Denver, CO · Member since 2018 · 15 posts · 2 votes
I live in the suburbs north of Denver, CO and purchased a 2 bedroom townhome with an unfinished basement in February during a "sellers market". I am now in the process of looking into other living arrangements and would like to use my home to generate income, but with a high mortgage and HOA, the avg rent prices in the neighborhood project that I will have a difficult time covering my monthly costs. I am beginning finishing my basement to add another room and would like to rent each room to college students (I live 5 minutes away from a community college and 2 minutes from public transportation perfect for commuting to some schools in Denver) in an effort to rent higher and cover my monthly costs to profit monthly.
I would love to hear from someone who has overcome the issue I’m facing in terms of buying high and trying to leverage my home to turn it into an asset providing passive income. If you’re that person, please share your story and your successes and failures if you feel comfortable. I would love to learn from you.
@Jeff Beaman just be sure to check your local ordinances/codes around basement dwellings...these are usually pretty technical and restrictive...in general, basements are not considered "habitable"...and to make them habitable is pretty pricey. Most of the concerns are related to egress and fire.
And in general, finishing below grade space only returns .30-.40 cents on the dollar...
@Jeff Beaman just be sure to check your local ordinances/codes around basement dwellings...these are usually pretty technical and restrictive...in general, basements are not considered "habitable"...and to make them habitable is pretty pricey. Most of the concerns are related to egress and fire.
And in general, finishing below grade space only returns .30-.40 cents on the dollar...
@Jeff Beaman I am an investment broker here in Denver and work with some people that have done what you're doing. You do need egress windows to make your basement "habitable."
The house hack play could be the best option for you here. Margins are usually thin and gradually increase. As your fixed mortgage stays "fixed" and rent gradually increases as time passes, your margins will improve and equity will increase. Also building equity into your property is smart, especially if you can save money doing it yourself in a timely fashion.
In the time initial time of thin margins, your outlook on the numbers is important. For example, if you have to pay a portion of your monthly costs, it should be the case that your other two renters are covering more than 2/3rd of the monthly costs. (This dynamic of other people paying for you in part = house hack).
@JeffBeaman, you could househack until you find another place, it's a great strategy! Here's a blog post from biggerpockets that's helpful. I'm a househacker myself and it's been great.
@Brandon Sturgill Thank you for the information. Are you suggesting that it may be more beneficial to rent it without finishing the basement? Rent in my area for similar homes is $1500-$1700. I know this may not have been by the books but I was intending to make the space a “living room” with a bathroom and a closet down there. It would not be able to list as a bedroom, but it does have a window and someone would effectively be able to use it as a bedroom even though it may not conform. It would effectively just give me 300 sq ft of finished living space. Finishing costs are estimated at $3,500, I’ll be doing much of the work myself. Where did your figures of .30-.40 on the dollar return come from?
@Quinn Holland Orris Thank you for reaching out! My goal is to not be living in the space at all. I am starting a family and have quickly outgrown my 2 bedroom townhome. By finishing the basement I was hoping to use it as a room to rent without it necessarily conforming to code. From looking at comparisons in the area I’ve estimated renting it without the basement would only bring $1500 each month whereas with the basement $1700 each month if I rent to a family. If I go for the “renting to college kids” or “renting rooms to individuals who share common spaces” route I was hoping to rent per room at a higher price.
My monthly expenses are roughly $1900, therefore I would be having to pay the difference if I rent for less, however I would be freeing up roughly $1700 per month of my own money to invest elsewhere. What are your thoughts on that? It’s not ideal but I’m exploring all opportunities.
This is my first time legitimately renting a home (I currently rent a room in my house to a close friend with no formal agreement in writing) and I’m thankful to be able to talk through this with someone familiar with something like this.
@Suly Bolanos Thank you for the link Suly, I’ll definitely check it out! I currently House-hack however I just got news that my family is growing in the next few months and this may not be logistically possible in my small townhome anymore.
For your house hacking, did you buy a multi family or a single family and rent out a room in the home? Very interested to hear how you’re doing it?
Have you looked into Airbnb or VRBO. Generally you can get a good price if you just rent out each individual room or you can rent out the entire house. My brother bought here in phoenix recently in the 'sellers' market and is doing airbnb for two of the bedrooms. He gets roughly $60/night for each room and rooms are booked on average of 15 nights a month. Between the two rooms he is able to get anywhere from $1,600 - $2,000 a month.
@Jake Mullins Great suggestion, I have not looked into that. Is the home they’re using for AirBNB in the suburbs or near local hot spots? Also, what did they have to do to get the home ready for AirBNB? (Dial pad locks, different ins, etc?) Finally, are they currently living in the home as well?
