Analyzing a Denver House Hacking Opportunity
Recently, I came across an incredibly unique property in Denver that appeared to be the PERFECT investment property for a future house hacker. With nine bedrooms and seven bathrooms throughout four, separated units (plus an unusually large garage) it had to be a hidden gem. Curiosity got the best of me so I finally decided to analyze the property and estimate the potential rental income that an investor might be able to generate. In this post I’ll show you exactly how I‘d do this, the tools I’d use, plus other things to consider when house hacking.
The Basics of House Hacking;
What does this mean and what’s unique about the house hacking strategy?
If the term ‘house hack’ is unfamiliar, it is a real estate investment strategy where an owner rents all the spare bedrooms in a home with the intention to subsidize their living expenses while generating cash flow. In every case, an owner will be required to live in the home for the first year but after that, it’s common for them to move out, rent their former room and repeat the strategy. For a real life example of someone doing this in Denver, read Carly’s story here!
It’s easy to understand how house hacking benefits a buyer/owner but it’s not so easy to see why anyone would rent these spare rooms or want to live in a house hack. In short; it’s cheap. In most cases, the ideal tenant is someone seeking extremely affordable rent who doesn’t care about sharing common spaces for the right price. As such, an owner should be prepared to offer a comfortable room, meet all landlord regulations, AND price their available rentals competitively so they’ll attract tenants.
On that note, when trying to be competitive, an owner may make more amenities available to make the space appealing. In this particular situation, there could be up eight other tenants living at this property. That’s a lot of people living at one address so it might make sense to provide parking or stock the laundry room for free. We’ll talk later about how to factor in additional opportunities that can be added or subtracted based on demand, but it’s a good idea to consider what other features might be valuable to a tenant.
Research Rent-by-the-Room Rates for a House Hack;
Where to find rental data and how to compare it
I want you to have a clear understanding of the price and availability of rooms-for-rent nearby so we can price each unit as we ‘walk’ through them. The best way to do that? Start shopping for nearby rooms to rent!
I like to use Facebook Marketplace because of how much information is visible but there are other tools like Zillow and Rentometer that are also helpful. In our search, the main priority is finding comparable properties with enough similarities to this property’s units that we should expect to command about the same amount of rent each month that they do. We want to get the closest picture of the immediate competition in this specific area.
Our home in question is located in Federal Heights, north of Denver. In Facebook Marketplace, we’ll narrow the search to be within 2 miles of Federal Heights and filter to show ‘Private Rooms only’. See the search results below with some additional details. Note; I’ve not added photos of rooms that were anomalies.
From these listings, assuming the space is one singular room, shares a bathroom, kitchen, living space, and parking with other tenants, rooms will rent in the range of $600-$1,000/month depending on a few factors. On the high end, a unit should have it’s own kitchen. On the low end, laundry won’t be included.
One additional cost you might be wondering about is utilities; as in, should these be included in the monthly rent or not? This answer typically depends on the term length and the owner’s personal preference when it comes to collecting payment. In sifting through other Facebook Marketplace listings, many of the offerings didn’t mention utilities at all or there was a flat monthly fee of about $75/month on average. Because of the number of rooms and undecided rental term on this property, we will assume the owner pushes a $75/month fee to every tenant each month to cover some of the trash, recycle, water, electricity, internet, and other utility costs.
Pricing Your Rooms For Rent Competitively;
Using comps and the market to set rent-by-the-room rates
With a range in mind, it’s time to explore our property and assign rental values to each room. Then, we’ll determine the monthly rent per unit, utility fees collected and calculate the total rental value of the property.
Unit #1
Consider yourself in Unit #1 as soon as you open the front door. You’ll be standing in a large living room. There are two bedrooms and one and a half bathrooms to your left, a kitchen ahead, and then a dining room/den, third bedroom and loft area to your right. All three of these bedrooms are going to share a full bathroom while one of the bedrooms will have it’s own private half bath. Because of this, this tenant will pay slightly more. The tenant in the bedroom on the left-hand-side of the house will have more privacy and can be provided access to the loft area just outside of their room.
This unit has more appeal than the lower-end Facebook Marketplace listings but could not be considered on the higher end because it’s not completely private. They’ll share a kitchen and a full bath; however all units are above ground and are located at the front of the property. As such, it’s more desirable than the lowest end listings but we’re not quite in the middle of the range when it comes to amenities. Therefore, I’d estimate these rooms as follows;
Top-left bedroom: $700/month
Bottom-left bedroom: $750/month (has private half bath)
Top-right bedroom: $725/month (access to the loft)
Total rent: $2,175/month for Unit #1 + $225/month for utilities
Unit #2
Walking through Unit #1’s kitchen, you enter a hallway that connects Unit 1, 2 and 3 with the laundry area. Continue straight through the hall to enter Unit #2. It also has a secondary entrance that leads to a back deck and yard. There’s more natural light as well as quick access to parking area in the center of the property and the laundry room.
In the unit is a full kitchen, a living room, three bedrooms, a full bathroom and a 3/4 bathroom. If you look closely at the layout, you’ll notice that bottom-right bedroom is only accessible through the top-right bedroom so it’s not well set up for two people who don’t know each other. In this case, it’s better to consider the third bedroom an office for whoever stays in the second bedroom and charge slightly more for this additional space.
