Starting out in Denver/Aurora CO - is my plan crazy?

Question

Hi all!  I've been reading up on BiggerPockets and I'm very interested in investing in real estate, specifically within the Denver area.

My goal is buy/hold/cashflow to eventually be able to REI full-time.  My plan is to find a nice SFH with 5+ rooms, 2+ bathrooms and a basement.  I often work from home and I'd like to live in the basement as the on-site property manager, so to speak.  I would then install locks on the bedroom doors and rent them either by the month or with 3-month, 6-month, and 12-month lease options.  With $30k available for a down payment (and a bit of buffer for other expenses) and excellent credit, I'm looking to finance conventionally with ~5-10% down.  This will be my primary residence for at least 2 years (to get the cap gains exclusion if I decide to sell, which I don't now).

I'm wondering if my rough calculations are missing something here:

- Based on discussions with lenders for properties that match my profile, PITI comes in at ~$2200/mo.  I pay more than this for rent right now, so I'm happy about that.

- If I plan to keep 4 of the rooms rented at >$900/mo plus utilities (seems possible based on initial market research - calling landlords, monitoring craigslist, airbnb, etc), that means I'm at >$3600/mo.  That's $1k/mo in the positive.

- Taking into account property taxes and maintenance, I'm looking at an estimated $8-10k/y in positive cash flow and no rent payment, where I could theoretically quit my job and manage rentals (though that's not what I intend).

This means that I'll be building equity and living rent-free.  I might be painting a pretty picture for myself and I'm wondering if some of you more experienced members might provide a reality check in case I'm going about this the wrong way.

RE occupancy limits - I'll be targeting properties with concealed-ish parking, no HOA, and rentals will be 1 month+.  I also have high risk tolerance, though I'm open to learning from anyone here (including those who would strongly advise against this).

Thank you for your time!

Account Closed · Answer

Hi Tracy -

I agree with @Bill  -  I don't know that these number make a lot of sense. What is your overall budget for a place? Using $30k as a starting point, it would seem that the overall budget would be anywhere from $300-600k which has a large amount of variation into the property to buy.

To me, it seems like you are talking about is more of a communal living/roommate situation, which is not uncommon in the Denver area and I had looked into pretty extensively.

There is a FB group that would be helpful to look into: https://www.facebook.com/groups/rentdenverhousing/

Have you ever lived in this sort of situation before? It's not for everybody, and you will be managing the property (and the tenants) 24/7. Unless you find a place with a MIL apartment you won't really have much privacy, since every room that isn't a bedroom is shared.

Depending on the number of rooms parking could be its own nightmare (think garages, parking spaces, being blocked in, etc.) The tenants willing to live in this sort of situation I don't think will be willing to pay $900+utils. If I were you I would budget more around $600 (including utils) as more realistic.

This sounds like so much work to oversee. Potentially, you are managing 4 month-to-month leases, along with everything that comes with that - it can be a ton of work dealing with vacancies and screening tenants on a 12 month lease. The longer of a lease that you sign the less you will have to deal with this aspect.

What about security deposit? What if one tenant knocks a hole in a wall and then leaves without paying?

Are you using other comparable properties (5+br, communal living/roommate) or are you looking at 1br apartments as comps?

If you are looking at Airbnb as a backup - just know that Denver requires you get a lodger's tax ID, taxes 10.75%, and you are only allowed one listing (so you can either list a single room or the whole property, but not multiple individual rooms). Plus there are a lot of upfront costs for furnishing/decorating a vacation rental, even on the cheap.

@Bill S.undefined

Bill S. · Answer

@Tracy S. your title asked if your plan was crazy. I think your approach is doable. I also think your numbers are overly optimistic. Rents are on the high end and home price on the low end. Your purchase price point is in the very competitive segment of the market and has very unique requirements. Most people are happy just to get a property in that price point.

My approach would be as follows. Get with a lender that has experience in funding people who are house hacking and see what exactly you qualify for with your approach to the property.   2nd get an agent to do some sold searches for your price point (based on your lender's pre-qualification) and property requirements in the whole metro area. It will likely narrow your search down to 3-4 zip codes/neighborhoods. Use those zip codes/neighborhoods to do some rent comps. Only after you have done that, can you tell just how crazy your plan is.

