House hacking scenario in west Denver neighborhood

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House hacking scenario in west Denver neighborhood

David Chen
Member since 2019 · 5 posts · 1 vote

First time homebuyer and new to the real estate investing world. Thanks for all your advice in advance!

I am a newly graduated dentist looking to house hack in the area just west of Denver proper. I am currently looking at a property in Lakewood, close to Edgewater, with a purchase price of $432k. The property is a 3 bed, 2.5 bath townhome "row house" in a newly built complex. The immediate neighborhood leaves something to be desired at the moment (think liquor stores, pawn shops, industrial businesses) but surrounding neighborhoods (West Colfax, Edgewater) have seen significant growth in the last few years, and the property is near a light rail station and is a 15 minute drive from downtown Denver. I am considering jumping into a house hacking situation here.

I will only be able to afford a down payment of about 3% at the moment, and am looking at a loan package with an interest rate of about 5%. According to some estimates I have done with my real estate agent, my monthly mortgage along with other expenses (taxes and insurance) will come to about $3000 per month. I am planning on renting to a family member at a slight discount as well as another roommate. Based on similar listings in the area, I would conservatively estimate that I could rent my other two rooms for a total of $1600-$1800, leaving myself with a monthly expense of $1200-1400 per month. My short term goal is to move out of my parents' basement while paying a mortgage (after rental income) that comes out to what I would pay for a comparable rental situation. My long term goal is to build a portfolio of buy-and-hold rental properties that will hopefully segue into a comfortable and hopefully early retirement.

My concern is that this property, as the numbers stand now, will not be able to generate a monthly cash flow (even if I factor myself in as a renter). It seems like most (non-distressed) properties in the greater Denver area are in this same boat. It just seems all the "Rules of Thumb" i.e. 50% rule or 1% rule found in the Bigger Pockets books are nearly impossible to find in a market like Denver. I will not be able to dedicate a significant amount of time or financial resources toward rehabbing a property due to my job. Although it is generally advised against, I will be hoping for appreciation to make this a better long term investment.

In a situation like mine, would you consider this a viable investment for my long term goals? Would it be more prudent for me to save up more capital for a rehab or look harder for a better deal? Is it ever ok to consider a negative cash flow situation by betting on above average appreciation? THANK YOU!

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Scott Hibbert
Denver, CO · Member since 2016 · 52 posts · 42 votes
6y

@David Chen As someone who is also looking to purchase a single family house hack in West Denver, I'll give you my perspective.

First of all.  The 50% and 1% rules of thumb are no longer relevant in Denver in my opinion.  I'm guessing they were accurate in 2013-14 but price appreciation and minimum rent appreciation has changed everything.

I currently rent a room in Wheat Ridge for $900/month plus utilities. Do you currently pay rent? The reason I ask is because I think if you can buy a property and reduce your effective "rent". Then the property might make sense. For example if I buy a 3 bedroom 3 bathroom house and rent out 2 rooms for $900 each plus utilities and my mortgage (PITI) is $2600. Then my effective rent is $700 a month which is cheaper than my rent. It gets more complicated when you include the value of your downpayment, closing costs, any unforeseen repairs, vacancies, etc. but it is something I look at for a quick analysis.

About the specific location.  I agree it is still turning over but I have a positive long term outlook.  I'm sure your real estate agent knows more about this than I do, but one of my concerns in that area is there is so much construction of very similar properties that your potential tenants/roommates will have plenty to choose from over the next 2 years as more buildings are completed closer to sloan's lake and the amenities that surround it.  Will that reduce your potential rents and not increase them over the next couple years?

I agree with @James Carlson about finding less expensive options a little further out if that is something you would consider.  It's definitely a trade-off that I battle with every time I see a potential property pop up.  I want to live with close proximity to my job and going out with friends and am willing to pay more for it.

