Welcome to our new “Ask an Investor” series! We’re inviting clients onto the podcast and giving them the opportunity to ask questions about their plans and properties; Chris and I will weigh in with our opinions based on our years of investing experience. This podcast will mirror a lot of great conversations we have with our clients that go into deep nuance on a variety of topics.
Our first guests are Will and Dianna, who you may remember from episode #274 House Hacking In Denver for Less than $5,000 Down (Not a VA Loan!) a couple of months ago. They bought their first house hack in Aurora and got a great deal on financing.
Will and Dianna targeted Aurora, since it was in their price range. About halfway through their home search, agent Lauren Valinoti figured out they could use a Bank of America grant program, which narrowed their sites to low and moderate income track housing. They found some neighborhoods they liked and one in particular that has farmhouse style homes. They bought a 5 bedroom/2 bathroom house in February 2021 and have been renovating it ever since. They came to us with questions about their best options for house hacking, buying their next property, and how they should approach the rest of their renovations.
- Listen to the podcast “#46: New Series! Ask an Investor: What’s the Best Approach for Our House Hack?” on the Colorado Springs 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.
Denver Rental Property Overview
The layout of the property is unique with 3 bedrooms and a bathroom on the main floor and 2 more bedrooms and another bathroom in the basement. There’s a living area off of each bedroom in the basement which has a lot of potential for future renters. They plan on pursuing a room-by-room strategy once they move out, but their immediate concern is the best ROI while they’re living there. They hope to move out either the summer of 2022 or 2023, based on when they have enough money for a down payment and reserves for their next home.
The grant program enabled them to save a lot of capital, and they have an account with $10K for reserves and CapEx projects that they haven’t touched yet. Another account is set aside for renovations; they started with $15K in it and are now down to $8K. So far, they’ve tackled a lot of yardwork, renovated the bathrooms, and repainted the whole house. The home doesn’t have air conditioning which they’re considering putting in, and the kitchen still needs to be renovated.
What are some financial strategies that will get us cash to use towards our next house?
The Bank of America grant program can be used repeatedly until the money runs out, so that is a possibility for their next home. They bought the house they’re in now for $350K, and nearby comps put the current value between $420-450K, giving them about $50-70K in equity.
Chris and Jenny say: You can do a cash out refinance or HELOC to get money now. An owner-occupied refinance will give you the better interest rate, probably around low-3%, but that’s higher than your current interest rate. You can pull out as much as 80% equity, but check with a lender to explore this option because it depends on the appraisal and mortgage balance, and it resets the clock on occupancy requirement timelines. The HELOC will have a higher interest rate but would enable you to move out. You can usually go up to 95% on the cash you can pull out, but it’s essentially a credit card with an interest rate that can go up at any time.
Should we try Airbnb or pursue a medium term rental strategy?
They talked to another couple who do house hacking in Aurora and have done well with Airbnb. That couple charges $95 a night, which is pretty low. Will and Dianna have more space in their basement and think they could allow up to 6 people, thanks to 2 bedrooms and a pullout couch. But do they actually want that many people in their basement?
They also estimate that it would cost $3-4K to furnish the basement for Airbnb. It would probably take about a month or two to get their investment back, but that creates the issue of what to do with the furniture when they move out. Since Aurora has rules that Airbnb hosts must live in the residence, they can only pursue this strategy while they’re living there.
Their main hesitancy with Airbnb is their comfort level. The amount of time it takes isn’t an issue so much as constantly having new people around. They have a dog who likes to spend a lot of time in the backyard, which would be a shared space. Another concern is how much wear and tear the house will sustain from all of the people coming and going.
Chris says: For Airbnb, you would want to cap occupancy at 4 to make sure you don’t have any parties or extra people. That way, your renters are either a couple who rents out the whole area, or two couples vacationing together. We can run an AirDNA report to see how much they could get, but $125 with 65-80% occupancy rates seems reasonable. It’s all about finding the sweet spot.
However, my gut says to do medium term rentals instead because you’re in the middle of renovations and planning on getting married, both of which are time consuming. You know you want to move out soon and don’t want to deal with extra furniture, so keep it simple.
Jenny says: Comfort level and the amount of time devoted to managing a rental are just as valid as the numbers. Since it’s the house you’re living in, your comfort level matters more than a pure investment property. Crunch the basic numbers to get an idea but remember to take into account how you feel. Either option will cover the cost of the mortgage, so you can do the math on how many months of having your mortgage covered will it take to get to your next property. You’ll get there either way by the middle of next year.
We only have one egress window in the basement; what’s the best approach for renting out that space?
One of the bedrooms has an egress window but the other one doesn’t. They can’t decide whether they should rent out the whole basement to one tenant, or if they should look into putting an egress window into the other room to make it a legal bedroom.
Chris says: Absolutely put an egress window in there if you plan on renting out that room. The risk vs reward is not worth it. If something were to happen to the person renting that room, the lawsuit would wipe you out entirely. Put the window in there now, since you have $8K in reserves for renovations. The summer will end soon, so you don’t need to worry about AC right now. You can get someone in the room ASAP and make back the money.
Jenny says: Start by renting out the room with the egress window already installed and see how that goes. Use the proceeds from their rent to pay for the second egress window and then rent out the bedroom.
Should we do something with the flooring to make it quieter?
Chris says: You can drive screws through the floor to make the floorboards quieter, but that will ruin the floor. The only time I’ve done that is when I put new flooring overtop it.
Jenny says: Everyone who will be renting a room knows it’s a temporary living arrangement and thin walls and hearing noises is to be expected. If it were your forever home, it would be worth doing something about it, but not in this situation.
Should we do the renovation work ourselves, or hire it out?
Chris says: As with everything, it depends. If it’s electrical or plumbing, definitely hire it out since you’ll be held liable as an unlicensed person. Bring in licensed people to do that work. It takes me five times longer to do my own work and the quality isn’t as good, so is it worth it? There’s a tradeoff of doing the work yourself or paying someone who can do it faster. You’ll get more rental income faster to make up for it.
Jenny says: My rule of thumb is I hire out anything that requires technical knowledge. I only do paint, landscaping, any tiny things that won’t hurt someone if they’re messed up.
For more of our advice, watch the YouTube video (link below) to see pictures and videos of the house and hear our ideas for how they should renovate the kitchen and basement.
Connect with Will and Dianna
If you have your own feedback for Will and Dianna, connect with them on social media to share your ideas. Their
- Instagram – @diaaaanna and @willtalty
- Will’s Facebook
We’ll have them back on the show as they make more progress and get closer to purchasing their second investment property.
How to Get Started Building Your Own Colorado Springs Rental Portfolio
If you’re interested in house hacking, check out our free Ultimate Guide to House Hacking online course.
YouTube Video
New Series! Ask an Investor: What’s the Best Approach for Our House Hack?
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