Bill S. · Answer

@Tracy S. so my thoughts on prices. 10% down and the stated down payment amount of $30k means a home valued at below $300,000. 5 bed/2bath and a basement and lots of off-street parking under $300K is a very tall order in this market. You need to get with a lender and get your price point and funding figured out.

Renting a room for $900 with a shared bathroom seems very high unless you are in desirable areas. There are no $300,000 homes in desirable areas. I don't sample the market for room rentals but the roommate situations I have had that look at my properties are all looking in the $600-$700 (per room) range. For $900 you can find studios and 1 bed apartments in the less popular areas. Obviously if you are seeing rooms rent for that price in the areas where you will be buying, then go for it.

Jennifer Slaughter · Answer

@Tracy S., sounds like you have spent some time putting together a plan.

So are you thinking boarding house, just having roommates or Airbnb?

One time I was under contract on a property in a college town, the house was right across from campus and we were planning on using it as a rental. We had to kill the deal because we found out it was zoned for low density so no more than 2 unrelated people could live there.  Lesson learned--look at zoning before making an offer.

When we were first looking at Airbnb, I was given the advice by a private lender with hotel experience to call/email 10 of the top rated hosts in similar markets to find out what works, what doesn't work, how to differentiate, % of income that goes to expenses, etc.  It was incredibly helpful and I would recommend it to get an idea of what to expect, especially since short term rentals are more hospitality than landlording.

Welcome to Colorado!

Account Closed · Answer

@Tracy S.   I agree with @Kevin Grinstead .  You should know the number one issue that makes people complain about things like this is a ridiculous number of cars being parked at the house causing problems for the neighbors.  Absolutely loook for a house with enough parking.

Depending on your background you might also be able to do a sober living house.  They are more profitable than what you are talking about and have a huge number of legal protections from zoning and HOA issues.

Tracy S. · Answer

Thank you @Bill S. - this is very helpful.  I'll do that.

Tracy S. · Answer

@Chris Lopez thank you - I just finished listening and have some great notes.  Very informative podcast.

@Jennifer S. - I'm thinking roommates.  I enjoy the hospitality aspects and would feel better with more overhead but in-house presence to keep a close eye on the property (and take advantage of conventional non-investment financing).  RE zoning - I'll add this to my property profile that my agent is using.  Thank you very much for the heads up.  Call 10 hosts - that's an awesome idea; I appreciate it.  Thank you for taking the time to help me.

@Carol Kotchek thank you!  I think I need a little luck :).

Carol Kotchek · Answer

Well if you can afford the property with 100% vacancy, you might as well go for it. If you don't get tenants at that price then you can always lower your price.

Good luck!!

Chris Lopez · Answer

@Tracy S. There have been a lot of good discussion threads on BP regarding Airbnbing in Denver. @James Carlson has posted a wealth of info. Spend some time searching and reading those.

Finding demand... Hop on Airbnb and search neighborhoods to see what people are asking for. Talk with the host(s) that you're staying with. If your schedule allows, stay in different Airbnb's while you get to know Denver. Hop around and talk to each host. You'll learn a ton.

Check your BP inbox... sending you an interview on Airbnbing in Denver.

Kevin Grinstead · Answer

Hi Tracy, rent can be used as income to help your DTI when you are borrowing money. If you have rent that is documented and is available for you then your income is increased and you can use about 75% of the rent you collect as income. This helps to ofset the mortgage on one property to buy the next property.

I have a client that bought a two-unit home and had rent from the secons unit and also rent from a carriage house.  Then after a year he leveraged the extra income to purchase the next house where he can do the same. The first property is giving him 3 long term rents and the second home is set to give them one rent and they are looking to add a carriage house to add another rental income from their property.

If you can find a good duplex then you could rent out one side as a long term and then you could use the other side that you live in to rent extra rooms for additional income.

I know that they had a package on BP for great lease agreements in Colorado to help you.

Starting out in Denver/Aurora CO - is my plan crazy?

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