If you only have a 3% downpayment, will you be able to cover vacancies and repairs(still happen with brand new buildings).  Assuming the negative cash flow, how will you build your reserves month over month and your next downpayment for your next property.

I personal won't buy a property that will be cash flow negative when I no longer live there. I don't bank on appreciation, especially with all talk about a recession at some point in the future. It's a nice to have but if you are long term buy and hold, appreciation won't help until it removes PMI which will be years.

Best of luck in your search and maybe I'll see you at a meetup.

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  • James CarlsonBusiness Member
    Real Estate Agent · Colorado | stan.store/JamesCarlson · Member since 2014 · 2k+ posts · 2k+ votes
    6y

    @David Chen

    What a great question and one loaded with all sorts of factors. A couple thoughts:

    Other goals?

    You talk about your investment goals but it seems like you have other goals with this purchase as well -- mainly proximity to downtown Denver and new-build, ready-to-go condition. (It sounds like you're looking in Villa Park or Barnum area.) Those goals are probably competing with your financial goals. That's alright, it's just something to be aware of.

    Gotta live somewhere

    You're right. It can be difficult to find a cash-flowing property in Denver. House-hacking can help, but it's not a cure-all. That said, we always tell our clients that you have to live somewhere and you might as well own that property. If you offset some of the costs along the way, then that's a win. 

    Other areas?

    When weighing your goals, if the financial aspect is more important, then I'd look for a not-new house further out. That doesn't mean run-down or in need of rehab; just not brand-spanking new. A 4br/2ba SFH in an outer perimeter like Thornton/Westminister up north, or east Colfax/Aurora to the east can be in the lower-to-mid $300s and you can actually cash flow once you move out then.

    Appreciation

    I know it is a blasphemy here on BP to even consider -- even say the word -- appreciation. I get it. Cash flow you can count on more. Appreciation is kind of a gamble. But I'll dive in. My wife and I totally consider appreciation when buying. Most of Colorado looks good for that. The midwest does not. Since the mid-70s, home values in Denver have dipped twice -- in the mid '80s during the savings & loan crisis and problems in the oil industry; and in the 07/08 housing crisis. In both instances, it took 5 years and 7 years, respectively, for the average home value to recover and then continue to go up.

    [email protected]720-460-1770
    James Carlson Real Estate
    WebsiteView Page
    3Reply
  • Steven Pesavento
    Investor · Denver, CO · Member since 2015 · 177 posts · 71 votes
    6y

    It's a great question, at the end of the day comes on what your goals are. because the fact that you're looking at buying a new property, I think you're not going to get some of the benefits that you get from buying existing inventory or something that needs a little bit of work. If new is a must, then you have to know going into it that you're going to pay a premium for that brand newnes. 

    I think house hacking can can be a wonderful strategy, for example I live in West Highlands and my house appraises at 700,000. But I've split it up into two units, and I live in the upper unit, and rent out the lower unit. of course I did the conversion myself, with a separate entrance and so I have money invested in the renovation of the property. But in this area I'm able to achieve about 2,000 per month for furnished year-long lease. So what I would encourage you to do is if you want better numbers, be willing to do a little work or search for something that has more than one unit.

    DM me if you want any other advice, happy to connect you with folks who could help.

    2Reply
  • James CarlsonBusiness Member
    Real Estate Agent · Colorado | stan.store/JamesCarlson · Member since 2014 · 2k+ posts · 2k+ votes
    6y

    @David Chen

    As an example of what a cash-flowing rent-by-the-room/house hack in a different area of Denver could look like, this deal diary I posted a few days ago from a client of mine might be interesting. https://www.biggerpockets.com/forums/522/topics/783521-rent-by-the-room-investment-in-denver?page=1#p4603926

    [email protected]720-460-1770
    James Carlson Real Estate
    WebsiteView Page
    0Reply
  • Scott Hibbert
    Denver, CO · Member since 2016 · 52 posts · 42 votes
    6y

    @David Chen As someone who is also looking to purchase a single family house hack in West Denver, I'll give you my perspective.

