All of us agree that the focus for deal analysis should be on #2 - after you move out and convert it to a rental property. Remember, you are buying a future rental, so the numbers need to make sense as a rental. It’s common for new house hackers to get tunnel vision and only focus on the analysis while living there. Don’t! The real wealth-building comes from buying multiple house hacks that make sense as rental properties.
This module covers:
- Property analysis spreadsheet
- Assumptions: garbage in = garbage out
- Deal analysis: room-by-room house hack in Aurora
- Analysis after move out
When you’re house hacking, there are two ways to analyze a property:
- While you’re living there.
- After you move out and convert it to a rental property.
Property Analysis Spreadsheet
The spreadsheet we use is Joe’s rental property analysis spreadsheet. It's a great spreadsheet that allows us to put in all appropriate numbers to analyze a property but is simple enough that it doesn’t take an analyst to fill out. It has pull down menus for multiple lending scenarios (buying as primary residence vs. investment property) and is somewhat “dummy-proof” in that, if you put in a number that doesn’t make sense, it will pop up with a warning. An example is if you enter a 5% down payment but have chosen “investment property”, you will get a notification that you need to put at least 15% down.
We also offer the house hacking spreadsheet. The house hacking spreadsheet is designed for longer-term financial modeling of buying four house hack properties. Module 8, Long Term Financial Modeling, will go into detail on using that spreadsheet.
As you start analyzing properties, use Joe’s spreadsheet for analyzing individual properties. The screenshots in this module are from Joe’s rental property analysis spreadsheet. This module is not meant to be a tutorial on how to use the spreadsheet. You can download the spreadsheet for free and watch YouTube tutorials at www.DenverInvestmentRealEstate.com/RentalSpreadsheet
Assumptions: Garbage In = Garbage Out.
Your analysis is only as good as the assumptions that you use. Our recommendation is to use realistic and conservative assumptions in your deal analysis. Below is a table with general assumption ranges that are common in the Denver market as of 2020.The table is provided as a quick reference so you’re not using inaccurate rules from nationwide websites. Understand that these are estimated ranges. Always check with us or your real estate team.
|Spreadsheet Field Name||Amount||Notes|
|Acquisition Costs |
Condo/Townhome Detached House Multi-family
$3,000 $4,000 $5,500
|Includes inspection, appraisal, closing costs, title fees, etc. IR buy down & prepay PMI will increase acquisition costs.|
|Vacancy||5%||This is a conservative number. For the last few years, many landlords have been less than 3%!|
|Property Management||10%||Most PMs charge 7%-8% but round up to 10% to handle misc. costs.|
|Repairs/Reserves Condo/Townhome Detached House Multi-family|| |
5% 8%-10% 8%-10%
|The HOA handles exterior items for condos and townhomes, thus reducing your repairs reserves. 10% is used if property is older and/or has more deferred maintenance items.|
|Taxes||Get from MLS or public records. Make sure it’s the most recent year.|
|Insurance Condo/Townhome Detached House Multi-family|| |
$300-$500 $1500-$2,000 $1500-$2,000
Water / Sewer Trash Electric / Gas
| $600-$1200 $300 |
|Utilities will vary from property to property. These are estimates for while living there. Trash is included in the City of Denver’s property taxes.|
Deal Analysis: Room by Room House Hack in Aurora
Our client, Austin, purchased this house hack in Q1 of 2020. It’s a 5-bedroom, 2-bathroom house in North Aurora. It’s close to the Anschutz Medical Campus near Colfax Ave and I-225. This part of town has some of the lower price points around the metro area and high room by room rental demand because of the hospitals. It’s a great house hack and long-term rental. The layout is great for renting room by room. The house is in good condition and required no major work when he moved in.
Austin purchased the house for $375,000 with a 5% down conventional loan. After he was under contract, he reviewed all of his lending options with Joe and decided to pay his mortgage insurance monthly, rather than upfront at closing. His actual mortgage insurance came in lower than the estimated amount in Joe’s spreadsheet that is shown below, which means even more cash-flow!
Austin currently lives in one bedroom and rents out three other bedrooms at $800 per room, which includes utilities. Four people can live comfortably at the house. Once they are all settled, he’ll test renting out the additional bedroom for around $700/mo. or so. Once he moves out, the plan is to continue to rent it room by room to maximize cash-flow.
Let’s review the spreadsheet….
The acquisition costs of $7,475 are higher than the estimated ones of $4,000 because Austin chose to buy his interest rate down.
The monthly rent is $800 x four bedrooms. Austin may bring in additional income from the fifth bedroom, but it’s best to use conservative numbers. If the fifth bedroom works as a rental, great! If not, his property still cash-flows and meets his return expectations.
Austin’s insurance premium is one of the lowest I’ve ever seen for a home here in Denver. The house had a newer roof (age of roof and material are a big premium driver due to hailstorms), and he shopped around to find a low rate.
