Critique my 4 new properties for Denver CO. Love it? Hate it? Alternatives?

Question

Good morning,I've been trying to find my way forward with purchases in Denver that are great buy-and-hold candidates in a rapidly appreciating environment. Duplexes, 4plexes, and traditional income properties are through the roof and I haven't seen anything worth buying in a couple years, so I changed my criteria and have bought 4 condos/townhomes in the past 3 months with these criteria:1) Condo or townhome, 3 beds minimum. There seems to be an outsized rental premium for 3-bed vs. 2-bed properties in Denver currently.2) Built since 2001. I'm not looking for big assessments.3) Low HOAs/Taxes. A well-managed HOA seems to be money in my pocket each month4) Cash flow of at least $600 after PITI/HOA is paid.5) At least 1 car garage per unit6) Good access to light rail, opening 2016. I think this is a big benefit, perhaps it is overstated?7) 2-year leases. Vacancy is a stupid problem to have in a great renter's market like this.8) 20% down financing with 7/1 ARMs at 4%. I self-manage my properties currently, and love that all the exterior maintenance is taken care of on these units; it makes managing multiple units much more bearable, and I avoid big-ticket items completely, plus don't have to worry about tenants taking care of the lawn.Here are the numbers for all 4:1) Purchase price: 116k 2 bed/2ba/1garagePITIHOA: 655Rent: 1275CF: 6202) Purchase price: 141k 3bed/3ba/no garagePITIHOA: 755Rent: 1350CF: 5953) Purchase Price: 149k 3bed/3ba/2 garagePITIHOA: 840Rent: 1545CF: 7054) Purchase Price: 132k 3bed/2ba/1garagePITIHOA: 835Rent: 1450 (anticipated, just got this one)CF: 615I'm excited about these criteria and my ability to branch out with what I feel to be good investments, in newer buildings, with minimal management on my part. The units are not high-end, but are definitely not low-end either. Makes for more stable tenants. Thoughts? Critiques? Suggestions for other approaches in Denver?Thank you and have a great day!

Micki M. · Answer

@Adam Haman Good for you for getting so many deals under contract in this market that work for you numbers-wise. I'm a bit of a broken record here on BP for saying that I like HOA's for managed costs versus surprise big ticket costs. I also hate shoveling snow. I review tons of HOA docs for clients so I've gotten used to skimming for red flags. I also have a friend who is an HOA management expert and she'll review docs for a fee. She's put my mind at ease more than once. The best thing to do is make sure you read meeting minutes prior to purchase so you know what types of repairs are coming up and how participatory and functional the HOA is. People seem to forget that as an owner you ARE the HOA, and I don't think most people realize that a good HO6 policy has coverage against special assessments.I will also chime in that an older well managed building (preferably without elevators) can be a much lower cost risk than many of the larger newer complexes in Denver many of which have had litigation against their builders already, and whose taxes are often double or triple. Keep us posted on your progress with everything!

Martin Scherer · Answer

Keep in mind also that not all HOA documents are the same. Are these condos or PUD's?Have you actually read all the HOA docs, not all include ALL exterior maintenance. Did you review the financials? You could get a surprise with a special assessment to do all the roofs or paint the buildings. Does the reserve fund have enough to cover those costs?Are they attached, detached? That can make a difference who is responsible for a waterline break in the wall and it's damage.If it is a PUD you own the land and you may be responsible for painting, roofing etc. You would be responsible either way if you want to upgrade windows etc.If it is a PUD you own the structure. In a condo you own air space. All of these things can make a huge difference and not being aware can cost you.I think you indicated they are 15 years old and as such are likely beyond the warranty time frame for the developer. A high percentage of HOA's sue their developer and to pay for it increase monthly assessments. I have watched one HOA in San Jose go from 250 per month to 850 per month---there goes your cash flow.Another problem you should know about is if an HOA does sue their developer it makes selling your units practically impossible as lender will not lend on an HOA in a lawsuit.I am certainly not trying to rain on your parade. Your numbers look good but I see way too many people assuming that "all exterior maintenance is paid for" and needed to chime in.

