A lot of people hear room by room and immediately think of house hacking, but this is an investment property that my client isn’t living in. This approach is generating big returns for him and shows that there are still ways to make money in today’s market.
- Listen to the podcast “#37: Room by Room Rental in a Single Family 5 Bedroom Home” on the Colorado Springs Real Estate Investing Podcast
- Watch the YouTube video (at the bottom.)
- Read the blog post.
This investor has room by room rentals down to a science. He is already implementing this strategy in other properties that he owns, so he knew exactly what he was looking for and what it would take to get the property ready to rent out.
Investment Property Details
This is a 5 bedroom 2 bathroom single family home located in east Colorado Springs. It’s a ranch house with a basement: the main floor has a kitchen, living area, 2 bedrooms, and 1 bathroom; the basement has 3 more bedrooms, a bathroom, and another living area.
Appealing Features of the Property
The number of bedrooms is great for his room by room strategy, since he’ll be generating rental income from each bedroom.
I received an email from my client early one morning informing me that he saw that this property come on the market, and he wanted to make an offer on it.
Property Contract Details
We put in an offer at the list price of $350K with great terms. My client agreed to cover all appraisal gaps and limited inspection objections. I asked the sales agent what was most important to the seller and was told they needed a post-closing occupancy agreement. My client was willing to accommodate that, and we were under contract that evening.
Sellers aren’t always most motivated by getting top price; sometimes they have other things that they value more. A strong offer is based on making sure the seller’s needs are being met.
The house is fairly new and in decent shape, so nothing big came up during the inspection. My client is going to repaint the house and replace the flooring.
Property Financing Details
Stabilization: Plan v Reality
The primary bedroom has an ensuite bathroom and will rent for $750 a month. The other bedrooms will all go for $600 a month.
If he were to rent this home out to one tenant, he would likely get $1800-$1900 at the top end instead of the $3150 he’s getting now.
My client is going to spend $6500 in total to get the house in shape to rent out. Some of this will cover the paint and floors, but he is also going to provide furniture for the common areas and basic cooking supplies for the kitchen. Since he’s done this before, he knows exactly what to buy and understands nuances of group living, such as exactly where to put the washer and dryer.
Property Operating Expenses
He plans on self-managing the property, but since he lives out of state, he hires helpers to assist with any boots on the ground needs. He spends about $100 a month on these services.
He covers the utilities and internet himself and estimates his expenses based on what he spends on his other properties. This house came with solar panels, though, so his electricity bill will likely be lower.
First Year Returns
Using the room by room rental strategy, my client is looking at a cash on cash return of 11.6% and a cap rate of 6.9%. When we run the numbers on this property as a single tenant lease, the returns drop down to just over breakeven. These results show us that the same property can generate a variety of returns just based on the strategy used to rent it out.
Immediate Goals and Plans for the Property
He got possession of the property about a week ago and already has the rooms leased and tenants moving in.
Exit Strategy/ Long Term Plan
He plans on holding on to this property for the long term and letting it generate returns.
This deal analysis highlights how a slight change in strategy can yield very different outcomes. Keep in mind, though, that everything is a tradeoff. Having 5 different leases for 1 house is a lot more work than having 1 long term tenant. If you have the personality and energy for it, then this could be a good strategy for you.
In this tight market, using creative strategies is more important than ever. If you have any questions, reach out and I’ll be happy to help you formulate the right plan for your goals.
Get Started Building Your Own Colorado Springs Rental Portfolio
For information on how to get started investing in Colorado Springs, check out our free 2021 Colorado Springs Real Estate Investing Guide.
You can also check out our real estate investing toolkit which has free spreadsheets you can download to analyze rental properties.