    First of all.  The 50% and 1% rules of thumb are no longer relevant in Denver in my opinion.  I'm guessing they were accurate in 2013-14 but price appreciation and minimum rent appreciation has changed everything.

    I currently rent a room in Wheat Ridge for $900/month plus utilities. Do you currently pay rent? The reason I ask is because I think if you can buy a property and reduce your effective "rent". Then the property might make sense. For example if I buy a 3 bedroom 3 bathroom house and rent out 2 rooms for $900 each plus utilities and my mortgage (PITI) is $2600. Then my effective rent is $700 a month which is cheaper than my rent. It gets more complicated when you include the value of your downpayment, closing costs, any unforeseen repairs, vacancies, etc. but it is something I look at for a quick analysis.

    About the specific location.  I agree it is still turning over but I have a positive long term outlook.  I'm sure your real estate agent knows more about this than I do, but one of my concerns in that area is there is so much construction of very similar properties that your potential tenants/roommates will have plenty to choose from over the next 2 years as more buildings are completed closer to sloan's lake and the amenities that surround it.  Will that reduce your potential rents and not increase them over the next couple years?

    I agree with @James Carlson about finding less expensive options a little further out if that is something you would consider.  It's definitely a trade-off that I battle with every time I see a potential property pop up.  I want to live with close proximity to my job and going out with friends and am willing to pay more for it.

    If you only have a 3% downpayment, will you be able to cover vacancies and repairs(still happen with brand new buildings).  Assuming the negative cash flow, how will you build your reserves month over month and your next downpayment for your next property.

    I personal won't buy a property that will be cash flow negative when I no longer live there. I don't bank on appreciation, especially with all talk about a recession at some point in the future. It's a nice to have but if you are long term buy and hold, appreciation won't help until it removes PMI which will be years.

    Best of luck in your search and maybe I'll see you at a meetup.

    3Reply
  • David Chen
    OP
    Member since 2019 · 5 posts · 1 vote
    6y

    Thanks for the replies so far! There's some really good information for me to consider.

    @James Carlson You're right. I was looking at some other properties that were in less expensive parts of town (Aurora, Westminster, Thornton, etc.). It does seem far more likely that I would be able to cash flow a 4BR property in those areas of town while keeping the purchase price the same or lower than the one I am considering now. I am definitely making sacrifices on some of the financial metrics in order to find a place I would be comfortable living in and commuting from for a number of years. I also set my location goals partly according to my sister, who would be a no headache tenant, who also has connections to many potential trustworthy tenants.

    @Scott Hibbert At first when I was trying to apply 1% and 50% rule around Denver I thought I was crazy! I guess that's an adjustment many of us will have to make when looking at markets like ours. Your point about other newly built rental properties possibly driving supply up and reducing rent prices is something I hadn't thought of. I've been lucky enough to be paying no rent, since I've been staying with my parents while looking at properties and getting settled into my job.

    1Reply
  • James CarlsonBusiness Member
    Real Estate Agent · Colorado | stan.store/JamesCarlson · Member since 2014 · 2k+ posts · 2k+ votes
    6y

    @David Chen

    I hear you about your sister. I think that's great, and again is just a different consideration for you when deciding what and where to buy. That said, if the potential for easy tenants is why you would choose your area (because your sister and her connections would stay there), I would push back a little and say that with a little work, you shouldn't have trouble getting tenants elsewhere either. 

    [email protected]720-460-1770
    James Carlson Real Estate
    WebsiteView Page
    2Reply
  • Jeff WhiteBusiness Member
    Realtor · Denver, CO · Member since 2016 · 278 posts · 371 votes
    6y

    @David Chen As others have mentioned, I wouldn't go into a new build townhouse for house hacking purposes unless you were putting 40% down payment, when looking at properties to house hack, you want to run the numbers when you live there and when you move out. The most important number is cash flow per month after you move out since you won't live there long-term. 

