Is this the Ultimate Colorado House Hack Idea in 2024?

Question

I was recently talking to a graduate of one of the military academies who will be moving to the Denver/Aurora area at the end of this year. We were brainstorming house-hack ideas. We arrived at this as the hypothesis:

- Look for a 4-5 bedroom single family home, or a large duplex - 4-5 bedrooms.

- Look for properties for sale with assumable mortgages in that area. There are multiple properties that are listed that can be purchased with less than $50K in cash, with assumable mortgages, in the 4-5 bedroom range, for less than $550K.

- Look for properties with a large backyard and/or detached garage that would work well with an ADU and learn the ins and outs of the new CO laws that essentially have rezone most of the state to require approval for new ADU construction.

- Underwrite the property to breakeven or small positive cash flow as a standalone long-term rental to a single tenant. This must produce positive cash flow to protect downside.

- Understand the upside of the "rent by the room" strategy

- Understand the upside of any repairs that can be made to the main unit.

- Understand the cost/value of completing an ADU project

- Underwrite mid-term and short-term upside cases as well.

I believe that this approach minimizes downside by exploring the numerous currently for sale opportunities with assumable mortgages. That it has a strong "base case" cash flow from the house-hack, and that it has multiple avenues for material upside, combinining live in flip and house-hack concepts.

I further believe (though would not underwrite to this) that this approach would offer the buyer the potential opportunity at a future date to conceivably subdivide the parcel and sell the main unit and ADU as separate properties. That is speculation, but I believe the law will tend towards allowing that kind of outcome in future years.

What do you guys think? Practical? Feasible? Worth exploring?

Dan H. · Answer

The multi unit works better for financing due to ability to use rent from the other unit to meet income requirements on the loan.  Rent for rooms in the owner occupied unit does not  have this same benefit.

>Underwrite the property to breakeven or small positive cash flow as a standalone long-term rental to a single tenant. This must produce positive cash flow to protect downside

With realistic expense estimates, this is tough at investor LTV.  It is very tough at owner occupied LTV.

>Understand the cost/value of completing an ADU project

In my market ADU additions in single family zoned areas are getting valuations far below the hands off cost of the ADU addition.   This negative initial position can consume years of the cash flow.  The primary problem is that building a single small unit is near highest development cost.   This is only one of a plethora of issues that make ADU additions typically a poor RE investment.

In general, it is a tough RE market but house hacking is perhaps the best not real active option.  Active options, such as flips and value adds, require work, have risks, and are tough to do well on the first try.