House Hack Success in Denver!

[James Carlson]

Stepping out of my Covid-19 news coma to deliver some lighter news. 

I was so excited to help two clients close on this deal last month in Denver's up-and-coming Barnum neighborhood. Just another example of how in a hot market like Denver (or Colorado Springs to the south), house hacking can still generate great cash flow. 

Big props to first-time buyers @John Mayer and @Savanna Mayer for recognizing the value of this home and going hard for it. Very impressive people.

The home

A 1900sf, 6br/2ba SFH. Remodeled a bit. Nice open space living room. Priced at $475,000

This was a unique property in the Barnum area, just southwest of Downtown Denver. It had been used (illegally) as a rent-by-the-room Airbnb. It had three bedrooms upstairs, three downstairs, plus an office and several separate entrances. (pictures at bottom). 

It also had a 3-car garage and spots for maybe 2 more. (Good parking situation is helpful when you house hack so as not to raise the ire of the neighbors.)

How'd we source the deal?

Plain-Jane, vanilla MLS search. The listing popped up and showings weren't starting for a few days. Numbers looked good and we worried about getting into a bidding war. I could also see from the showing calendar that there were already a lot of showings scheduled for when they opened it up. We pushed to see it early, and to our surprise they said yes. (You miss 100% of the shots you don't take.) John and Savanna loved it, ran the numbers and said, Let's get this.

The offer

We submitted an offer that same evening. We knew other house hacking types were going to see how well the numbers worked, and we didn't want them getting a shot.

If we'd offered at asking price offer with no other bells or whistles, the sellers likely would have waited for other offers. We wanted to make them choose us and choose us now. 

So we went a little aggressive. $5,000 over asking, no inspection requests for individual items below $2,000 (a no-nit-picking clause), and the lender agreed he could close in 22 days. The owner was an investor sitting on a vacant home. Closing quickly would be attractive.

And ... the seller signed the next morning!

Getting set up

Savanna and John tore down the wall between one of the upstairs bedrooms and the next-door office, which had a separate exterior entrance. Now they had a bigger bedroom and a private entry to their own space. They also added an island with an additional cooktop to accommodate all the people living there. And they added an additional laundry set-up upstairs.

The numbers

They used a 3.5% down, FHA loan.

Purchase price: $480,000

All-in monthly: ~$3,200
-- That's PITI (mortgage payment) of $2,630 plus 5% for vacancy, 5% for repairs, 5% for CapX

Rents: $3,975 
-- They have four bedrooms rented already at an average of $795. Will get the fifth rented soon. 

Cash flow: $775/month and that's while living there. If they move out and rent the other room for the same, they'll be cash-flowing nearly $1,500/mo.

General thoughts

John and Savanna had done their homework and ran numbers, so when they saw this place, they knew it would work and acted aggressively. That can be vital in a hot market. 

And I think our push to get in early paid off. During inspection, they played hard ball and didn't really agree to much of anything. I think that was because they had buyers come in after us offering more. But we had already locked it down. We got some validation when the appraisal came back at $520,000, $40k over our offer.

Considerations

Future house hackers should be aware of your city's laws on the number of unrelated people that can live together. It varies city to city in Colorado. For instance, in Denver the cap is two unrelated people, though it is not actively enforced, and the city is going to change that soon. 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.

Pictures

A few pictures of the place.

[Craig Curelop]

@James Carlson - Congratulations man! This deal looks great. Hopefully that rule change doesn't get delayed with everything that is going on.

[James Carlson]

@Craig Curelop

Thanks, man! Hope you're doing well. I have a few contacts in the co-living space area, people who run cooperative living houses, and they have said the city of Denver essentially doesn't enforce any of this actively. If a neighbor complains -- likely because of parking issues -- they will go out and may even send you a stop-doing-this letter. Even then, the above mentioned people said that if you don't respond, the city will never pursue it further. 

Not a real comfort for people who want regulatory certainty when making a big purchase to house hack in Denver, but it is what I hear. 

[Jeff White]

@James Carlson Congrats to you and the two buyers! Terrific deal and great numbers for a more expensive house hack in Denver, especially Barnum area, but it looks like a really good one and already fixed-up too. This deal shows that you can still live in a nice house hack and make money with a FHA loan as well!

[Theresa Harris]

@James Carlson  Congrats and I am sure your clients will love their new place.

[Lashaw Salta]

@James Carlson - great job with this one! Way to think creatively and make the situation work with the "difficult" Denver market. 

[James Carlson]

@Jeff White

Hope you're doing well with your places. The extra parking, the 6 bedrooms, and the multiple separate entrances made this property certainly unique. Excited to see some Denver buyers doing well with it. 

[James Carlson]

Thanks, @Theresa Harris, I think they are already quite happy. When you go from spending $1,500 in rent to living for free + $1,400, that's a $2900 swing in your monthly expenditures. No one complains about that. ;)

[James Carlson]

@Lashaw Salta

Thanks! Much of the praise goes to the buyers who knew what they wanted and went for it. It can be tough to do so in Denver. Sounds like you've done well with your flip over in Aurora. Happy to hear that. Cheers!

[Gray Hall]

@James Carlson Great write-up! Thanks for sharing this. I think we all need a little good news every now and then. 

Awesome to hear appraisal came in $40k over price. 

[Erin Spradlin]

@James Carlson - appraisal in at over $40K? Shouldn't you be bragging about this more in our Monday meeting?? Anyway, this is awesome and very happy for Savannah and John on this property. This will be a great first buy and I think it must be nice to have someone else paying the mortgage right now. 

[James Carlson]

@Gray Hall Totally agreed.

[Kyle Donath]

Thats quite the cashflow for a SFR! For my own learning, how does this fulfill the 50% rule?

At $2,630, shouldn't this be looking to generate at a minimum $5,260 in rent per month to be considered break even - per the 50% rule? 

[James Carlson]

@Kyle Donath

Thanks for the note. And good question.  

In general, I kind of hate all the "rules" I see floating around here. The 50% rule. The 2% rule. Th3 1% rule. Etc. I think it's good to have a marker to gauge an investment's worth, but it feels a little strict and doesn't account for other big money-making aspects of real estate. (Namely, appreciation.) You're hard-pressed to find a property in Denver that meets the 1% rule, much less the 2% rule. That doesn't mean properties aren't a good buy. The above buyers will cash flow for them about $700/mo while living there and house hacking. And Denver is a strong market with low supply and high demand, and every indication is that over the next 10-15 years prices will continue to rise and with that, their equity goes up. 

(Side note here: Since 1975, Denver's home values have risen an average of 6% every year and that's accounting for two big downturns. That's crazy amounts of equity if you hold for the long-term.) 

And the 50% rule in my experience is a bit ridiculous. We have five doors, many of them for five years now and none of them require 50% of the rent to cover all expenses. I think a simple 5% vacancy, 5% capX, 5% repairs budget is strong. (So essentially, 15%)

Anyway, for me, I try to keep things simple. Can I cash flow a bit? Is this home in a good location with appreciation potential? If so, great. 

[Kyle Donath]

@James Carlson Thanks! I've read that these "rules" don't apply on pretty much every Denver post made in the past 4 years, but it builds confidence to hear it again from an experienced local on a project within my future realm of possibility. 

[Andrew Syrios]

Well done James, the house looks great!