Deal Analysis – First Time House Hack in a Historic Denver Home with an ADU
In this deal analysis, we’re profiling an investor, who, along with his fiancée, bought an old home in LoHi with an attached Accessory Dwelling Unit (ADU). His background is in investing, but this is his first house hack. He and his fiancée wanted a home they could comfortably live in that provided them both privacy and rental income. Listen to the podcast to hear how agent Lauren Valinoti helped them find a house that fit their needs and gives them a variety of medium and long term rental options when they’re ready to move on.
Three Learning Options!
  1. Listen to the podcast “#275: Deal Analysis – First Time House Hack in a Historic Home with an ADU” on the Denver Real Estate Investing Podcast
  2. Watch the YouTube video (at the bottom.)
  3. Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast or video.

Investor Profile 

Our client started his career as a banker, underwriting loans for all types of commercial and residential properties around the Bay Area in California. Currently, he leads investments for a private equity firm specializing in real estate and renewable energy.  He and his fiancée wanted a home they could live in for a few years that also has an ADU that could be rented out when not being used by their parents.

Long Term Real Estate Investing Goals 

He would like to own both a home in Denver and a second home in the mountains.  He’s also aiming to build a private real estate investment portfolio that generates $100K of annual net cash flow within 20 years (after debt service, in 2021 dollars).

Strategy for Achieving Goals 

He and his fiancée are both fortunate to have high paying jobs and don’t have kids or debt outside of their mortgage.  They are focused on saving as much as they can and will allocate about 25% of their investment portfolio into real estate.

Investment Property Details 

This is a 4 bedroom 3.5 bathroom with 2.5 car garage Victorian house built in the 1890s.  It is located in the LoHi district of the Highlands neighborhood in Denver.  When they bought the home, it had been recently remodeled and split into a main living unit with 3 bedrooms and 2.5 bathrooms with a connected ADU that is a 1 bedroom 1 bathroom apartment. 

Historic Denver Home with an ADU rental

Deal Overview 

Appealing Features of the Property 

He and his fiancée already lived a few blocks away and love the neighborhood, with its picturesque, tree-lined streets and good light.  They liked that the home already had an existing lock-off ADU.  Overall, the building was in good shape for its age and they liked that the updated kitchen and other finishings match their taste.  The home also has plenty of space for a home office, and the large garage is a nice feature.

Denver LoHi rental with ADU real estate map

Investment Business Plan 

Their plan is to offset their mortgage by renting the ADU to travelling nurses on a one to three month basis.  For about two months out of the year, the unit will be used by their friends and family, particularly his parents.

Sourcing 

He was checking listings online every day, and I took them on showings to get a better feel for what they were looking for.  

Property Contract Details

Inspection Issues 

The house is about 125 years old and was recently renovated.  The inspector found numerous issues stemming both from the age of the home and the work that had been performed on it.  Some concerns were minor, such as a leak they traced back to a defective washing machine, while others were more serious, especially structural bracing put on the house that will need to be fixed. 

When they went under contract, they included a limited inspection clause as a sign to the seller that they would be easy to work with.  As the list of issues piled up, though, they were concerned the cost of repairs would become prohibitive.  I communicated with the seller that if they could not find a middle ground, he and his fiancée would be priced out of the house.  We initially asked for $25K in repairs and settled on $13K in seller credits, as well as fixing both minor and major issues, such as replacing the sewer line, painting the garage, and replacing missing doorknobs. 

General Notes 

Because they had no Private Mortgage Insurance (PMI), they were able to use the seller credits to cover closing costs and buy down the interest rate.

Property Financing Details 

Plan v Reality

When they bought the property, there was a tenant in the unfurnished ADU paying $1800.  After doing some analysis, they decided to furnish the unit and list it conservatively at $1950 per month.  They posting the listing on various websites, including Airbnb, VRBO, and sites aimed at traveling nurses.  

ADU rental in Denver LoHi home
Furnished ADU in home

They received several high offers, including $2600 via Airbnb for one month, but the prospective tenants wanted to bring their dog.  After they signed a three month lease with a traveling nurse for $1950 a month, they received another offer through VRBO for $2200 for one month.  Given how quickly they were able to lease the unit, they feel good about their thesis that there is upside in the rental rate to $2200.  

Terms of the Deal 

Interesting Points 

Using a combination of existing items, Amazon, and IKEA, they furnished the property for about $1500.  They also added a microwave, hot place, and a convection oven.  

Kitchen of ADU rental in Denver LoHi home
Furnished ADU with hot plate and convection oven

The largest unexpected cost was getting the HVAC and AC zones set up.  They wanted separate heating and cooling zones for the ADU and added additional vents to heat the main unit living room, which cost $4000 in total.  Although this was more than they expected and wasn’t necessary, they’re glad they did it.

To make the unit more marketable to traveling nurses, they spent $2000 to install a security system.  According to his research, most traveling nurses are women who rate safety as a top concern.  Although the neighborhood itself is relatively safe, having the security system will give both the renters and himpeace of mind.  

While marketing the property, he noticed that there is a shortage of medium term rentals that accommodate dogs.  During the pandemic, more people seem to be traveling with dogs, which he estimates accommodating could earn a 30+% premium.  However, he decided against allowing dogs, as the home has some historic molding and new furniture that he doesn’t want to risk being damaged.  

Spreadsheet Analysis

Denver rental with ADU Deal Analysis spreadsheet

Because of the high purchase price of the property, he needed a jumbo loan.  He debated whether to put down 10% or 20% because he could get a better interest rate at 20%.  He talked to one of his mentors who told him to take advantage of the once in a lifetime interest rates by putting down 10%.  Ultimately, he took that advice and got an interest rate of 3.375% 30 year fixed, which is great for a jumbo loan.

Property Operating Expenses

Property Operating Expenses analysis spreadsheet Denver LoHi rental with ADU

Property Operating Expenses After Move Out

Property Operating Expenses after move out analysis spreadsheet Denver LoHi rental with ADU

First Year Returns

First year returns spreadsheet Denver LoHi rental with ADU

Essentially, he and his fiancée are paying $2800 a month for this property.  This was the same amount they paid in rent for a nearby 2 bedroom 1 bathroom apartment, which they were notified was increasing to $3300 before they bought this house.  

In Denver, short term rentals are only allowed in a primary residence, so he and his fiancée are looking at medium and long term rental options once they decide to move out in a few years.  They’ve played around with the numbers for renting out both units and feel confident this was a solid investment.    

Immediate Goals and Plans for the Property 

Currently, the ADU is rented through June 20th. Once the current lease ends, they will aim to get it leased at a similar or higher rate.

Exit Strategy/ Long Term Plan

They are planning on living in this property for the next few years and expect to hold it long term.  Eventually, his parents may move into the ADU full time.  When he and his fiancée are ready to start a family in about five years, they’ll assess whether it makes more sense to sell the house or convert it into a full investment property. 

Conclusion  

He and his fiancée plan on purchasing a second home in the next year and continue purchasing an additional property every one to two years after that.  Right now, they are saving up to buy a mountain home.  Ideally, they would be able to rent the home out part time when they’re not using it, and could potentially use it as a wedding venue for their upcoming nuptials. 

If you’d like more information on the Denver market in general, you can schedule a real estate investment consultation. For information on what house hacking is and how to get started, check out our free Ultimate House Hacking Guide.

YouTube Video: Property Analysis – First Time House Hack in a Historic Denver Home with an ADU

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Authors
Lauren Valinoti
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