This case study was discussed in our April Monthly Round Up.
Property Details:
- 4 Bedroom
- 3 Bathroom
- Sold Price: $430,000
This property provided an excellent opportunity for our client to live in a home below market cost, build equity, and get started in real estate investing. The main property has 3 bedrooms and 2 bathrooms and what makes this property a unique house hacking opportunity is an additional unit that is built above the garage. The unit has its own bathroom, kitchen, and entrance completely separate from the main house.
No major repairs are required to make this property move-in ready but the buyers are planning on spending some money to update the bathroom in the separate unit. They plan on listing the space on Airbnb and investment in it will help command higher nightly rents. Given the location of the home, near Olde Town and freeway access, the unit should be in high demand.
Financing
These buyers are using a low money down strategy to acquire property at a faster rate than a standard 20% down investment property. They put 5% down and will have to live in the property for a minimum of 1 year. They had higher than normal closing costs but they did opt to buy down their interest rate and did pay nearly double for their appraisal. The increased cost in the appraisal is a strategy that can be used to help close faster. They were able to close in 2-3 week rather than 4-6 weeks. This helps give the sellers confidence and ensure that the buyers are able to secure the property.
House Hacking Numbers
Along with renting out the separate unit on Airbnb these owners also plan on renting out 1 of the bedrooms in the main house. They do plan on renting it out to a family member so the rent is discounted from the market price. With the combined income, these buyers are paying about $800 per month to live in the house. This includes money set aside for maintenance and capital expenditures but does not include the tax benefits of owning real estate. Regardless, they are able to own real estate while still paying what the cost of 1 bedroom in a shared home in Denver would be.
Rental Numbers
Once these buyers move out of this home they will be able to rent the main house and the garage unit separately on long term leases. We used conservative numbers to estimate rents and the annual cash flow is negative $2200. While this could seem concerning there are several factors to consider to justify this investment.
- Slight increases in rents to both units could get the property to break even cash flow in year 2. A $100 increase in both units would allow this to happen.
- The PMI payment on this mortgage is $2,640 annually. These buyers plan on removing that before the 10-year mark which would allow the property to become cash flow neutral without an increase in rents.
- This negative cash flow should be considered a deferred down payment on the home. At 20% down the property would cash flow but because of the lower % down the time needed for positive cash flow does extend.
At the end of the day, these buyers were able to get into a growing area of the Denver market for less than $25,000. They get to live for below average living costs for the city while getting to experience the upside of appreciation and tax benefits. In as few as 12 months, they are able to repeat the process again and continue building their real estate portfolio.
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