@Jeff Beaman Are you moving out and then renting it? Or are you living there and want to rent out the extra bedrooms?
It's tough to make two bedrooms work. The only time we've bought a two bedroom house hack was in downtown. Out in the burbs, the more bedrooms the better. Generally, we focus on four or five bedroom places.
You're on the right track. You're looking at comps and getting numbers for finishing the basement. if it makes sense to invest $xx into the basement, then do it! If it doesn't, then don't.
What amount did you put down? I'm assuming 5% or so?
It's hard to make places cashflow at such low down payments. If you send me your address, I'll be happy to take a look and give you some insight.
@Chris Lopez That is my next issue, I used a CHFA first time home buyer loan with downpayment assistance and did not put any money down myself (I used that money to rehab the interior). So I do currently have a silent second on my home through the downpayment assistance, which I regret but I’m learning as I go.
I do not plan to live in the home while I rent it. I know being able to cash flow may be difficult in a 2 bedroom townhome which is why I considered finishing the basement to be a “living room” with a bathroom and a closet that I may call a bedroom. The basement has an egress window but the layout of the basement does not allow me to have the room where the egress window is (that window will end up in the storage room once finished).
@Jeff Beaman, You're welcome and oh yeah you'll definitely require a lot more space with a growing family.
For my 1st house hacking experience we lived in one of the four units in a multi family property we bought in Denver. For the next property and to avoid paying so much towards a downpayment for a multi family we bought a single family home with a mother in-law suite. It's much like a duplex minus the price (6 bedrooms 3 bathrooms, 2 kitchens, 2 laundry rooms etc) The entire place is rented by a family except the 2 rooms in the mother in-law suite. We hope to have that part of the home fixed up and rent ready by February.
How much would you stand to lose if you rent and how much if you just sold? Its hard to make a deal bought at the wrong price a good deal so cut your losses while you can. In 2-3 years it could be worst. Only other thing you can consider now really is trying it as a short term rental which will take alot more of your time.
@Charles Kao Thank you for your input! You would recommend selling instead of trying to rent and pay down the principle and build equity? I would barely break even as it stands now but would most likely lose money. The city has approved several large upgrades within a 2 minute walking radius in the near future including a new recreation center, retail stores, condos, and much more in the next 5 years. I’m not saying I haven’t thought about selling, I just didn’t want to sell now if there’s a chance for all of this to help raise property value in the near future.
@Jeff Beaman to be honest their home isn't near any real hot spot. It's just generally cheaper to book an Airbnb than a hotel and also the house feels much more like a home which many people prefer. My brother currently resides in the home and rents out two other rooms. He provides a mini fridge and toaster oven in the rooms for guests and as a host you have the ability to what you're willing to provide to your guests. He uses a lock on the door that needs a code to enter and changes the code every week or so providing future guests with it the day of their arrival. Overall It is a fairly simple set up and the only maintenance is washing the sheets after each guest stays.
My father also rents his house out for $250/night. He requires you stay a minimum of 5 days and had it booked for 2 months straight at one point. His home is in a much nicer area and provides much more amenities such as a pool and plenty of great golf courses near by. My father did however run into trouble with the HOA when somebody reported him. If you consider it make sure to check in with your HOA as his HOA had a minimum rental term of a month.
Anyways you can essentially set it up however you like and there is plenty of website with tips and you're able to pick an choose potential tenants as your guests and you can read reviews on them to ensure you don't have any terrible people drop in.
I assume your HOA is fine with you renting out your unit. Make sure of that before you proceed. The problem with having an unpermitted "bedroom" is that if there was a fire and the occupant couldn't get out you would be in a world of trouble. If you put a closet in the room it will be considered a bedroom no matter what you call it. The "bedroom" must have an acceptable egress from THAT room. You might be able to do this and get away with it and nothing ever happen but if something did you will find yourself in serious trouble.
@Don Gouge Thank you for the heads up! Any suggestions on how you would go about making this room a value adding investment if the plumbing that is already there does not allow for a layout that has a bedroom by the egress? The other window is 6 ft wide and opens up to my front yard, it just isn’t technically an egress window. I look forward to hearing back from you!
@Jake Mullins Great info here. I really appreciate that! This may not be the right choice for my current home but I will surely keep this option open for future investments as I go! Thank you again!
Thought I would share my story, not unlike yours. I bought a 1/1.5 townhome in Philly in 2010, thinking the area would improve. Ended up moving out 4 years ago to buy our "forever home" with my wife and decided to rent out that property to get into real estate investment.
