There are two scenarios that we need to consider when we are evaluating how to maximize rents for house hacking. How to maximize rents while you are living in the property, and how to do it after you move out. This module walks you through the analysis.
This module covers:
- Renting Room by Room
- What is a bathroom worth in a Denver house hack?
- Mother-in-law suites
- Short-term rentals - Airbnb
- Medium-term rentals
- Long-term rentals
The first scenario to consider when determining how to maximize rents is, of course, while you are living in the property. Lending guidelines require that you move into the property within 60 days of closing the transaction, and then you are required to stay in that property as your primary residence for at least 365 days.
The second scenario is after you have moved out of the property. This scenario is ultimately the more important of the two because you will only be living in the property for a relatively short period of time. You need to make sure the numbers work on a long-term basis.
There are several strategies for collecting rents for each scenario, and we will talk specifically about renting room by room, short-term rentals, medium-term rentals and long-term rentals.
Renting Room by Room
This strategy works best with a single-family home with several rooms and bathrooms. In the current Denver market, we are seeing the room by room model as the most popular for hitting a “sweet spot” and maximizing the room-to rent-ratio. Our expert House Hacking Coach, Jeff White, uses this strategy in his second house hack property after moving out and his third house hack property while living there.
A few reasons room by room rentals work so well are because of the demographics and the price points. Jeff has found that the demographics of the room by room tenants tend to be young professionals between 25-35 years of age. These tenants are only required to pay between $700-$850 per month in rent whereas, if they were to get a one-bedroom apartment on their own, they would be paying between $1,200-$1,600 per month to live in the Denver Metro area.
Typical rents - We usually see between $700-$850 per month in rents and that is pretty consistent around the Denver area. In general, for a 10’x12’ bedroom with a shared bathroom, we will see between $700-$750 per month. For a master bedroom with a private bathroom, we are seeing about $850 per month. Rooms with private bathrooms command the most rent.
Facebook Marketplace is a great resource for rental comps and shows how you should structure your listing and has great visuals. Craigslist is good for comparing rental comps and is nice because it has a map feature, which allows you to get a decent perspective on what different areas are getting for room rentals.
In our experience, we have found that location doesn’t have as much impact on room rental versus an entire unit rental.
What is a Bathroom Worth in a Denver House Hack?
In December 2018, one of my clients, Austin Allan, asked at a house hacking class, “How much impact do private bathrooms have on rent when renting it out room by room?"
My response, "I have no idea! Sounds like a great thing for you to research and tell me." To my surprise and delight, he did!
Below is an analysis by Austin Allan on how much a bathroom is worth when it comes to renting out room by room.
--------- Start Austin’s Analysis ---------
After talking a little bit at the end of the house hacking class you gave this last week, I began to really think about what a bathroom is worth when renting a room out. I am trying to put together the best plan I can so that, when I am able to purchase that first property, I have it optimized as far as rents and location goes.
I decided to do a little project to see if I could figure out what a bathroom is worth here in the Denver market. I analyzed 50 room-for-rent posts on Craigslist and ran a linear regression to see how a private bathroom affected the cost of a room rental. This is by no means the most comprehensive analysis that could be done, but it does provide at least some insight and can help with future decision making.
The factors that I used for collection data were:
- Cost of the room
- Private bathroom
- Laundry in the unit
- Distance from downtown
- Access to the light rail.
There are notes in the spreadsheet that go into more detail on each of the variables. Given the inconsistent nature of Craigslist posts, many had to be excluded because of incomplete information.
After running the regression, several interesting things stood out to me.
- Laundry and light rail access are worth very little when it comes to the value of a room. They both had a negative value, only indicating that there was no consistency in the pricing of rooms which had those features. Neither of those would ever decrease the price of the room, so the variable is not very helpful in determining the value of a room.
