[Calc Review] Help me analyze this deal

[Leanna Mansour]

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Duplex in CO, outside Denver in Longmont. I am told this is an up and coming area with a nice downtown. Management company would charge 10% of monthly rent and realtor told me the rent on each unit will soon be increased from $1200 to $1300/month. Good deal? Thoughts?

[Steve K.]

Originally posted by @Leanna Mansour:

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Duplex in CO, outside Denver in Longmont. I am told this is an up and coming area with a nice downtown. Management company would charge 10% of monthly rent and realtor told me the rent on each unit will soon be increased from $1200 to $1300/month. Good deal? Thoughts?

I like Longmont and have a few properties there (also looking to buy more). Downtown is definitely undergoing a revitalization with the recent addition of several great restaurants, breweries, coffee shops, etc. I don't even hear the nicknames "Methmont" or "Stabmont" being used much anymore ;) 

Not to be a stickler but I wouldn't really call it "outside Denver" as it's 45 minutes away and a distinct town from the metro, not a true burb like Arvada, Westminster, Lakewood, Littleton, Centennial, Highlands Ranch, Aurora, Greenwood Village, Commerce City, Northglenn, Englewood, Glendale, Thornton etc.etc.etc.... Denver has endless burbs but Longmont is well outside of those and a separate market. It's in Boulder County, much closer to Boulder than Denver and halfway between Denver and Fort Collins. So while some residents commute down to Denver or up to the Fort, either way it's a crappy commute and wouldn't be anyone's first choice. A much larger percentage of people commute into Boulder or work in town/the surrounding area. 

There is a lot of variation in neighborhood quality within Longmont, with some parts being fully gentrified (SE side which is rapidly approaching Boulder prices), others that are still "transitional" and also some pretty rough hoods that may never be nice (W/NW side). Based on my experience in the market, my suspicion is that a duplex at this price point is probably in a less desirable location or else is in bad physical condition. If your goal is to put some money into it, fix it up and hold for a long time period, it could be a good buy as I think most of Longmont will continue to have good appreciation. I would be surprised if it cash flows anywhere near $618/month initially though. My suspicion is it may be more of a break-even at best type scenario for the first several years due to vacancy/tenant issues and especially deferred maintenance/capex expenses and management costs. I'd calculate management at 15-18% as there are likely going to be a lot more fees to the PM than the base 10% such as leas-up fees (typically 1 month rent), lease renewal fees ($100-1/2 months rent), inspections, maintenance calls, eviction fees, etc. I'd also set vacancy to at least 10% and bump up your repairs by a lot. But that's just going on the age and build quality of the duplexes I've seen listed recently in that price range. It could be a smoking deal on a nicer property in a great neighborhood for all I know, just highly unlikely at that price point. If you want to share the nearest cross streets or the address I can tell you more about the specific building and location.

Regarding rent increases: my buildings are in class C+/B- locations and rent for $1100-1200/unit. I can fill units easily and retain tenants at that rate but any higher than that I'd be competing directly with much newer and nicer buildings that have gyms, pools, granite, etc. so you'll have a hard time fetching any more than $1,200/side on an older duplex IMO. There is a brand new development downtown called South Main that will bring 314 new units online this spring with rents starting at ~$1,400 and amenities that include high-end finishes, a year-round pool, hot tub, community BBQ, covered gazebo, private gym, lounge, pet spa, gear workshop, and co-working space. So that's your competition if you want to push rents. Hope that helps!