    If you don't cash flow after you move out or at least break even (maybe lose a little bit per month for a nicer property in a good location), then it isn't a good property to house hack.

    Based on your price range, I think you could definitely find a 4-6 bedroom house in Lakewood, Westminster, Thornton, Northglenn, Wheat RIdge, and west Denver locations. In might not be a new build, but you could probably find a decent 1960-80s ranch house that is fairly updated, doesn't need much work, and move-in ready. 

    I'm currently house hacking in west Denver and cash flowing every month, so it is realistic. It is definitely possible to achieve your goals here, you just might have to work with your sister and sacrifice a little on location and living in an older house.  

    It is important to think about cash flow and appreciation here in Denver metro. 

    For example, Edgewater is a great spot due to proximity to Sloan's Lake and Highlands. If you live in Lakewood, which is right next to Edgewater, you are a little further from the Sloan's Lake and all the bars, restaurants, and redevelopment; but the house prices aren't as expensive, and you could probably get pretty close to the same amount of rent per room. Edgewater will have a higher appreciation rate, but probably not as much as you think. 

    The big difference is what you get for your price $430-450k, in Edgewater, you are looking at 2-3 bedroom house, but in Lakewood, you will get a 4-5 bedroom house, that extra bedroom or two or three is an additional $700-$2,100 cash flow per month right there. 

    I think Lakewood is a good middle ground that can give you cash flow, and you will get the side benefits of appreciation. It won't be as much as prime areas of Denver, but it still be a solid 5-6% (which is the average last 40 year annual appreciate rate in Denver). 

    With that, you will live for free or be really close to it, and still be close enough to fun things in the city while setting yourself up for a successful first house hack. 

    3Reply
  • James CarlsonBusiness Member
    Real Estate Agent · Colorado | stan.store/JamesCarlson · Member since 2014 · 2k+ posts · 2k+ votes
    6y

    @Jeff White

    Always good to hear your thoughts on this. Are you two still up north or are you on to to your third place now?

    [email protected]720-460-1770
    James Carlson Real Estate
    WebsiteView Page
    0Reply
  • Jeff WhiteBusiness Member
    Realtor · Denver, CO · Member since 2016 · 278 posts · 371 votes
    6y

    @James Carlson Thanks!  Likewise!  


    We are on our third place now over near Belmar on the east side of Sheridan. It's the best one yet.   

    0Reply
  • Marcus R.
    Real Estate Agent · Denver CO · Member since 2019 · 209 posts · 332 votes
    6y

    @David Chen Welcome to the club!  I'm a new RE investor myself.  You may have already done this but I'd suggest revisiting your mortgage lender options.  Who's your lender? The 5% rate seems a bit high.  You may be able to get something in the 3.75% - 5% range.  Check out Key Bank.  I recently purchased a property with them in October at $413K, 5% down, with a 3.5% rate, so a somewhat similiar situation.  Key Bank also has a medical professional laon which allows dentists, doctors, and physicians, etc... to purchase with no money down.  I don't think 1%-1.5% will make or break a deal but it is about $200-$250 a month which could help you build reserves or cover other small capex items. 

    1Reply
  • David Chen
    OP
    Member since 2019 · 5 posts · 1 vote
    6y

    @Marcus Roberson

    @Marcus Roberson that's a great point! I'm working with Fairway Mortgage. As it stands, there is an FHA option with 3.5% down which would wipe out all my bank accounts at the moment. This would be at a 3.75% interest rate. There is also a down payment assistance program that I will more likely go with, that would bring my entire closing cost down to around $4500 and have an interest rate of 5%. My plan is to go with the DP assistance program, then refinance to a lower interest rate mortgage after about 3 years. As I understand it, my down payment would not have to be paid at that time, so in theory I will have my current cash as reserves or to put toward my next deal or other invrstments. Essentially, my much lower down payment would offset the higher monthly mortgage payment until I can refinance to the lower rate. Hopefully this all makes sense. My lender also told me that the physician program starts at a purchase price of over 500k. Is this legit? Anyway good luck on your RE journey and let me know if I can help in any way. Hope to see you around town!