- The change in price as you move further away from downtown is much smaller than I expected it to be. I think that there are a couple of explanations for this; Denver is not a very large metropolitan area, so, even when you live in an outer suburb of the city, you are still less than 20 miles from the downtown area. When compared to larger metropolitan areas such as LA, New York, or Houston, the sprawl is much larger, and people commute from much greater distances. I also believe that the majority of people commute to work via car and not public transportation, so a drive of less than 20 minutes should take around 30 minutes or so with a consideration for some light traffic. I believe that, for most people, this is an acceptable commute time, so the cities that are outside of the downtown area still remain a desirable and reasonable place to live, even when working downtown.
- The more important takeaways from the data are that bathrooms appear to be worth between $100-$150, with consideration to the standard deviation. With more rental data, I could surely get to a more accurate number, but I think, considering the fairly small sample size, this number seems pretty close to me. The intercept also indicates that, as long as you have a room to rent, you should be able to get at least $700 a month for it, no matter where it is or what you have to offer.
There are many factors that I could not account for that could change the price of the room:
- The age of the home I believe could be a pretty big factor when determining the value of a room. A new build should be able to charge a premium vs. a house that is 100 years old. However, the older homes tend to be in neighborhoods that are closer to downtown, so it's not so easy to tease that information to determine exactly what kind of impact age has.
- The size of the room being offered should have an effect on the price as well. Several of the posts had masters for rent, which had the bathroom, and these are worth more than a room with an unattached bathroom. Square footage of an individual room is hardly ever listed, so trying to determine the true value of a larger room would be hard to do.
- Some neighborhoods are more desirable to live in, so they do command a premium, even while offering only basic accommodations.
All in all, I think this does help reinforce some of the decisions that are made in consideration to where to purchase, how big of a property and how much one can charge for individual rooms. I think that there is a lot more research that could be done to learn more insights into the market of individual room rent. I would love to hear your thoughts on the findings and what else you think could be interesting to look further into.
--------- End Austin’s Analysis ---------
Thanks, Austin! He did a great job with his analysis. If you want a copy of the spreadsheet, send me an email.
Utilities - In most cases, the landlord will pay these bills and charge a monthly amount on top of rent. Landlords usually add up all the utilities for one year and divide by 12 months to get a monthly average to add to rent. Some months will be more expensive, some will be less expensive, so the average will even everything out at the end of the year.
This is also the easiest way to charge for utilities because you don’t have to collect the bills, divide them up, send separate invoices to your tenants, then hunt down payment for $30-$50 each month. It can also eliminate issues if a tenant takes a three-week vacation to Europe and doesn’t want to pay for utilities they didn’t use. We recommend following the keep it simple stupid (KISS) principle with utilities.
One utility to remember is house Wi-Fi. It’s not practical to have four different people with four different routers in the same house. Most of us would consider Wi-Fi a necessity these days, so it’s best to include it as an added benefit to your tenants.
Considerations - Make sure you check your specific municipality for the occupancy limits. You need to verify how many “unrelated parties” can live together. The average is usually three to five parties, but laws change, so make sure to double check. Denver County, for example, is currently in discussion to raise the limit of unrelated parties from two to eight people. You need to be aware of the rules and the consequences.
As far as managing your rental, you need to consider how you will manage the property once you move out. Most property managers do not take on room by room rentals, which means you will have to self-manage; that can be time-intensive, so be prepared.
When thinking about furnishing the property, it’s usually a good idea to do, but keep things simple. If you furnish the property, it limits how much a tenant has to bring in and is easier when they have to move out as they don’t have as much stuff. It can also help minimize conflicts between tenants if something gets damaged.
Setting good expectations and good examples from the beginning is arguably one of the most important parts of living with others. You need to have these in place from the first conversation you have with your potential tenants. Set house rules and lead by example. Tenants will more than likely follow your lead. If you clean up after yourself, so will they.
You always want to be thinking about the long-term. This includes keeping your next house hack in mind. To make sure that you are getting the most out of your current house hack and setting yourself up for success on the next one, it’s important that you track everything you do and all the money you collect. You need to have written leases and proof of deposited security checks. You also need to claim this extra income on your taxes. If you don’t keep accurate records of these items, you won’t be able to use this rental income towards your debt-to-income ratio when qualifying for your next property.
