This deal analysis looks at a 1031 exchange I recently helped a client complete. He was able to sell his investment property condo and use the exchange for a duplex in Lakewood. This was a really fun deal to complete, and now my client has an asset with a lot of upside.
- Listen to the podcast “#366: Utilizing a 1031 Exchange to Buy a Lakewood Duplex” 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.
This was a great client to work with: he has a professional career and a family with a new baby at home. He wanted a smooth, easy transaction that wouldn’t take up too much of his time.
Investment Property Details
He owned a condo that I helped put on the market. Since it’s a seller’s market, it was easy to find a buyer for this property. The stressful part came from needing to extend closing to perform repairs, but that’s why communication is key. 1031 exchanges are complicated, so we do as much prep work as we can to ensure a pain-free transaction.
Appealing Features of the Property
This is a duplex in Lakewood that has side by side 3 bedroom/2 bath units each with a one car garage. The property located in a great area and is on a large corner lot.
The units have had the same tenants in them for a long time. While the rents are significantly under market, the units were very well-kept.
How the Deal Was Sourced
This was an off-market property I found through my connections around town. I make it a priority to maintain good relationships with other brokers, and they can trust that I’ll get deals done.
Property Contract Details
The client paid $660K for the duplex. Initially, the buyer wanted more for the property, but it needed some cosmetic work. This allowed us to get the property for a little less than asking.
The duplex has an older water heater and furnaces. Since we already negotiated the price down, the seller didn’t want to work with us on replacing them, as we expected. My client will need to replace the water heater and one of the furnaces.
Luckily, the seller was already in the process of working with his insurance company to replace the roof. It was replaced right after we went under contract.
Property Financing Details
I used the Rental Property Spreadsheet to run the numbers on this deal.
Right now, the rent for each unit is $1300 a month, which is severely under market. These are quite large units that are in good shape even without the cosmetic upgrades.
Property Operating Expenses
This property is great for landlords—the utilities are already separately metered, and the tenants split the water bill. The current tenants are handling snow removal and landscaping, but my client expects to pay for that down the road.
First Year Returns
In as is condition, the property is a 3.3% cap rate and has a negative cashflow of $4300 a year. While these numbers aren’t great, this is where the art of real estate investing comes into play. The property is in a fantastic location and in good shape, which means my client has the ability to push rents.
When we run the numbers with his expected rents, we can see why this is a great deal.
Pro Forma Returns
All my client needs to do to turn this into a well performing asset is bump the rents to market rate. He can easily get $2400 per month per unit and add in $1500 annually for landscaping and snow removal.
Once he makes those changes, the property jumps to a 6.6% cap rate and cash flows nearly $18K a year, or $1500 a month. He plans on saving money through self-managing, but these numbers are strong enough that he can easily add a property manager.
My client was able to lock in his interest rate early and we closed on the last day of his rate lock. If he were to buy this property today, the interest rate would be about 4.75%. Rising rates affect returns, but they shouldn’t dissuade investors from putting their money in real estate.
While rising interest rates are an added hurdle, investors can overcome it by looking at different types of loan products and shopping around for the best option.
Connect with Us
If you want help buying or selling your own investment property, reach out to me. I’m happy to sit down with you and form a plan.