The estimated cash-flow of $4,971 is for AFTER he moves out of the house. To calculate his return while living there, we just need to reduce the rental income from $3,200 to $2,400/mo. to account for the bedroom that he’s living in. The reduced rental income brings the cash-flow to -$3,381 per year. He’s living for less than $300/mo! You can’t find a room that cheap to rent around town.
Overall, this is a great house hack, and it demonstrates why buying a four- or five-bedroom house and renting it room by room is often one of the best strategies in the current market.
This deal analysis is discussed in great detail on episode #144: “Deal Analysis - Room by Room House Hack in Aurora" on the Denver Real Estate Investing Podcast. To learn more or to connect with Austin Allan, contact him at firstname.lastname@example.org.
Deal Analysis: Arvada Airbnb House Hack
Our clients, Ben and Allyson, purchased this house hack in Q2 of 2019. We’re using this as an example to share historical operating data for running their Airbnb rental. Ben and Alyson moved to Denver a couple years ago and know the power of house hacking. Their main goal was to reduce their living expenses to less than $1,000/mo. and to start building a rental portfolio.
They purchased a house with a mother-in-law suite. The main house has three bedrooms and two bathrooms. The mother-in-law suite has one bedroom and one bathroom. It’s a perfect layout for house hacking. The mother-in-law suite is above the garage with a separate entrance and private path along the side of the house.
The main house was in great shape and had recent updates from the seller. It was turn-key and move-in-ready. The mother-in-law suite was functional and livable, but outdated. To maximize their Airbnb income and long-term rental income, they decided to renovate the mother-in-law suite. They did all the work themselves and spent around $5,000 on materials.
The house was listed at $424,900, but there were multiple offers. Ben and Alyson ended up buying the house for $435,000. Don’t let bidding wars or multiple offers scare you away from a property. In the current market, low-ball offers do not work. It’s in a great location in Arvada. It’s near Ralston Park, and you can easily bike to Olde Town Arvada. Location, Location, Location!
This house works out well for while they are living there and as a rental after moving out. Let’s analyze the property while they are living there and once they move out.
Analysis: While Living There
Their acquisition costs are higher than our estimates from earlier because they decided to buy their interest rate down. They received $2,000 in seller credits for minor inspection items. The seller credit reduced the cash they needed by close to $2,000. The initial repairs were about $5,000. Including the initial repair cost is a good idea because you need to spend the money to get the projected rent.
The unit #1 rent field shows the Airbnb income after fees and taxes. On average, they were making about $1,950/mo. They really enjoy the Airbnb hosting experience and making new friends. One of the guests that stayed with them on business ended up hiring Alyson’s sister for a new business!
The unit #2 rent field shows the rental income from charging Alyson’s sister rent for one of the rooms. It’s below market rent for a room rental, but it’s family and it’s a win-win situation. They could have rented out the additional bedroom more cash-flow but didn’t want to. The extra income wasn’t worth the inconvenience of having a roommate they didn’t know. Remember, it’s a balancing act!
Their water bill is on the lower side because they did not water the lawn for the entire year. Going forward, they’ll be watering it regularly. They expect the water bill to be about double.
While they are living there, the property has a negative cash-flow. Remember, that’s their living expenses. They are living there for just over $300/mo. Their original goal was to reduce their living expenses to $1,000 a month. We beat that by almost $700/mo.!
Analysis: After They Move Out
Ben and Alyson plan on house hacking one or two more times to help build their rental property portfolio. Once they move out, they will no longer Airbnb the mother-in-law suite to stay compliant with short-term rental rules. It’s always a good idea to follow the rules. They’ll rent out the main house and mother-in-law suite separately or to a multigenerational family.
Nothing changes on this part of the spreadsheet compared to the previous analysis because they’ve already purchased the property.
The main house (3/2) should rent for $2,100 to $2,200/mo. The mother-in-law suite should rent between $1000 to $1,100. Both rentals would be long-term. We’re using the lower range to be conservative in our analysis.
As discussed earlier, the current water bill is lower than expected based on when they bought it, and Ben and Alyson expect the bill to increase to around $1,200/yr. Overall, this number will not have a significant impact on the rent projection. Remember, this is only an estimate to get us in the ballpark.
The tenants will pay the Xcel bill (electric and gas). There is only one gas and electric meter. The owners will most likely put the bill in their name and then prorate the bill back to the tenants. It’s a minor inconvenience to bring in extra cash-flow.
We have an estimated annual cash-flow of $2,357! Hopefully it’s a little higher since the lower rent ranges were used. This property is an absolute win because Ben and Alyson dramatically reduced their living expenses while living there and have a positive cash-flowing property after they move out. Remember, the property is underwritten on the conservative side. They may even see better cash-flow. All of this with a 5% down payment that had them all-in for just over $30,000!
This deal analysis is discussed in great detail on episode #148: “Deal Analysis - Arvada Airbnb House Hack" on the Denver Real Estate Investing Podcast. To learn more or to connect with Ben and Alyson, contact them at email@example.com.
If you want to see additional house hacking resources, then check out the Deal Analyses section of the website. The website is updated regularly with recent house hack and Nomad™ case studies.