Because each of the two rentable bedrooms have their own bathroom with a shower, they can be listed as private 1 bed/1 baths (in a rent-by-the-room format). These tenants only share the space with one other person, the unit is above ground, and they have a back deck but they do still share a kitchen and laundry so I’d estimate them as follows;
Left bedroom: $800/month (3/4 bathroom)
Right bedroom: $950/month (full bathroom + second bedroom/office)
Total rent: $1,750/month for Unit #2 + $150/month for utilities
Unit #3
Unit #3 is located in the basement. It’s completely closed off with a lockable door at the top of the stairs and there’s a secondary door that leads directly out to the parking area. This unit is closest to the laundry area and has it’s own water heater.
Here there are two bedrooms, a full kitchen, a living area and a full bathroom. As a basement unit, this is where I’d recommend the owner of the home live for their first year in the house as it will likely have the lowest rental rate per room. Because this space is below ground, I’d estimate these rooms as follows;
Top-left bedroom: $650/month
Middle-left bedroom: $650/month (but we’ll expect the owner to live here so we won’t count this as rent)
Total rent: $650/month for Unit #3 + $75/month for utilities
Unit #4
Back upstairs, out the doorway leading towards the garage, we’ll take the stairs up to Unit #4, coined an accessory dwelling unit (ADU). This is a private 1 bed/1 bathroom with it’s own AC and it’s own in-unit laundry. It’s comparable to any other private apartment in the area and so we’ll price this space accordingly but not as if it’s a true apartment.
Other 1 bed/1 bath apartments in the area command up to $1,400/month in a formal complex. Because this unit will share parking with the rest of the house and is located on the same lot, I’d price the unit at $1,250/month.
Total rent: $1,250/month for Unit #4 + $75/month for utilities
Estimated Rental Value From Rooms Rented;
Applying rental estimates to understand the full picture of the property
Unit #1 at $2,175/month + Unit #2 at $1,750/month + Unit #3 at $650/month + Unit #4 at $1,250/month =
Rent: $5,825/month or $69,900/year
+ Utilities: $525/month or $6,300/year
Remember, these are estimates. We used the local market today to predict how these rooms may rent but it won’t be until they’re listed that we will really know what they’ll command. Always expect rental rates to fluctuate throughout the year based on changing demand (ex: less movement in winter, more in summer). Additionally, rooms are unlikely to be full 100% of the time. It’s important to factor in a vacancy rate - typically about 5% - which would impact the annual rental income (decreasing it to about ~ $66,405/year). Similarly, expect utility costs to fluctuate as well and note that the $525/month budgeted may not always cover all costs.
Now, there are some additional opportunities to increase the rental income not discussed in my calculation that I should mention. I would not recommend charging for any of these items if the demand for rooms is low but if demand is high and rooms are staying rented, an owner could provide the following at reasonable monthly fees;
reserved parking space in the garage or driveway (all others will street park) ~ $75/month/person
reserved storage space in the garage ~ $50/month/person
pet rent ~$50/month/person
Finally, because the 1 bed/1 bath ADU is completely separate and this property is located in Adams County where current regulations allow short term rentals (current meaning as of this post publication date), it could be furnished and listed on sites like Airbnb to draw a higher monthly rate. We’re not assuming this in the calculation because this requires other start up costs but it may be an option for an owner looking to optimize rental income.
Will This House Hack Cash Flow?
Does the potential income surpass the associated expenses?
At this point, the potential rental income might sound enticing, but we haven’t discussed the owner’s total costs associated with owning the property. While, I cannot calculate a true monthly mortgage payment, I’ll share with you tools that I use to guesstimate. I must emphasize; these numbers are hypothetical and yours will vary. Disclaimer; do not buy this house based on my hypothetical guesstimates.
The first tools to check out are online mortgage calculators. You can find multiple through a quick Google search but one I’ve use a handful of times is Fannie Mae’s Mortgage Calculator. With a $750,000 purchase price, a 20% downpayment on a 30-year loan at a 7% interest rate, Fannie Mae’s calculator estimates a $5,398 mortgage payment. This does not factor in any details about the owner’s finances so expect variation based on credit score, monthly income, etc.
For another perspective, reach out to a trusted lender to provide a ballpark, disclosing that you’re just trying to get an idea. A local lender that I work closely with shared a few rule-of-thumb calculations he does to get a rough estimate of costs based on the average interest rate at any given moment (at the time of this post it’s about 7%).
He estimates $665/month of principal and interest costs for every $100k of money borrowed and 1/2 a percent for insurance. Using our $750,000 purchase price, let’s say $700k is borrowed ($50k downpayment) so $4655/month goes towards principal and interest + $313/month for insurance. Then, utilizing the annual tax amount from the listing ($3,297/year), we’ll add an additional $275/month for taxes. In total, this rough estimate might suggest a $5,243 monthly payment but again, it will vary depending on the owner’s credit score, downpayment, if they have PMI and other factors we cannot assume.
In conclusion, we can only make data-driven estimates about what rooms may rent for and hypothesize what the future owner’s expenses will look like so I won’t claim that it’s an outright good or bad investment. Even still, it’s obvious that there are unique opportunities available when a property has 9 bedrooms, 7 bathrooms, and a 1,700 square foot garage. At a minimum, any investor that’s curious about house hacking should run their own numbers and speak with a lender to practice analyzing deals like these.
Please comment on this post if you have suggestions to make my estimates more accurate, other tools you recommend, or feedback you have about this kind of analysis. I hope it’s a helpful way to think about a deal and I look forward to seeing who buys this home!
