New Format for Deal Analyses

This deal analysis is part of a new series we’re launching on YouTube called Drinks and Deep Dives with Chris Lopez. In it we cover

• Networking and learning with local experts
• Market updates
• Deal analyses

You can find the podcast for this market update within that podcast episode called New Show! Drinks and Deep Dives: Market Update, Multi Family and Office Deal Analyses. Tune in Wednesdays at noon MT to join me live for the next one.

Investment Property Details

Deal Overview 

This is an eight unit multi family apartment building in north Colorado Springs.  The building is essentially two combined fourplexes that are mirror images of each other.  Each unit has two bedrooms and one bathroom, and each building has its own laundry and storage rooms.  

Appealing Features of the Property 

There are not a lot of small apartment buildings in this area of town, and the highly rated school district is a big draw for renters.  The building is located in a complex with other small apartment buildings and they all share an HOA.  All of the buildings in the complex are well-maintained, attractive brick buildings.  

Property Contract Details

Inspection Issues 

After the inspection, the seller agreed to replace the sewer line, which cost $15K.  Two of the units could use some updating, but nothing required immediate attention.  

General Notes 

The original contract price for the property was $1.38M, but the appraisal came in lower.  We’ve seen this a lot in the current market, and commercial buildings are appraised based on how they perform instead of sales comps.  We were able to negotiate the purchase price down $800K to $1.3M.  

Our clients’ down payment was 37%.  Typically in the commercial world, if a buyer isn’t local or doesn’t have experience in a market, the lender will require a bigger down payment than the usual 25-30%.  This is done to ensure that the buyer has some skin in the game and provides reassurance to the lender.  In this case, the lender required a 65% loan to value (LTV) and our clients decided to put in a little more on top of that.  

Property Financing Details

Stabilization 

Plan v Reality

The rents for this building were originally all over the place, ranging from $800-$1100 a month.  The previous owner was billing back the renters for utilities at different rates and including other maintenance, such as snow removal and common area cleaning.  There are eight storage units in the building, but the previous owner was keeping them for personal use.  

The rents are significantly under market value, so the new owners plan to raise them to $1100 plus a bill back of $75.  The laundry is expected to generate $200 a month in income, and the storage areas will be available for rent for between $25-50 per month.  

Interesting Points 

I’ve never seen an HOA for small, multi family buildings before, but it’s an intriguing concept.  The current rate is $237 a month and covers parking area maintenance, trash, and covenant enforcement.  The buildings are clearly well-maintained, and we saw towing enforcement while at the property, so it seems to be worth the cost.  

Spreadsheet Analysis

This was a commercial loan.  The interest rate was surprisingly in line with the residential rates we’ve been seeing: 3.875% 30 year term, with 5 year fixed and then a floating Adjustable Rate Mortgage (ARM). 

Property Operating Expenses

First Year Returns

The 6.2% capitalization (cap) rate is higher than what we’ve been seeing on other multi family units recently.  With some more efficiencies put in place, I’m confident it can go even higher.  

Immediate Goals and Plans for the Property

Our clients are planning on raising the rent by spending about $10K to update the two units and increasing rent as leases end.  

Exit Strategy/ Long Term Plan

There are a lot of options for this building in the long run.  There’s an opportunity to build a parking pad at the base of the building to eventually provide private parking.  They are also looking into potentially renting out some of the units as corporate rentals, which need to be furnished but have a high rate of return.  With higher rents, they’ll be able to refinance down the road and take advantage of equity.  

Conclusion

This is a great deal for our investors and gives them a lot of opportunities in the future.

How to Get Started Building Your Own Rental Portfolio

For information on how to get started investing in Colorado Springs, check out our free 2021 Colorado Springs Real Estate Investing Guide. Or sign up for our Colorado Springs deals email list to get pre-screened properties sent directly to your inbox.

YouTube Video:

New Show! Drinks and Deep Dives: Market Update, Multi Family and Office Deal Analyses