This portfolio analysis was done for a client who owns two fourplexes in the Loveland area of Colorado. Both of the properties are underperforming from rent and CapEx standpoints. I spent a lot of time trying to figure out his best move, and we’re currently meeting weekly to go over the pros and cons of each of his options. We looked at these same properties using a Strengths, Weaknesses, Opportunities, and Threats (SWOT) analysis in a forthcoming podcast. I recommend listening and reading about these together to get a fuller picture. (Note: the SWOT analysis will publish around the end of August.)
This analysis was featured on a live episode of Drinks and Deep Dives. You can find the podcast for this blog post within the episode #296: Analyzing Denver Area Rent Trends and Fourplexes in Loveland.
Tune in Wednesdays at noon MT to join me live for the next Drinks and Deep Dives show.
- Listen to the podcast “#296: DDD: Analyzing Denver Area Rent Trends and Fourplexes in Loveland” on the Denver 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.
For this article, we’re going to discuss what it would look like to raise the rents or leverage up to a bigger property.
Overview of Fourplex Properties
The first fourplex has a mix of two and one bedroom units and is entirely paid off:
Having the one bedroom unit hurts the potential rental income for this property because you can’t pull as much rent from a one bedroom as you can a two bedroom. That makes this fourplex less valuable than the other one. The total rental income he’s receiving from this property is $3556 a month; compared to the market rate of $4400, this puts him at almost $1K under market. However, he bought it in 2012 and it’s entirely paid off, so everything he receives is pure equity.
The second property is all two bedroom units, but the building still has some debt on it:
Like the first property, this fourplex is also being under-rented at $3789 a month vs the market rate of $4600.
Optimization Scenario 1: Raise to Market Rents
The first option for optimizing these properties is to bring them up to market rents. (Note: for Denver area 2020-2021 rent trends, check out the Rent Trend Data for the Denver Metro Area – Should I Raise Rents? blog post.)
Once the rent is increased, the NOI and cashflow also increase, though the equity stays about the same. To evaluate the numbers, I combined both of the properties.
By increasing rents, the NOI goes from $41K to $56K, giving him an extra $15K total. The location may make it difficult to increase the rents that high and could involve more expenses to get them to that level. Assuming he is able to do that, though, he would have two nice properties that are performing well and could leave it at that.
However, he already expended a lot of CapEx on these fourplexes, which left him worn out. It’s important to keep in mind that people’s feelings about their properties can matter just as much as the numbers. If he’s had a bad experience and is tired of these properties, then that in itself is enough to want to make a change. Luckily for him, he’s sitting on a lot of equity that he could take advantage of by selling these properties.
Optimization Scenario 2: Leverage Up Using 1031 Exchange
The second option is to do a 1031 exchange and leverage the fourplexes into larger real estate. Collectively, he has about $1.1-1.2M in equity that he could use to buy a new property.
Using this equity, he could transfer it into a property that’s four times the value, meaning he could buy a $4M property with the amount of equity he has now. There is often a “wow” moment for clients when they see the how much the worth of their properties can increase. With this amount of money, he could move into commercial real estate space, and if he were to leverage up again, he could even have an $8-12M property eventually. Cashflow is a big thing in real estate, but in markets like Denver, there’s so much equity that it can create life changing options.
I ran this scenario with a 23 unit apartment complex in Colorado Springs. There are many options, but this is just an example of a type of property he could buy. The $4.13M price of this apartment complex is within the realistic range of properties he would be able to purchase.
People may expect to see much higher cashflow, but because of the debt and operating expenses, the increase won’t be huge. However, when you look at NOI, he’s getting closer to $190K in cashflow once the property is paid off. He’ll have more cashflow; make more money; and in the long run when the property is paid off, he’ll have a much bigger multiplier.
Real Estate Investing – Paying to Wait
It’s hard to compare real estate that’s leveraged because the cashflow is skewed. Paid off properties are always going to be cashflow heavy and lower risk, but if you want more cashflow in the future it can be worth it to trade up into a bigger property. In real estate, we’re all paying to wait. You put your money into a property and pause for 10, 20, or 30 years when the investment starts to come flooding in. The best decision for optimizing these properties depends on the goals; what a 35 year old wants is going to be a lot different than a 75 year old.
What’s the Best Decision? Raise Rents or Sell?
For my client, his goal is to increase cashflow. If he were younger and wanted to get that cashflow later, then this apartment building would be a great play. Instead, he’s considering partnering up and going in on a property like this, using a portion of the 1031 funds to find something similar.
I also ran the scenario of buying more single units or fourplexes, spreading out that $1M over multiple properties. Individual units will cashflow more, but finding 10 separate units for a 1031 exchange would be tough.
There’s no clear right or wrong answer here; it’s going to come down to specific goals. There’s a lot of equity to work with, and this is a great opportunity to deploy that equity and let it work harder for him. This client wants to make moves, so now he has to find the ones that are the most comfortable and realistic for him.
When you have a property that’s under-rented and the location may not produce for you, it’s time to look at all of the possible scenarios. It can be a big jump to sell off your properties, and one of the benefits of running these scenarios is we can play around with the numbers and get an idea of how things could play out under various circumstances.
Do you have properties you would like reviewed? Reach out to us to run them through our Real Estate Portfolio Analysis Service. Schedule a Portfolio Analysis consultation and start optimizing your rental property today!
Or if you’re just starting out and would like help shaping your real estate investing strategy or finding a property that matches your needs, reach out to us. We love to help others get started investing in Denver real estate.