Sometimes, the best property to purchase is one with potential. With a tight market and low inventory, it can take some forward thinking to find something that has the ability to match your long-term goals, even if it’s not performing optimally in the moment.
In this deal analysis, we’re looking at a fourplex in the Cimarron Hills neighborhood of Colorado Springs that is underperforming now, but has a lot of potential for the future.
- Listen to the podcast “#75: Cimarron Hills Fourplex with Value Add Opportunity” on the Colorado Springs Real Estate Investing Podcast
- Watch the YouTube video (at the bottom.)
- Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast or video.
These clients are a couple who are experienced investors. They have investment properties all over the country, and have already purchased a couple of duplexes in the Springs. They were in the market for a fourplex and knew they wanted to be in the Cimarron Hills neighborhood because of its proximity to Peterson Air Force Base and the development in the area.
Investment Property Details
Location of the Property
If investors are able, it’s a good strategy to offer an affordable rental product in this neighborhood. A lot of the new builds in this area are starting at higher price points, so giving tenants a less expensive alternative is an attractive option.
How Was the Deal Sourced?
We found this property on the MLS. It had been on the market for a couple weeks, which is a pretty long time in today’s climate. The reason for that is that it was priced aggressively and is underperforming. Many potential buyers didn’t want to pay that much for something that wasn’t optimal.
Property Contract Details
The property was listed at $800K, but my clients drew the line at $765K. While I typically haven’t had a lot of success in this market with getting clients under contract for less than list, this was an exception. Since the property had been on the market a while and potential buyers knew it was underperforming, the seller was amenable to their terms.
The seller accepted the offer of $765K, but he made it clear that he wouldn’t do a single thing when it came to the inspection. This was a fair tradeoff, and I wrote the contract so that my clients were able to back out if anything major came up, but they wouldn’t make any objections.
Luckily, the inspection went well. All of the units are in good shape, and the inspector only found minor items to take care of, such as improving the stairs and some electrical items. We estimated around $5K for them, which was within my clients’ budget.
Property Financing Details
I used the rental property spreadsheet to run the numbers in two ways: as the property is currently, and what it will look like in a year or two.
Right now, tenants are charged their base rent, plus a flat $80 per unit for utility bill back. Each unit pays for shared utilities equally. There is also coin-operated laundry that evens out to $25 per month per unit. Altogether, my clients are getting $4105 in total monthly rental income, which is well below market rates.
Property Operating Expenses
Since my clients are out of state, they are paying for property management.
The landscaping for the property is minimal, but there is a large parking lot that will require snow removal.
First Year Returns
Looking at the initial numbers, it’s easy to see why other investors didn’t have any interest in this property. A negative cashflow plus a low cap rate of 3.7% isn’t very appealing. However, these buyers have a patient approach to investing, and took a longer view on this property. It’s located in a growing area and the building is in good shape, two things that are much harder to change than the management structure.
Property Overview after Adjustments
Given the unit size and condition plus the location of the building, it’s reasonable to rent the units out at $1100 each. A more accurate rate for utility bill back is $90 per month, which is still acceptable to tenants, who expect to be charged for utilities. Laundry should stay the same at $25 per unit.
There’s also the option to charge $35 a month for secured storage closets that are located off to the side of the building.
In total, the owners will be getting $1250 per unit each month.
Yearly Returns after Adjustments
Once the owners make these changes, they’ll see a drastic impact on their returns. Just from some slight increases, the cap rate jumps from 3.7% to almost 5%. All they need to do to reach this point is tell their PM what their strategy is and have some patience as leases turn.
This is a great example of a deal that doesn’t look too exciting on paper but becomes a great long-term investment after making some adjustments. Even with these conservative estimates, the buyers are getting great returns on this investment after a year or two. Since they plan on holding onto it for along time, it’s a solid strategy.
Connect with Us
If you want help strategizing your investing plan, reach out to us. We’d be happy to run the numbers and help you find the right property for your long-term goals.