Help...Need Help Analyzing a Value-Add Quadplex in Denver CO

[Alysa Phalen]

Hello fellow BP members! I would really appreciate your help analyzing this off-market “quadplex” I am under contract with in the Berkeley neighborhood (3 blocks to Tennyson shops & restaurants) in Denver, CO 80212. It is in a great LOCATION! :)

The property was built in 1910, on a 6154 lot, and is technically a triplex totaling 2641sqft, and has a “non-conforming” detached garage that was converted to a 1br/1ba apartment, with an additional 413sqf as well as an empty oversized one car detached garage.

Currently the unit mix is as follows:

Triplex:

1br/1ba (900sqft): $1000/mo rent

2br/1ba (1200sqft): $1300/mo rent

2b/1ba (650sqft):$1000/mo rent

Detached garage unit:

1br/1ba (413sqft has a tiny attic space as well): $1000/mo rent

I am under contract for $900k, list price was $950k. I was under the 45 day deadline for a 1031 exchange identifying replacement property and found this at the last minute. Total expenses for 2018 were $22,935.40, not including property management. Net profit with rents above were $29,864. Cap rate 3.3%. Definitely need to get that up if I am going to close on this!

I had an Inspection done and hired a GC to go through it line by line and he came up with a total of $50k in repairs needed (of course cheaper if I didn’t use a GC). The units themselves are not updated and the exterior can definitely use some curb appeal.

If I close on this property, I could easily raise the rents on the three units in the triplex by $100 as they are all under market.

I am then trying to think of ways to make additional income and have thought of the following:

• Add a bedroom to the 1br/1ba 900sqft unit, making it a 2br,1ba
• Convert the 2br, 1ba unit to two 1br studios, I know I would need a Zoning Variance for this. This property is zoned U-SU-C1 which allows for Accessory Dwelling Units. I emailed zoning department and received an email back which stated it was zoned for 3 units but included plans showing a total of 5 unit apartment conversions including the garage unit. (It was converted from a commercial building apparently.)
• Add a bedroom to the garage unit, making it a 2b/1ba

I do have an excellent Real Estate Attorney on my team and have some cash available to spend on renovating this property, I am just not sure which strategy is best for me and how to get the best ROI on this property.

Rentometer, Craigslist, have 1BR at $1440 and there are hardly any available in that area, and 2BR at $2000.

After $100k renovations, $1million property with up to 8.52% cap rate,

2br,1ba (900sqft): $1500-1800

2br,1ba (1200sqft): $1800-2000

2br, 1ba (around 1000sqft detached garages):$1800-2000

2b,1ba(650sqft):$1300

=$85,200

I am hoping to get a chunk knocked off the price as it is a cash purchase and it will be appraised as a triplex not a quadplex, and I will also include the 95 page Inspection report with the GC quotes in the Inspection Objection which is due June 3, 2019.

As a final note, I would be completing a 1031 exchange, thus deferring a total of $138k in taxes (thank you to Dave Foster who is my 1031 Exchange Intermediary).  

Thank you in advance for your thoughts, comments and input! I greatly appreciate it, I am a bit in over my head!!  

[Alysa Phalen]

Hi Chris,

Thank you for your reply, and yes, you are correct that was gross cap rate.  Realistic would be about 6%.  And you are right, it would be a lot of work .  The main strategy would be for me to defer $138,000 in capital gains taxes that I would owe next year from having sold a 9 unit in Fla.  I also think that the location of the property will be a good area for appreciation.  I do think I need to negotiate the price down on the quadplex after the inspection came in with $50k in repairs.  I should get the Appraisal within a week.  

The other areas I was looking at were in DU and Cherry Creek.  

I appreciate your input!