    0Reply
  • Scott Hibbert
    Denver, CO · Member since 2016 · 52 posts · 42 votes
    6y

    @David Chen How has your search been going?  I looked at a few new build options in the West Line Village community near the Sheridan light rail station south of Colfax.  I couldn't get the numbers to work on what they are calling a 3 bed 3 bath townhouse.  The 3rd bedroom is a joke and even the regular bedrooms are small.  I've noticed a lot of this happening with the new builds near Sloan Lake.  The bedrooms are small and the 3rd or 4th bedroom wouldn't function as a bedroom in a room for rent scenario.

    1Reply
  • David Chen
    OP
    Member since 2019 · 5 posts · 1 vote
    6y

    @Scott Hibbert I actually put my earnest money down on one of the units you are describing (becomes nonrefundable Jan 2). The purchase price is $432k. I did notice that the 3rd bedroom is lacking and does not have an easily accessible bathroom. My plan is to rent the master bedroom and the adjacent top floor bedroom for a combined 1800-2000 while living in the ground floor bedroom. Hello anxiety and cold feet. In your opinion, should I reconsider this purchase before it's too late?

    0Reply
  • Scott Hibbert
    Denver, CO · Member since 2016 · 52 posts · 42 votes
    6y

    @David Chen Everyone is different so I don't want to tell you what to do.  What is your 2-5 year plan for this property?  Do you plan on living in it for a few years?  Do you plan on moving out after a year or 2 and turning it into a full time rental or do you plan on selling it?

    I have been running my numbers based on what rent would be if I don't live there.  I have made an assumption that I will probably get more cashflow per month as room for rent vs the whole unit.  So again it depends on what your future plan is for this specific property?

    My goal is to live in my house hack for 1 year ideally and then move on to another house hack and convert the first one to a full rental.  The new builds appeal to me in this way because I don't need to do any work on it.  I would just live in it and collect rent for the other rooms.

    0Reply
  • Kevin Grasse
    Denver, CO · Member since 2019 · 14 posts · 2 votes
    6y

    @David Chen @Scott Hibbert I'm currently under contract for my first house hack on sort of the opposite spectrum from yours in the Villa Park Neighborhood. Fixer upper (a lot of differed maintenance and some underlying issues) that I'm in a similar state of cold feet/questioning my decisions. I have contingencies in the contract that I have plenty of time to back out, but I've put down about $1,200 for a home inspection and structural engineer foundation inspection. I won't let that sway my decisions, but some of the issues (foundation settlement, old sewer lines, generally rough condition), are making it less of a straightforward numbers decision, and more of a risk evaluation. Since you're looking for more of a turnkey type situation, I think @Jeff White's advice about finding a well taken care of 60-80's home, 4-6 bedrooms, is great advice. Way more opportunity to cash flow than the new builds, but a bit more monthly maintenance that you can have a handyman take care of. If my contract does not work out, that's what I'll be looking for near Belmar.

    One thing that makes me a bit nervous in the Denver county is the unrelated persons rule. Technically, more than 2 unrelated persons (or 3 with permit) can't live together in the same unit. I've heard it's very rarely, if ever, enforced, but something to consider from a risk standpoint.

    Best of luck!

    1Reply
  • Scott Hibbert
    Denver, CO · Member since 2016 · 52 posts · 42 votes
    6y

    @Kevin Grasse good luck with your inspections!

    Since you said it’s a fixer upper with deferred maintenance, I’m curious if you plan to renovate yourself or contract it out? Do you plan on having roommates while the renovations are happening? This is something I haven’t figured out for my own house hack.

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