Too good to be true? Needing a 2nd option. 10 Unit multi family Pueblo, CO

[Alex Jacobson]

Looking for a fresh set of eyes to look at a rental analysis for a 10 unit efficiency apartment building in Pueblo, CO. 

COC ROI: 21.8%

CAP RATE: 11.3%

GRM: 61%

I used conservative estimates: 5% capital expenditures, maintenance and vacancy. (In my experience these will be less for the area.) and 7.5% interest rate and am still showing a healthy cash flow of $1,700 a month. 

 Is this too good to be true? I am also always looking for investor partners on deals as well.  

Thank you!

Analysis linked below: Bigger Pockets Rental analysis

[Bjorn Ahlblad]

@Alex Jacobson welcome to BP! Not having seen the property or neighborhood but the numbers look good. You don't need to hit that 1700 dollar number for this to work. But you do need to see if the income and expense numbers are real and not just something from a seller's proforma. 

If that holds get it inspected and make sure all tenants are paying their full rent-you may want to use Estoppel certs to do that. All the best and keep us posted!

[Scott Trench]

What's the purchase price and price per unit? 

Here in Denver, I can generate $1700 in cash flow for a duplex, per month (the CoC ROI is lower, of course). But a high CoC ROI may be misleading if it means that you have to deal with 5X as many tenants who may be less qualified than opportunities elsewhere.

I'm not saying this is a bad deal - it's probably actually pretty good, if you've analyzed a bunch. Just know that in a few years, you might be a little frustrated at the relatively small cash flow compared to the large number of units/tenants, even if it produces a pretty good return. 

[Alex Jacobson]

Thank you Bjorn,

I am using my own judgments to come up with the expenses numbers (other than the sellers stated rents) A Estoppel Cert is a great idea I would not have thought of!. I know the area well, and toured it with a property manager. I think I could get the numbers above 1700. I appreciate your input and will keep you posted if I move on it!

[Alex Jacobson]

Quote from @Scott Trench:

What's the purchase price and price per unit? 

Here in Denver, I can generate $1700 in cash flow for a duplex, per month (the CoC ROI is lower, of course). But a high CoC ROI may be misleading if it means that you have to deal with 5X as many tenants who may be less qualified than opportunities elsewhere.

I'm not saying this is a bad deal - it's probably actually pretty good, if you've analyzed a bunch. Just know that in a few years, you might be a little frustrated at the relatively small cash flow compared to the large number of units/tenants, even if it produces a pretty good return. 

Hi Scott,

The purchase price is $460,000. And it is 10 bed/ 10 bath. So yes 10 tenants!! . I live in Boulder and know the markets in this area and Denver are strong but think I would have to spend well over 460,000 to cash flow $1700. here is the BP rental analysis

Thanks for the reply and I do agree it could be a headache 

https://drive.google.com/file/...

Alex

[Scott Trench]

@Alex Jacobson - Thanks for sending! 

How are you getting a 30-year loan on this asset with no balloon? I would have thought it was too small for a Freddie Loan. 

Looks interesting for sure! Just make sure it isn't a "selling water bottles by the stadium entrance problem" (buying a $15 case of water bottles and selling them for $45 nets $30 in profit, and a "300% IRR", but isn't a great use of time.

Also, I don't see property management expense in your analysis. On a property like this, management will likely be in excess of 10%. I'd expect a manager to charge you 100% of first month's rent for each turnover event, plus 10-12% of rents, given that very low price points and high number of tenants. I might round it to 14% for this property. And, there is no way I'd buy this property without a property manager, unless I lived a few miles away and was fine to content myself with this as my part-time job for a number of years. 

Once you factor that in, I'd tweak your pro forma cap rate, and then I'd run the analysis two ways: 

- once levered (like you are) with $90K down

- once unlevered - no debt, straight cash

Might yield some interesting takeaways.

