria for great location and low maintenance.
• Value add upside with no major construction or high vacancy.

Deal Quadrant: MLS

Read about the deal quadrant and finding Denver Investment Properties.

Investment Property Details

• Type: Multiunit
• 8 Unit
  • All studio apartments
• Location: University Park Neighborhood
• List Price: $1,320,000
• Purchase Price: $1,262,500
• Why we liked it:
  • Location!
  • Legacy asset based on location and high construction quality.
  • Upside with minimal work.
  • A cooperative and professional seller and listing agent.

Property Contract Details

• Finding the property: Based on the criteria of the client we searched the MLS and reached out to our network. We found this on the MLS after checking out a few others. On the market for over 200 days.
• Under contract:  Below ask, secret sauce, reputation of us and lender.
• Inspection Concerns:
  • Minor electrical and plumbing
  • Roof needed spot repairs
  • One broken window
  • Sewer line issue
• Inspection negotiation outcome:
  • Plumbing and electrical completed
  • Roof repairs made and certified.
  • Window replaced
  • Credit for sewer repair.

Property Financing Details

• Lender: Local credit union
• Loan Type: 3/1 ARM w/ 30 year amortization
• Appraisal: Above
• Seller Concessions: $5,000
• PMI: No
• Interest Rate Buy Down?: No

Spreadsheet Rental Analysis – Actual

Property Operating Expenses – Actual

First Year Returns – Actual

The spreadsheet above shows the current numbers for this apartment building. A 4.7% cap rate is lower than we typically target for a hold. However, there is relatively easy upside for this building. Here’s the plan:

• Update the two units to bring to market rent ($15,000 estimated costs)
• Some of the current leases are below market rent. Once the leases expire, they’ll bring them up to market rent ($1050 to $1100/mo)
• The current RUBS is low. $50/mo per unit is a good estimate, they may charge higher if the actual costs are higher.
• There are eight parking spaces. None of them are rented out. They can easily bring in an extra $25/mo. Our property manager expects $50 per space.
• There are seven storage units. None of them are rented out. We estimated $25/mo, but our PM says $35/mo

The next spreadsheet screenshots show the proforma numbers. Note that we used the more conservative proforma numbers. The conclusion discusses the conservative and optimistic proforma numbers.

Spreadsheet Rental Analysis – Proforma

Property Operating Expenses – Proforma

First Year Returns – Proforma

Conclusion

The conservative proforma shows a 5.3% cap rate. The optimistic proforma (not shown, but using the higher-end estimates discussed before) is a 6.3% cap with $27,000/yr in cash flow! Our guess is that it will fall somewhere between the two. Even a 5.3% cap rate is a good deal for a building in this highly desirable location.

After the new owners increase the rents, their plan is to put on longer-term, non-recourse debt. Since this is an income property, increased rents = increased value. The plan is to take out cash during the refinance. Our estimates show a cash-out range of $100,000 to $225,000. They’ll use that to help buy another place!

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