Rent by the room investment in Denver

[James Carlson]

I helped two buyer clients close on this deal last week in Aurora, Colorado, just outside of Denver and thought I'd share it. It's a good example of how even in a hot market like Denver, if you get creative, you can still cash flow. In this case, they are doing a medium-term rental, rent-by-the-room model. It's a straight-up investment property for them, but it would definitely work for anyone wanting to house hack in Denver.

The deal

A 1500sf, 4br/2ba SFH

The seller had remodeled it a bit. 

How did we find the deal?

The MLS. Sure, off-market deals are great ... if you can find them. We had looked at some other houses in the same neighborhood and missed out on one that was about $10,000 cheaper, but it was also in older shape. This one will photograph well, which is important for the tenants the clients want to attract.

Rent-by-the-room model

The clients are furnishing the property for about $4,000 and renting by the room on a medium-term basis. They had 13 showings for potential tenants before they closed. Most were doctors and nurses who are working temporarily at the hospital. 

What was nice about this space is that A) it was ready to go and looked good in photos so it attracted a higher price and more quality tenant and B) it had two living spaces which will allow the roommates to spread out a bit. This second thing may seem trivial or meaningless to your bottom line, but I see it as a way to keep people happier longer, which may also keep them out of your hair and keep them renewing a lease.

The numbers

Purchase price: $325,000

All-in monthly expenses: $2,050
-- That includes principal, interest, taxes and insurance (they put 25% down); 5% savings each for repairs and CapX, 5% for vacancy and about $200 for utilities

Rents: $2,900 
-- That's an average of $725/room, though two of the rooms were for more and two were for slightly less

Cash flow: $850/month

Again, the above numbers show me that anyone wanting to house-hack in Denver could do this and live rent free, or even cash flow a touch. Because if you lived in one room, then, you'd lose about $725.

Considerations

Anyone wanting to house hack needs to be aware of the laws around the number of unrelated people that can live together. For instance, in Denver the cap is two unrelated people. In Aurora, it's four. This can certainly change your model.

Also, for those house hacking and wanting to incorporate a short-term rental or Airbnb in one of the rooms, you should know what your STR laws are in that city.

What's next?

They're going to get this up and running and then rinse and repeat.

Pictures

[Angie Shires]

@James Carlson Thank you for sharing. I've really been leaning toward the "boarding house" model this past year and this takes it even a step further! We have a major college and a large community college in town, as well as two large hospitals! 

Our market is doing well, but I think that this concept could be even more profitable in our area! 

Also completely agree with the two living areas, keep them happy and they will stay longer! How did they handle parking? 

[Account Closed]

@James Carlson great post. What would a 4/2 normally rent long term for in that area? I don’t know Denver much but I would think it’s around $2900 as well.

I’ve thought about the rent by the room strategy but it hasn’t pencilled out for my area of Oakland. An investor friend of mine bought a 5/3 in East Palo Alto 5 years ago for around $500K. It’s 1 mile from Facebook and she gets $1500/room which is insane.

[Damian Gutierrez]

@James CarlsonThanks for sharing and breaking down the deal. Is your client managing the rentals or hiring out to a property management company? I’m also interested in hearing how your client plans to minimize costs with unexpected higher turnover rate.

[James Carlson]

@Angie Shires

They are likely doing street parking. In that neighborhood in Aurora, the parking is not that bad. They do have a 1-car garage that they might rent for a little extra, but they don't know yet. It could also be storage. I wish you luck in your investments!

[James Carlson]

@Account Closed

Denver's huge, and the rents vary widely. For this area of Aurora, you might get $1,900 to $2,000. (This is a little nicer than some of the comps around it, so maybe $2,100.) It's not unlike others areas of Denver where it's really tough to get a traditional long-term rental that cash flows. You almost have to get creative, either through house-hacking -- if you're going to live there -- or through some sort of short-term rental/Airbnb or medium-term, rent by the room.

[James Carlson]

@Damian Gutierrez

They're managing it themselves. It will definitely be more work than a traditional long-term rental. But the demand for these types of rentals in this area are such that if they are diligent in getting new ads up with a month's notice of when they'll need to fill a vacancy, they shouldn't have too much trouble getting tenants. 

As an example, we've had two condos that we ran for going on three years as furnished medium term rentals in the heart of Denver. (We actually sold one recently, so only have one now.) Our vacancy rate over that time averaged about 3.5%, which I don't think is bad. 

If they did have to hire a property manager, the monthly cash flow would obviously be affected, but it would still cash flow about $500, which is kind of crazy for Denver. 

[Marcus R.]

@James Carlson Love the creativity!  I'll keep this in mind in 2021 when it's time for my next deal.  I think this does have a lot of promise, especially if you find a property located near one of the hospitals.  I'm very interested and currently researching more on medium term nursing rentals. 

[James Carlson]

@Marcus R.

Thanks for the comment. I think it's a pretty good idea too. There is so much demand in Denver for room rentals as people continue to search for cheaper rents amid the exploding rent prices. Proximity to the hospital is just a bonus to have another potential market of renters to tap into.

Cheers!

[Tyler Henry]

@James Carlson Hey James! I've been renting rooms in my Aurora house for a little over a year as well! I do  live in this property though. I wanted to ask if you'd share how they found their tenants? I have the Master bed/bath available now and am having a difficult time finding a quality tenant. I've already reduced the rent to what I'm charging for the other rooms that are smaller and don't have a private bath. Could it be the time of year?

[James Carlson]

@Tyler Henry

I think they got a lot of hits off of Facebook page for traveling medical professional types. And also Roomster. 

We've also found a good resource for the rent-by-the-room, house-hack types are Facebook groups for subletting/roommates in your local area. There's a group for Denver roommates and one in Colorado Springs as well. People are posting on there a lot looking for a place to stay.

Good luck!

[Tyler Henry]

@James Carlson

Thanks! I definitely get the most interest from FB but haven't looked at those groups, I'll check it out.