Please Help me Analyze this FourPlex deal in Denver, Colorado

[Vasant A.]

Hi Guys,

I need some assistance from you about what would be a good offer price on this fourplex:

Background

I have an opportunity to purchase a fourplex in the Lowry/Stapleton/Fitzsimmons Medical Complex area in Denver. If you are not familiar with Denver, this location will not mean anything to you. If you are familiar with Denver, you will know that this fourplex is right in the center of the "path of progress." Hundreds of millions of dollars has poured into surrounding area - and more to come. The fourplex is located well, and the neighborhood is poised for further improvement. It has already improved dramatically over the past year.

This property is not listed. It has been brought to me by a friend. And the seller is somewhat motivated. Seller is not in any distress. He owns hundreds of apartments and this one is just too small for him and hence it is not getting the attention it deserves. I do have an income stream as a private lender, and sometimes similar offers are put in front of me. I have not been interested since I had a 9-5 job in addition to my private lending activities. I recently retired, so I am now more open to real estate investment opportunities as well -- not just private lending.

Property details:

Presently gross income = $2,300pm ($27,300 pa). This is low for the area. Perhaps because the apartments need updating.

Note: All tenants are on month to month leases. Owner has wanted to convert the fourplex into condominiums but is too busy to get around to it. I feel that with a $5,000 (total) cosmetic improvement I could justify a rent increase that would gross $3,000pm ($36,000pa). Later, I could convert them to condominiums.

Asking price $280,000-$300,000.

Where I need Your Advise:

Can you suggest what a good offer price would be? With present gross rent of $2,300pm and using the 50% rule, 4.5% interest, $280,000 purchase price, 25% down, this investment provides negligible cashflow of $86. After cosmetic improvements, and increasing gross rent to $3000 pm, cashflow becomes more interesting at $436 pm.

Some additional facts.

As a Private Lender I average 12%pm (1% a month). How do I factor the opportunity cost of using $70,000 as a down payment versus lending the $70,000 and earning $700pm on it?

How do I measure the impact of depreciation write offs? While this cannot be the primary reason for investing in rental real estate, I could use some of the depreciation write offs. A property purchased for, say, $280,000 would generate $10,181 in depreciation write offs and thus a $2,545 income tax savings (assuming a 25% tax bracket). Eventually, I would like to have more than one rental so that I can generate more depreciation write offs. The goal is to shelter income from various sources (including Private Lending) and convert my Traditional IRAs to Roth IRAs without incurring any income tax.

Guys, I would really appreciate some guidance. If you need any more information, I will provide it if I have it. Since this is my first rental, I would like some guidelines on how to make a fair offer price. If the seller will not accept less than $280,000, is it worth the trouble? What are the other negotiation points where I could get some concessions -- if he will not budge on selling price?

Thanks,

Alfredv

[Bill S.]

@Vasant A. The area North of Lowery, South of Stapleton and West of Fitzsimmons is a very challenging area. Let me guess you were offered this property by an RE Agent from Evergreen who specializes in turn arounds?

This is no deal. The area is a war zone and I would fear for my life at night in that area. If you watch the news regularly you will see at least one dead body a week there. I own one on the fringe of this so I'm familiar with the area. I have looked at a large number of properties in the area but have not bought again since my initial impulse. It has been "in the path of progress" ever since the CU medical center announced it was relocating to Fitzsimmons (10+ years). I met a landlord that was selling in that area and he had owned the property for 10 years but the bank wouldn't refi his ARM because the value had slipped so much from when he purchased. The property had good cash flow but no value.

The area is large and I haven't seen significant change or real investment outside 1or 2 blocks within the 3 areas you mentioned. If you are looking for a write off via depreciation, people usually purchase in a nicer area for those plays. As for value add by rehab, why do that if you are looking for a tax shelter? Buy one already rehabbed and then you don't have so much risk or time (for free) in the deal.

With regards to rents, keep in mind that it's not so much how nice your place is as it is the curb appeal of all the neighbors. Look at the adjoining properties. Those are the tenants that are going to feel comfortable in your place. I agree with @Jon Holdman regarding rent prices. If you are going to get $700 per month you had better have a large nice place within a couple of blocks of Fitzsimmons. After that $600 is tops for a 1 bed. You might get $800 for a 2 bed unit. It helps to have in unit W/D and also a private yard for each unit. No on-site laundry is a huge minus.