Overall, the room by room rental model can be more management intensive as you are doing all the work, but it has a good reward in the extra rental income you can achieve. An average four-bedroom, two bathroom single-family house will get around $2,200-$2,600 per month for a long-term tenant. Renting that same house out room by room, you can get $2,800 - $3,200 per month.
House with a Mother-in-Law Suite
There are certain areas in the Denver Metro area that have more of these layouts with a mother-in-law suite, which can be a huge advantage to your house hacking strategy. The nice thing about these properties is that they have separate entrances, kitchens and bathrooms, so you can really live uninterrupted from your tenants. However, there are some downsides as well.
Typical Rents - The rents for these units are in line with other properties that have a similar bedroom and bathroom mix.
Utilities - Since these homes are single-family homes, there is typically only one electric, gas and water meter. The easiest solution is to include the utilities in the rent, just as we discussed in the room by room section above.
Considerations - It’s important to understand that the vast majority of these mother-in-law suites are not permitted.
Houses with mother-in-law suites can provide significant cash-flow but have their cons too. If you want more details, please reach out to us.
Short-Term Rentals - Airbnb
This method is for any rental period of 30 days or less. It’s hard to give a typical rent range on this method because it’s highly dependent on location, and rental rates are very dynamic. These rentals demand higher rates for the convenience, but they also require more operating expenses and time management. Many of our house hacking clients do not choose this model for two main reasons:
- The extra income they earn per month ends up not being worth the time required to manage the rental, or, as I say, “The juice isn’t worth the squeeze!”
- The areas that demand the highest short-term rental rates are in downtown Denver and other hot spots, which is not where our typical house hack properties are found because they are typically more expensive and have poor long-term price-to-rent ratios.
Typical rents - Are highly dependent on location and can change neighborhood to neighborhood. A great resource is AirDNA.co which pulls all the data from short-term rentals in a certain zip code to compare rental comps. It costs around $200/mo. to access all of Denver Metro. Fortunately, we have a subscription and are happy to run rental comps for our clients. Please reach out if you need any.
Short-term rentals also have higher operating costs that you want to keep in mind when underwriting the property. There are host website fees from Airbnb/VRBO. There are cleaning fees for each turnover of tenants. There will also be higher maintenance costs as there is more traffic and higher likelihood of “wear and tear.” You will be expected to supply all necessities such as toilet paper, soap, shampoo, dishes, pots, pans, silverware and linens. If any of these things run out, break or get taken, you will have to replace them. These expenses can add up quickly.
Basically, you will function like a mini hotel. This means that, on top of all the amenities, you need amazing pictures and should highlight those extra special things you do for your guests such as providing snacks, shampoo, a welcome book, etc. Remember, you’re running a hospitality business.
Utilities - You as the landlord will pay everything and include the costs in the rental rate. You’ll also want to remember to include the Wi-Fi costs as it will be expected from guests to be included with their stay.
Considerations - One of the most important things to remember is getting familiar with the rules! Both for the HOA and for your specific municipality. Don’t commit fraud, know the rules, play by the rules. For example, in Denver County, the property that you are using to short-term rent must also be your primary residence. If you own a multi-family in Denver, you cannot live in one unit and Airbnb the other unit; it’s against the rules! You’re only able to Airbnb the unit in which you live. Rules are continuing to change, and municipalities are cracking down on enforcement, so make sure you stay up-to-date.
It’s also important to have a “Plan B.” You want to make sure the numbers work as a long-term rental in case you are not able to do short-term rental.
Remember that you are running a hospitality business. You’re not just a landlord. You will be expected to be available at all times to give instructions for check in/out, give directions, coordinate with the cleaning company on “turns,” etc. You will want to consider the possibility of using a management company to help with this, which is another expense.
