In this deal analysis, we’ll look at a townhome a client recently purchased in west Denver. While things didn’t go our way at first, we were still able to get a great deal that will cashflow once my client moves out. This is a good first step toward achieving his long-term goals.
- Listen to the podcast “#322: House Hacking in Denver for Only $300/mo!” on the Denver Real Estate Investing Podcast
- Watch the YouTube video (at the bottom).
- Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast or video.
My client is a younger, single man who became interested in house hacking while renting a room in his landlord’s house hack. Once he saved up enough money for a down payment, he wanted to replicate that strategy in his own property. He was mostly focused on finding a home where the numbers worked and was flexible with the house itself.
Investment Property Details
This is a 3 bed/3.5 bath townhome in west Denver with a great setup for house hacking and room by room rentals. Because the house is built into a hill, the basement is at ground level. The entry door is in the basement, and there is an interior staircase with a door that leads to the upper levels. The basement has a full bathroom, bedroom, and kitchenette (everything but a stove). On the top floor, there are 2 bedrooms each with a full bathroom. There is also a half bath on the main level.
Property Contract Details
The price point of the house was very competitive: $349K. My client offered $381K with a $20K appraisal gap. The appraisal came in at $358K, and the seller agreed to come down $3K to meet the appraisal gap.
Lenders will only lend on the appraised value of the home, so appraisal gaps are used when a home appraises below the offer price. My client had $20K in cash that he decided to set aside if the appraisal gap became necessary.
Some people have the misconception that the appraisal gap only goes to the lender and fees. In reality, that money acts as a higher down payment and increases the equity the buyer has in the house. We are comfortable putting appraisal gaps in our offers because it goes toward our clients’ equity.
The house was in such great shape that we didn’t need to submit an objection.
Property Financing Details
We analyzed his property using our Rental Property Spreadsheet.
My client initially planned on putting down 5%, but he ended up closer to 7% with the appraisal gap. Since he made a larger down payment than anticipated, he opted for monthly mortgage insurance instead of the upfront option.
We advise our clients not to get too fixated on the mortgage insurance because this is one of the most variable numbers on the spreadsheet. Lenders will present clients different options for mortgage insurance once they’re under contract. This way, the client can choose the option that works best for them.
Property Operating Expenses
We analyzed this property once he moves out in a year or so. While the immediate numbers are important, we’re more focused on the long-term picture. He plans on renting out the basement for $1100, and the 2 other bedrooms for $900 each. This gives him a total of $2900 in monthly rental income, a great return for a house at that price point.
Maintenance reserves can be lowered to 5% because this townhome has an HOA. The monthly HOA fee will go toward repairs he would otherwise budget for.
Though he hasn’t yet figured out how to bill for utilities, he has a lot of good options. He may include most of them in the rent and then charge $50 or so to cover water, sewer, and trash.
First Year Returns
He’ll be paying about $380 a month while he’s living in the property and renting out the other two bedrooms. This is much cheaper than he was previously paying to rent a room, and now he has an appreciating asset and is building equity.
Once he moves out, he’ll be cash flowing about $5K a month. This is why the extra $20K he brought to the table wasn’t an issue. In the long run, the numbers make sense.
Exit Strategy/ Long Term Plan
He is planning on doing a hybrid house hack/NOMAD strategy, so he’ll live in the house for a year renting out the extra bedrooms. After a year, he’ll move out and convert the entire home into a rental property, most likely continuing the room by room rental strategy.
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This is a great deal to show that while it’s a competitive seller’s market right now, buying property still makes sense in the long run.
Though we faced a setback with the low appraisal, this house was still a great deal for my client. He’ll be able to pay only a few hundred a month while he’s living in the property and will cashflow once he moves out.
If you’re interested in creating your own strategy, reach out to me and I’ll help you figure out your long-term goals and how to achieve them.