Denver, CO Triplex Deal Check Request

[Paul Lee]

Hey BP members, 

I need a quick sanity check on the math here just to make sure I'm not biting off more than I can chew.  I'm currently under contract for a triplex, which I will be occupying one unit (2 BR, 1 BA) for a year before renting it out.  A little backstory on the property: It was built in 1880 and last sold in 2004.  The seller has not changed rent prices for years, resulting in the previous tenants staying for more than 5+ years and paying way below market rents.  Based on my research of Craigslist, Rentometer, and Padmapper, 1 BR / 1 BAs go for $1,100 - $1,500 and 2 BR / 1 BAs go for $1,400 - $1,900.  A current tenant on a month-to-month lease pays $900 for the 1 BR / 1 BA.

**The following analysis assumes that I move out and have all units being rented out.

Denver, CO (Baker) Triplex

List price: $620,000

////////////////////////////////////////////////////////////////////

INITIAL INVESTMENT: $129,780

ANNUAL PRE-TAX CASH FLOW: $7,100

CAP RATE: 5.13%

CASH-ON-CASH RETURN: 5.47%

IRR: 12.85% per year (30-year hold assumption, 3% increases in rents / expenses)

////////////////////////////////////////////////////////////////////

INCOME**

Gross Rental Income UNIT 1 (1 BR / 1 BA): $1,150

Gross Rental Income UNIT 2 (1 BR / 1 BA): $1,150

Gross Rental Income UNIT 3 (2 BR / 1 BA): $1,600

Vacancy (6%): $234

TOTAL INCOME: $3,666

EXPENSES

Prop tax: $517 ($6,204 annual)

Insurance: $110

Maintenance & Repairs (10%): $390

TOTAL EXPENSES: $1,017

NET OPERATING INCOME (NOI): $4,683

DEBT SERVICE

Loan Payment: $2,058

TOTAL DEBT SERVICE: $2,058

MONTHLY CASH FLOW: $591.47

////////////////////////////////////////////////////////////////////

Am I missing anything for my analysis?  I know some people factor in property managers in their analysis.

[Nathan Zierer]

Couple of things:

Your ROI is at 5.5% - (average for the stock market is 7% and this can be a lot less work than owning a home)

There is no break out for utilities - does the land lord in Denver have to cover anything.  I am used to paying for Water, Sewer and Trash.  Electric and Gas are on the tenants. 

Are you always going to self manage or will you get a property management company - budget on the high end at 10% until you find one and see what they are actually charging. 

Insurance seems low to me, I would have figured about $140-160 after you have moved out and its purely an investment property.  While you live there it should be higher still. Have you contacted an insurance company to see or is this an estimate from a 3rd party real estate plate form?

Maintenance & Repairs - are you combining the Maintenance and Capex at 5% each. If so, that old of house (unless it was gut rehabbed recently) will require a larger Capex. Cast iron plumbing stacks/sewer laterals, lead or galvanized water lines, fuse boxes/knob & tube wiring, roofing, windows - and if your in a historic district they city/neighborhood will have a lot to say about what you can do and its never the cheaper option. Here in St. Louis, the Cultural Resources Office will make you put in historic looking wood windows that can cost $800-1,500 each vs. vinyl at $400. Also the Repair % will depend on the tenant quality, college students will tend to tear a place up while young families not so much. Also if the house is full of plaster the repair costs can go up because it can unravel from a golf ball size hole to a whole wall if your not careful (I live in a house from 1886)

Not trying to discourage, just laying out some items that I didn't see and don't know if you had factored in.