[Nathan Harden]

When I was just looking through your analysis, I had a couple of questions. Did the current landlord give you the utility expenses that he pays every month? The reason that I ask is because I see that you have $100 taken out for electricity, is that the bill for the common area? Second, It looks like you will pay for water/sewer, if you are paying for all 10 units then $100 a month is way too low. Third, usually the landlord covers garbage in larger complexes like this and I see that you marked garbage as $0. Also, I didn't see any management fees so I will assume that you are going to be managing it...? If not, include lawn maintenance in your analysis as well.

Good luck!

[Evan Polaski]

Hi Alex, my few comments are:

Typically, but confirm with your lender, commercial loans will be 25%+ down. You underwrite to 20% down. Additionally, and almost more importantly, you need to know your lender's DSCR, since many commercial loans are limited by DSCR, not LTV (although an 11% cap rate is much higher than typical).

You have no reserves built into cash needs assumptions, which sounds risky to me, but I don't know the property or market.

Generally, my sentiment is the lower the rent, the more frequent and higher cost each turnover is.  At 5% vacancy, you are assuming a 5 of the 10 units will turn over each year.  At $1,500/turnover that is $7,500/dr just in turnover cost.  You budget has about $7k TOTAL in maintenance and capex combined. 

My general sentiment is this could be a good deal, but overall from my past experiences and not knowing this asset, I would expect to lower CoC return given more equity in and less cash flow, but as others noted, you still have reasonably good margin to work within.

[Stephanie P.]

Quote from @Alex Jacobson:

Looking for a fresh set of eyes to look at a rental analysis for a 10 unit efficiency apartment building in Pueblo, CO. 

COC ROI: 21.8%

CAP RATE: 11.3%

GRM: 61%

I used conservative estimates: 5% capital expenditures, maintenance and vacancy. (In my experience these will be less for the area.) and 7.5% interest rate and am still showing a healthy cash flow of $1,700 a month. 

 Is this too good to be true? I am also always looking for investor partners on deals as well.  

Thank you!

Analysis linked below: Bigger Pockets Rental analysis

On a 10 unit, the rate will be higher than 7.5% using a DSCR product which will eat into your monthly cash flow, but it still looks like a good deal.

[Steve K.]

I would put this in the "too good to be true" category personally, or at least adjust the numbers with much higher turnover and more management expenses for the following reasons... First of all I'd want to build in an additional $50-100k into the down payment/ initial repair cost due to what I see as a lot of deferred maintenance/ capex issues which I'd want to address. I say this because it’s a 1960 build in a rough area without many updates (for example it still has those original 9x9 asbestos floor tiles, roof looks old, parking area needs new asphalt, etc.). I think your vacancy rate and management expenses are also optimistic considering the makeup of the units (only one unit has it's own dedicated kitchen, the rest are ~200ft2 studios with their own bathroom, sharing a common kitchen). This seems like more of a boarding house situation, ideally with an on-site manager living in the largest unit that has it's own kitchen. I'd run the numbers for that scenario, assuming reduced rent for the manager's unit and much higher turnover for the other units because it looks like more of a boarding house than an apartment building to me. 10 units with only 2,600 total square feet= I don't think you're going to attract a lot of long-term tenants and high turnover can be a real profit-killer. The current sale price, after 1.5 years on the market and nearly $200k in price drops, is not much more than the current owners paid for it in 2020, during the strongest seller's market and steepest appreciation curve that we've ever seen, so consider adjusting your 5% annual appreciation forecast closer to maybe 1%? If you don't have extensive experience with Class D/F property, this would be a hard pass for me. Location, location, location! At least it's not in the Superfund part of town, but still might be difficult to get financing and insurance on this in my experience, due to what it is. In my opinion that's why the cap rate is what it is.

[Drew Sygit]

@Alex Jacobson the rental market is slowing down, so you may want to consider using the more traditional 10% vacancy factor.

[Chris Russell]

Property taxes seem pretty low, $89 a month?? Is that correct?