This deal analysis highlights the importance of having long term goals. My client’s major focus is on diversifying and building a real estate portfolio. He isn’t concerned with cash flow since his plan is based on equity and appreciation. I helped him find the right property to get started in the Denver real estate market.
This deal analysis was featured on a live episode of Drinks and Deep Dives. You can find the podcast for this blog post within the episode #294: Changing Real Estate Trends in Denver.
Tune in Wednesdays at noon MT to join me live for the next Drinks and Deep Dives show.
- Listen to the podcast “#294: DDD: Changing Real Estate Trends in Denver” on the Denver Real Estate Investing Podcast
- Watch the YouTube video (at the bottom).
- Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast or video.
Investor Profile
My client is an out of state investor who works in finance on Wall Street. He has a full time job and didn’t want anything that would require a ton of time on his part. Using his understanding of finance, he knew he wanted to diversify and start building his real estate portfolio. He studied the Denver market and realized that was the best place for him to start investing.
Long Term Real Estate Investing Goals
He came to me with a long term plan in place that he wanted help putting into action. His goals are centered around building equity and riding the wave of appreciation, not cash flow.
Strategy for Achieving Goals
His plan is to buy one property in the Denver area every year for the next 5-7 years, potentially moving out here eventually.
Investment Property Details
This is an up/down duplex in Arvada.
Appealing Features of the Property
The duplex is in a great location: close to Olde Town, light rail, and other shopping and amenities. The previous owners already put a lot of work into the property and agreed to replace the water heater before closing.
Property Contract Details
Contract
The purchase price of the home was $715K with a down payment of 25%.
Inspection Issues
Because the previous owners had done so much work, the property was turnkey. Both units were recently rehabbed, there was a new roof, updated boiler, and completely redone sewer line. This was exactly in line with what my client wanted, since he wasn’t looking to invest extra time and money into a property.
While some people may be concerned when they hear a home has a boiler, they can often be more efficient in older homes and last a long time. I’ve even seen a functioning boiler that was 80 years old.
Property Financing Details
Stabilization
There were tenants in place in one of the units and one who moved out while the property was under contract. This worked out well for my client because it allowed him to bring in a new tenant on a long term lease right after closing. The upper unit rents for $1995 and the lower one for $2000, both including utilities. This brings in just under $4K a month in gross rents.
Currently, there’s no bill back system in place, but that’s an area he’s looking into as leases turn or are extended. He could potentially do a bill back of about $100 a month per tenant. We ran the analysis assuming he implements the bill back system.
Spreadsheet Analysis
Download a copy of our free Real Estate Investing Spreadsheet.
Since he’s out of state, my client is paying for property management. This is already working out for him, since right after closing he received an abnormally high gas bill that the manager is looking into for him.
Arvada just instituted a new city-wide trash program that will cost most residents a lot less. For $25-30 a month their trash is taken care of and they even get free trashcans.
Property Operating Expenses
First Year Returns
He has a positive cash flow and a 4.4% cap rate for the first year. While some people might see these numbers and think they don’t look great, my client isn’t concerned about cash flow and the immediate returns. He’s focused on the long term and how the property will appreciate over time.
It’s important not to get too bogged down in numbers because a few tweaks here and there can make a big difference. An extra $50 in rent and utilities isn’t that noticeable to a tenant but can change outcomes significantly. Rents are also expected to go up this year to catch up with housing prices, especially since there’s not enough supply.
Immediate Goals and Plans for the Property
For the immediate future, my client is going to rent out this duplex and let the appreciation increase.
Exit Strategy / Long Term Plan
The main goal for my client is to build equity and appreciation. While he may not have stellar returns for his first year, this property will help him with his long term goals. If we look at the long term analysis portion of the spreadsheet, we can see why this property is exactly what he wanted:
By year 5, his total equity is $428K, more than doubling his all-in costs of just under $200K. He already plans to refinance in this timeframe, which will allow him to take that equity and buy another property.
Connect with Us
This deal analysis shows why having long term goals is so important. If you know what you want to achieve, we can help you make a plan that will match up with your goals. We can’t change the Denver market, but we can figure out where the market and your goals overlap. Everyone is looking for something different: some people want cash flow, others want appreciation. There’s no right or wrong answer, just make sure your expectations are in line with the reality of the market in which you’re investing.
For my client, he wanted a property that would meet his long term goals without being too much of a hassle in the meantime. This duplex is in a great shape and a desirable location, the numbers are solid, and it matches his goals and strategies.
If you want help shaping your strategy or finding a property that matches your needs, reach out to us. To see what real estate investing strategies other Denver investors are using, check out the 2021 Guide To Colorado Real Estate Investing Strategies.
YouTube Video: DDD: Changing Real Estate Trends in Denver
This deal analysis was featured on a live episode of Drinks and Deep Dives. You can find the podcast for this blog post within the episode #294: Changing Real Estate Trends in Denver.
