First Time Investor In Crazy Denver Market Looking For Advice And Perspective - Please Help!!

[Erika C.]

Dear Bigger Pockets Community,

I am a first time home buyer that has almost officially survived the crazy Denver housing market. I have been looking to buy my first home for over a year, and have been beat out on houses at least a dozen times due to all cash buyers, a low appraisal and people who were simply bidding more then me.

I am finally under contract on a big old house that has been converted into a triplex. If all goes according to plan...I will only be paying $550 for my mortgage and that includes utilities for the entire unit and cable. I am very exciting about this house hacking opportunity but I just want to make sure it is indeed a good deal and I know what I'm getting myself into.

The Drama: I currently live with my boyfriend in Jefferson Park. He bought his house in  September 2013 for $315 and six months after we lived there an investor bought it for $480. The house we live in is a cute renovated victorian that is close to everything. The house was built in 1885, beautiful, in great shape and frankly I am very sad they are going to tear it down and build fugly overpriced apartment buildings. Since, he bought it, I didn't have a lot of say in what was going to happen to it. While I agree it is a great economic opportunity for him - it would mean we were going to have to find another place to live in the crazy Denver market and a historic house in Denver is going to be torn down forever. 

After my bf officially was under contract to sell his house (the deal is he is going to close in August 2015 - I started looking for properties that we could rent out and move into when the time came for us to move out.

Last summer, I started looking to buy a house in Denver with a $250,000 budget. There is almost nothing available at that price point in the city and by fall I had almost given up. This summer, I have a new job and am fortunately approved for up to $375 for a conventional loan and $425 HOA loan.

After looking for over a year I am finally under contract on a a triplex in north east park hill at the intersection of MLK & Leydon. 

My bf had opted to go golfing the day I was going to go look at the house so the first time he saw the property was during the inspection. At this time expressed he was not excited about the property and thought I should back out of the deal. He has pointed out every potential negative thing about this house and neighborhood and I'm not quite sure if he is being reasonable or not. Can someone please guide me on weather or not his concerns are rational? Or if he is acting spoiled about potentially moving 10 minutes away from down town Denver into a "less hip, less up and coming" neighborhood. 

Details on the property: The house was built in 1954 and used to be "the mansion on the block" at some point the split up the house into 3 units. The front unit has been renovated and currently rents for $875, the back unit currently houses a section 8 tenet and is in rough shape, but rents for $750...the unit we would live in we would only pay $550 each for the mortgage. 

My concerns:

Is the cash flow potential there? I won the bid on the house with an escalation clause at $390K - My monthly payment will be 2,295.12 + 250 for utilities. With no renovations whatsoever we will only be paying $550 for the mortgagee which is $450 less than what I currently pay my bf for his mortgage. If I renovate the middle unit and back units of the triplex...do you think I can get around $1400 for the 2 bed 2 bath and $1000 for the 1 bed and 1 & 1/2 bath units in Denver? The property is located less than 10 minutes from the heart of down town.  If the units rent out for the prices above I will be getting a monthly cash flow of $730 after I move out...Is it reasonable to think I can make cash flow off of this property? My boyfriend doesn't think so.....he said people don't want to move to this neighborhood.

My boyfriend has also said that he thinks people are not investing in north east park hill because he doesn't see any new construction or flipping going on. Is this accurate of him to think that? Are investors investing in north east park hill?

The property has outdated shingles and will need an entire new roof it the current roof is damaged. If this is the biggest thing wrong the the property, is that a deal breaker? Or should I just budget for a new roof in the future accordingly?

Is north east park hill a good area to house hack and buy my first property?

There has been gang activity in this neighborhood in the past, but the city has taken measures to improve this and things have gotten better....Is it safe to assume that it's only going to continue to get better?

Even if I have to put $20K into this property to make it a little nicer for future tenets, is this going to be worth it in the long run? 

Any input you have on this matter is greatly appreciated. When I found out I was under contract and was going to get the opportunity to house hack my first property (which I hope to be the first of many) I was ecstatic. But after hearing my boy friend literally list every possible thing wrong with this neighborhood and location I am feeling a bit defeated. Especially since I have been trying to buy a house in Denver for over a year. 

Please let me know your thoughts. 

Thanks,

Erika

[Bill S.]

@Erika C. save your $20K! I repeat, save your $20K. Live with the property for 1 year then decide how to spend your renovation money. That is except for bringing the current vacant unit to rentable condition. You will be surprised about how fast it will go.

Great that the unit is on individual meters for electric. The only challenge can be if they didn't take the time and $ to make sure the circuits only control power to the unit they server. You electrician should check that out. It's not uncommon for there to be a few stray outlets that get their power from one of the other units.

Individual controls on heat is good as well. If you don't want to go the route of billing by square footage, then there are meters/timers that can be added to the thermostat lines that can record the usage by each unit. You can then prorate by usage. You will want this setup if you get a tenant that abuses the shared component. Most are respectful so probably best to keep that in your pocket and only do it if necessary. Make sure your lease allows you to change to that type of billing at your discretion.

I used to sort of live in the area, about 20 blocks South, and I'm not a huge fan of it. Perhaps it will be different in a few years. While it is 10 minutes to downtown, there is a lot of RE that is physically closer. IMO those areas will need to mature before your area becomes the next "place to live" if it ever does.

Rents. I think your rent estimates are way high. Look on Craig's List for actual units in the neighborhood that are advertised. Look at how long they stay up and what they rent for. Drive the area and call the for rent signs. You RentJungle is way out of line. According to the Apartment Owners Association of Metro Denver rents are increasing at 10%. That really depends on the price point and the location. You really need to drill down on your rent projections. You should have at least 3 examples of very similar type properties for each unit. It will be hard but the most important aspect is location. They absolutely must be on your side of MLK and must be in the same neighborhood. If you can't find any on Craig's List that is a huge clue. You won't find you tenants on Craig's List. Next drive the neighborhood and call every for rent sign you see. I think we have maybe two more years of rent growth at the bottom end (what your units are). After that we will have significant pressure to hold rents steady. 

What about laundry facilities? What does each unit have? No laundry means lower rents and more turn over.  

Point of correcting for your population growth. It's 20K growth per YEAR not month. It's still pretty good.

Finally, if salaries start to climb we could see rents continue to increase. That said, you should plan on zero growth with good reserves. If it grows then you have some extra money. Don't bet or count on growth of either rent or price of property. Most times both happen but don't count on it. A good test is to see how you would feel if the property value and rents didn't increase for the next 10 years. If you are good with that then, go ahead.