- Listen to the podcast “#284: DDD: Stocks vs Real Estate and 2 House Hack Deal Analyses” 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.
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Investment Property Details
This home is located near Wash Park and was built in 1890. The main house has two units and there’s a carriage house in the back. The first floor unit in the main house is 2 beds + 2 baths; the upstairs unit is 1 bed + 1 bath; and the carriage house is also 1 bed + 1 bath converted from a garage. All of the units are separate except for shared laundry.
Appealing Features of the Property
This is a unique, historic home in an amazing location. There are already great tenants and rents in place, which made it more attractive to my client. Because of the layout on the first floor, there is an opportunity to convert the unit into two 1 bed + 1 bath units.
Property Contract Details
Initially, my client wanted to use an FHA loan to buy a multi family property. An FHA loan for a triplex only requires 3.5% down, but in order to use it, the buyer must pass a self-sufficiency test. This test consists of proving that 75% of the gross rents will cover principal, interest, taxes, insurance, and the monthly FHA mortgage insurance.
She would not have been able to pass the self-sufficiency test because the home prices in Denver won’t make those numbers work. Since the main benefit of the FHA loan is the low down payment, she found better rates using a conventional loan with 20% down.
There were no issues that need to be dealt with right away. The house is 130 years old and will require maintenance due to its age, but it has been well cared for over the years. Don’t get scared by old houses, just understand that due diligence is required. The most important factor is how well the different owners have maintained the property over the years. In this case, the structure of the house is in great shape and just has an old boiler that needs to be maintained.
Property Financing Details
Stabilization: Plan v Reality
The first floor unit rents for $2375, and the upstairs unit rents for $1795. The owner is currently living in the carriage house. There is a separate meter for the carriage house, and all utilities are being billed back to the tenants and are charged on top of rent.
Because the house is so old, we estimated repairs at 10% instead of the usual 5-8%.
Property Operating Expenses
First Year Returns
My client is essentially living in this house for about $200 a month. Once she moves on and rents out the carriage house, her cash flow will be around $800 a month. This is a good long term investment, and with the potential to create a 4th unit, she could see an even greater return.
Exit Strategy/ Long Term Plan
She’s planning on living there and house hacking for a year and moving onto the next property.
In the future, she has the option to convert the first floor unit into two 1 bed + 1 bath units. There is enough space to add another kitchen without making the units feel cramped. It would probably cost about $10K-$15K, but it would likely be worth it because of the rent she’d be able to get in this area.