Happy Thursday! Today we’re crunching the numbers on a duplex for sale in Denver. Sit back, grab your favorite hot beverage, and let’s dive in.
Here’s the duplex we’re looking at - it’s currently listed for $500k and has the following two detached units (with a shared garage):
3 bed/2 bath unit
2 bed/1 bath unit
This duplex is located in Elyria-Swansea, a working-class neighborhood located on the north side of Denver. Frankly, it’s one of the less well-off and safe neighborhoods in Denver, but sometimes the best deals are diamonds in the rough. We’ll assume that we purchase the property for the asking price of $500k and that we don’t need any upfront renovations.
We’re going to make the following assumptions:
20% down with a 30-year fixed mortgage at 7.5% interest rate
0.54% annual property tax rate (based on Denver’s current rates)
$175/mo home insurance
10% reserve for capex and maintenance
5% vacancy rate
2% annual rent and expense increase
We’ll live in the 3 bed/2 bath unit, rent out the 2 bed/1 bath unit, and rent out the two additional bedrooms in our unit.
Looking at rental comps in the area, it looks like 2-bedroom units go for about $1,800-$2,000. We’ll be conservative and assume we can rent out our unit for $1,800.
Rooms for rent on Craigslist in the area are going for around $800 - we’ll assume our rooms rent out for $800/mo each. That brings our total monthly rental income to $3,400 ($1,800 + 2 x $800).
Plugging these numbers into our house hacking calculator (reply to this email and I’ll send you the link!), we get the results below.
Our monthly outlay for mortgage + insurance + property tax comes out to $3,197 and we’re bringing in $3,400 in monthly rental income. That means we’re making $203/mo more than our monthly payment! We’re off to a good start.
In the first year, we’re putting putting aside $510/mo for capex, maintenance, and vacancy. This number could be higher or lower in reality, but this is a reasonable estimate (5% of total rent for each). Taking this into account, our true living cost is -$307/mo for our first year (-$3,682 for the whole year). We accrue $3,687 in equity in our first year - taking that into account, we’re breaking even! Not including equity paydown, we break even on our out-of-pocket costs in year 7 of ownership.
Would I buy this property? Possibly! The numbers here look pretty good - we’re putting down $100k to purchase the property and we’re breaking even in the first year. You’re making some sacrifices living in a less-than-perfect neighborhood, but that’s expected if you want the numbers to work out. I’d spend some more time doing due diligence on the neighborhood demographics to see if it’s something I’m comfortable with. It’s always an option to move out of the property after a couple years, but we’ll have to account for the fact that a lot of the financial benefit is in not paying our own rent.
Thanks for staying until the end - next week we’ll be breaking down an Airbnb for sale. Stay tuned!