Triplex Analysis - Denver

[Terrence W.]

Hi BPers,

I'm starting to analyze multifamily properties and have developed a spreadsheet to help me quickly analyze deals. I would appreciate any feedback you have on the spreadsheet and areas where you think I have over or underestimated costs. Thanks in advance for your help.

[Scott Trench]

Here are my thoughts:

1) Property taxes should be $3,245.57 per year per  Denver Gov if it is actually within the city limits.

2) I pay around $2,000 for insurance for my property, I'd estimate more than your $1005 unless you have a quote

3) Vacancy is quite high. I think you'll see more vacancy this year than landlords have seen in the past, but maybe not that much.

4) You are going to pay someone $5,230 to manage this property each year? A reasonable triplex in Denver should not require more than a few hours per QUARTER to manage property, once tenants are in place. Do you make $300+ per hour? It's good to estimate that, but I'd plan on paying yourself this money, not hiring it out.

5) CapEx is hard to gauge without knowing how old the property is. However, I think that for a 1950s or newer property around $1800-$2500 per year is just fine. I disagree strongly with the notion that 10% of gross rents should be budgeted for CapEx. I think that it probably costs roughly the same amount for materials, appliances, etc here in Denver as it does in Cleveland, while labor might be about 25% more expensive. So, a triplex in Cleveland might command $600 per unit, or about $21,600 per year in income. That same triplex, literally, same structure, transplanted into a Denver neighborhood might command $1350 per unit - per the model above. That's $48K per year. But, just because rents are higher does NOT mean that CapEx costs go up. They are not correlated, beyond the increase in local wages for labor.

6) @Jeff Brower - I think you make some great points, but disagree a little on the "general consensus of the site." I think that much of the general rules of thumb apply to markets like yours in the midwest with lower property prices and more rent per dollar invested. Here in Denver, I own a duplex that I purchased for $240K. At the time, it rented for $2300 (both sides combined) on PITI of $1550. A midwestern investor would tell me I got hosed, because according to the 50% rule, I lost money every month on that. But in Denver that produced a great return for me, and I managed it and did the work myself. I've never had a negative cash flow month, never had a bad tenant (including with several more units I've acquired since), and never had a major problem with the property. The "general consensus" of midwestern investors does not apply to investors on the coasts or in big cities, and there are plenty of folks that build great wealth through buy and hold investing in major metro markets.

My general rule - if you are covering standard operating expenses and financing expenses by $1000 or more per month (on a standard SFR/Duplex/Triplex/Quad), you have a safely cash flowing rental investment where major CapEx can at worst wipe out a year or two of cash flow, rather than decades. The name of the game then is to find properties that deliver that and then seek put yourself in position to get the greatest possible chance at appreciation and cash flow over the next few years/decades.

7) @Vanessa Thiele  is quite right. If you are assuming a fantastic interest rate (let's call it 4.8%), you will expect to put down $125,000 on this property, not $100,000.

So,  @Terrence W. , no, you aren't going to get an incredible amount of cash flow on this investment, probably more like 10% on your money at best. Maybe 13-15% if you manage yourself and manage well. However, you probably will not go bankrupt from a purchase like this, assuming you have excess cash to cover unforseen large capex expenses like a roof replacement, etc. The question then, is whether IN YOUR opinion, you can live with the property in the location it is in and patiently wait for your appreciation which is always specualtion and never assured. Because you will not be getting wealthy off cash flow from this investment. That, however, is my approach, and depending on the location, a $500,000 triplex within the city limits is ABSOLUTELY an investment I would consider buying at the moment. Good stuff!