Finally, you will need to have the place furnished not only with beds, couches, tables and chairs, but also with dishes, pots, pans, silverware, towels and toiletries. Just keep these extra expenses in mind when running your numbers.
Medium-term rentals are fully furnished units and have tenants who stay for 1-6 months.
A popular example is traveling nurses who will typically rent for around 3 months. Another example is corporate housing for people who are being relocated or are staying to work on a project for a few months at a time.
Typical rents – Are, again, very dependent on location. For example, traveling nurses want to be close to the hospital they will work at. A businessman will want to be in the city with a short commute, not the suburbs. A great resource for these types of properties to compare rents is FurnishedFinder.com https://www.furnishedfinder.com/ .
In general, we see higher rents than long-term rentals and lower rents than Airbnb, or short-term rentals.
Utilities - All will be paid by the landlord and included with the rental rate. Wi-Fi will be expected to be included as well.
Considerations - Again, you will need to be an expert on the rules and regulations of both your municipality and your HOA. Many short-term rentals had to pivot to medium-term rentals when Denver changed their rules and required that short-term rentals be your primary residence.
You will want to determine if you are up for self-management or if you want to hire a property management to help you find and turn tenants. In some cases, it can be easier to fill your unit if you work with a property management company or real estate company as they already have relationships built with companies who do corporate relocation.
A typical stay/lease for a medium-term rental is 2-3 months. You will want to make sure the place is fully furnished and ready to use as tenants will expect a “move-in-ready” property.
While we do have a few clients who have rented primarily to nurses based on the location of the property, we do not see many of our clients choose this method for house hacking simply because the margins become very tight. A few years ago, Joe setup one of his units as a medium rental. Guess what? He no longer does it. All the expenses and headache were not worth the extra income. Again, “The juice wasn’t worth the squeeze.”
Long-term is defined as six months or more typically. These are the standard rentals that we commonly talk about with one tenant on one lease for one year.
Typical rents for the not super trendy areas but standard properties in areas highlighted on the house hacking map can expect these rents:
- 2 bedrooms: $1,300 to $1600 (typically condos)
- 3 bedrooms: $1,750 to $2,000 (combination of condos and houses)
- 4 bedrooms: $2,200 to $2,600 (houses)
- 5 bedrooms: $2,500 to $2,700 (houses)
Zillow.com is great for rent estimates. Do not use the Zestimate feature for property price. However, their rental estimate is usually accurate within +/- $100. Their rental estimates often get wonky for multi-family properties though. Once you are under contract on a property, a good idea is to contact a property manager to see what rents they are seeing in that particular area. This is something that we help our clients with once we’re under contract.
Utilities - Can be billed in several different ways but, typically, the tenant pays or reimburses the landlord for water and sewer. The tenant usually puts the electric/gas bill and trash in their name and pays directly. If snow removal and lawn maintenance are not included in the HOA/rental rate, tenants are typically expected to be responsible for these items as well.
Considerations – Long-term rentals are the most common in the current Denver market. When you are thinking about purchasing a property, look at the numbers from a long-term perspective, even if you choose to rent room by room. The reason for this is that many people are able to rent room by room initially but get fatigued from it and want to pivot to a property manager or a strategy that is less time-intensive. As we mentioned before, most property managers will not take on properties to rent room by room, so you need to feel comfortable with the long-term method for your long-term goals.
Jeff makes a good point that, during the accumulation phase of your investing, the higher rents can be important, but once you get to the point where you want to be less involved in the day-to-day management of tenants, you will hopefully have acquired enough properties that the small decrease in cash-flow won’t make a big impact in the long-term.
So, to wrap up, which method is the best?
You should already know what’s coming. It depends.
You have to decide what strategy will fit with your available time, cash-flow goals, risk tolerance and mental sanity! There will be a different scenario for every location. We sit down with our clients to run the numbers as well as double check those numbers with industry professionals, so our numbers are very dialed in. Working with our team and network, you can be confident that you’re underwriting the property conservatively and accurately.