Mark Ferguson · Answer

I do ARMS and I love them! You have to make sure you can cover the cost if the payments go up, but with the savings on an ARM you really don't start paying more than a 30 year fixed until between year 7 and 8 with a 5 year ARM. Plus money is worth more now than in the future thanks to inflation. If you have plenty of cash flow to cover those increased payments and reserves I think ARMs are fine. I invest in SFR so I am not worried about apartments being built that could take tenants away. They can't build houses as cheap as I can buy them. My lender will also lender over 10 loans. I have my 11th under contract and counting my personal residence it will be my 11th loan.

Bill S. · Answer

All seems great deals for Denver. I like it except for the ARM part.CF is over stated. You haven't considered vacancies nor interior maintenance. You will need paint and flooring. Occasionally you will need a new bathroom and/or kitchen so you will need to be setting some aside for that.You mentioned good HOA management. Not sure how you measured that. Buildings that are 15 years old will start to need some maintenance so you should look at HOA reserves. Builders set the HOA fees as low as possible because it allows them to sell the property for more. Newer properties are notorious for underfunded reserve accounts.

Adam Haman · Answer

Hi Adrian, thanks for the reminders. Most of the HOAs for these newer complexes are $175. At that rate (for insurance, water, sewer, lawn, roof and exterior maintenance) I feel like I couldn't keep all of those items in order myself on a similar unit without an HOA. You are right, though, that mismanagement will likely chip away at that efficiency over time :)

Adam Haman · Answer

Hi Bill, thanks for the feedback. You are right about vacancies/maintenance. I'm a very active manager of my properties, and definitely have been the beneficiary of some good luck, but I've had only 7 weeks of vacancy in all of my rentals since 2010, so I'm having a hard time deciding on a baseline vacancy #. Interior maintenance, same story, I've had only one tenant turn over during the same time period. I know I'm fortunate, but am not sure HOW fortunate yet!As for the HOA mgmt, I've definitely seen the low HOA baiting from builders. I don't have hard-and-fast criteria of how to determine a well-run HOA except to compare HOA rates between complexes of the same age and content (preferably more than 5 years old to avoid the bait-and-switch you mention) and make a judgment as to which are relatively better run. I would say that generally, the larger the complex is, the better their ability to keep HOA fees down. I did have one question for you: do you have a suggestion for a great lender that will do 30-yr mortgages on investment properties at reasonable rates? I don't love the ARM thing myself, but I felt confident in my ability to pay these down significantly over the next 7 years to the point where an adjustment or a refi at a higher rate wouldn't be a fatal problem.

Bill S. · Answer

@Adam Haman the current guidelines allow for up to 10 mortgages. Only a few will do that and I'm not sure if they do condos. Find a good mortgage broker (one that is knowledgeable about investment properties) and you can max out at 10. After that you are in the commercial realm. After you pay down some or see rent growth and appreciation you can refi several into one commercial loan (say a 10 year fixed). Then you can go back to the 10 limit.Mark up in Greeley is doing the same thing with 5 year ARMS. All I know is a lot changes in 5 or 7 years. At the rate they are building apartments, I think it is reasonable that at some point supply is going to outstrip demand and rent grow is going to come to a screeching halt. At the same time taxes and insurance costs continue to grow. Maintenance becomes a must because in a tighter market since worn units sit. A year or two on thin cash flow could turn into 3 or 5 years with no rent growth and rapidly rising expenses along with escalating interest rates. This can make owning those condos not so fun in short order. Even if you have some equity after 7 years. Equity can fly away when the HOAs increase and since interest rates increase so the same sale price requires more monthly payment.Don't want to be Debby Downer, just want to point out some things to consider. Stay within your self and don't bet on any outliers and you are probably going to be ok.

Adrian Tilley · Answer

Those look solid. But keep in mind that you ARE paying for exterior/lawn/HVAC/etc, through your dues. Also, if something unexpected comes up, you WILL pay for it through assessments.