Every property is different, but consider you'll either need to manage this yourself or give it to a PM, and there is a time/money cost with that. You'll have to pay for CAPEX, maintenance, insurance, etc., and it sounds like the margins are razor thin. If you think this property can be a long-term investment property, whereby its value will continue to increase and you can gain significant equity/tax advantages from it, then by all means continue on that path.
Word to the wise (I hate when people say that), you need to be realistic about your expectations if you decide that path. I rented the home for 2.5 years and did everything wrong. I didn't screen well enough, I was too focused on "breaking even" instead of trying to properly manage and add-value, and I banked on significant equity increases which never came. I ended up selling that home, cashing out about 30k (10 years...30k equity, saddest thing ever), and flipping it into a cash-flow positive property.
Cash flow seems to be everyone's goal in this game, because if you have a positive cash flow you're still gaining equity (that someone else buys you), you are putting money in your pocket for fun or for the next property, and you still get the tax advantages for being a property owner (theoretically).
Basically, decide where you are at. A home is the most expensive purchase that you make and it can be your primary barrier to investing. If this house costs you money, and your next house costs you money, how could you possibly spin either of these into investment vehicles? If your salary goes primarily to pay two mortgages, how can you add another property under your belt if you aren't saving any money?
To me -- saving every penny, getting rid of unnecessary costs, paying down debt -- these are things to free you up to start investing, which I hope would be the primary goal of folks on this board. If you have a property costing you money, and you're going to buy another SFH that will cost you money, and you have a car payment, student loans, medical costs, et al -- you'll be back here in a few years saying "why can't I get off the ground?!" and the answer is right here.
@Jeff Beaman if you want to know more about people renting out on Airbnb - I follow @nestrs and @thanksforvisiting_ on Instagram and they are always posting about how they use Airbnb! Might be a great resource! I highly suggest checking out doing Airbnb... I am very interested in it myself. I know people who do it in the city and in the suburbs and make more than they would than typical renting. Do your homework on it though to see if your space would be a good fit! Good luck :)
@Jeff Beaman Lots of new info in the last 24 hours. The recommendation about the egress window is spot on. I would highly recommend not short cutting that. You'd be putting a huge liability on your shoulders that is unnecessary and not smart for you and your family. I work with a lot of contractors and investors doing fix and flips. So the opportunity to build real solid equity into your property is something I'm familiar with and sounds like a very straight forward job for you (around 3500? you said)(would also recommend getting multiple contractors in there to get multiple quotes). You have to do it right to get top value when selling. If renting you can get by with lower quality finishes, but still do not shortcut egressing windows. Then you can get home reappraised after to get that new equity on paper, or just sell.
Since your in a town home, your neighbors are your comps for price. Would be good info to know how many have finished basements on your street. Also keep an eye out to see what they're selling for. Average appreciation right now is around 6% annual.
Your outlook on the example of getting $1700 free'd up monthly despite needing to cover $200 is good. You may not make this into a slam dunk or positive cash flow, but your taking action and making things happen.
If this were my situation, I'd be running numbers for finishing the basement to get top-value and selling in Spring. I'd also run numbers for renting at per door rates with finishing basement w/ rental finish and egress windows. Whichever numbers make the most sense would be my plan of action. (I'm already be leaning toward selling, all things considered.)
It just depends but in my experience holding onto a bad investment too long is one of the worst mistakes I've ever made. In hindsight because market appreciated so much I could have broken into the green a little, but the time spent and purging more and more money was not worth it. I would simply analyze how much would you lose now if you sold
versus how much would you lose on monthly income. So for example if you sold now and lost 10k, but would only lose 100 a month holding and you think it would be cashflow positive in 3 years or could sell at breakeven at that point then you are looking at 10k now versus 3600 minimum over 3. One scenario you know what your loss is, the other is unknown so thats your call because you know your market and your financials hopefully better than I do. Also consider if you cannot get another investment because of this deal your loss could be higher because of opportunity lost. For my situation granted it was years ago I was
so relieved the day we sold our investment and we lost over 60k my only regret was not selling sooner. I made all the money we lost, less than 3 months after selling and my regret was the time wasted not the money lost.
"I’ve estimated renting it without the basement would only bring $1500 each month whereas with the basement $1700 each month if I rent to a family."
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Families can stuff children and family members into areas that strangers cannot be put into. Renting a specific basement to a stranger is a commercial activity. Renting an entire house to a stranger family, with no limit on that family putting a family member down there, is not the same, and in most places would be permissible.
