Colorado House Hackers - What's the backup plan?

Question

For those that are pushing, or currently doing the house hacking strategy in Colorado, what is the back up plan if your life situation changes and you don't want to, or can't house-hack anymore because you are forced to move? Are you purely planning/hoping for appreciation and plan on selling? Are you running the numbers to ensure it works as a long-term rental? I ask because most properties in the expensive metro areas (Denver, Boulder, Colorado Springs) don't provide positive cash flow as a long term rental.

Just curious...

Richard Updegrove · Answer

Stuart,

What is your end goal with investment properties? Do you want to keep moving to end up with multiple properties? Are you planning on doing all of your own property management? I'm asking these questions because they can help you decide your strategy and where you want to go. The biggest issue I can see with renting by the room is managing multiple tenants and leases. I've heard that most property management companies will not take on these types of properties.

I don't currently run any short term rentals but I've heard short term rentals are actually more in demand in Colorado during covid. It makes sense because people working remotely have the flexibility to work wherever they want!

I live in Arvada and currently own 2 properties. I have one full time rental and a primary. I'm using the nomadic strategy to purchase properties and then rent them out 1 - 2 years later. I'm thinking about purchasing a new primary in the next 3 - 6 months and turning my current home into a medium term Airbnb. I don't want to manage a short term rental or pay someone else to do it for me.

I agree about having options. I always like to make sure that I can rent out my properties as a full time rental as a plan A. Personally, I'm going to hang on to my properties for the appreciation.

James Carlson · Answer

@Stuart Grazier

Not sure if Covid will have an impact or not. From following the Airbnb laws in Colorado cities for years now, I can say the primary concern for the bigger, more liberal, cities is affordable housing. Whether accurate or not, Denver's council sees the issue of short-term rentals through the prism of housing inventory. They think taking homes out of the housing stock to use for STRs meaningfully decreases the inventory and therefore could push up prices for long-term rents and homes purchase prices, too.

The burbs and cities that at least slightly less liberal (say Arvada, Littleton and definitely Colorado Springs) seem to see this as more of a property rights issue, in which you can do with your property what you want.

Both types of cities have a contingent of neighborhood groups that are opposed based on the claim that Airbnb ruins the character of neighborhoods.

So far, I don't see Covid superseding those existing dynamics.

Ben Rhodin · Answer

Hey @Stuart Grazier!

This is a pretty common question, but a good one to ask! It all comes back around to having multiple exit strategies, and it is an important point to house hacking. Since the game plan is to house hack every year, you need to make sure that the property works after you move out. You don't want to be stuck with negative cashflow after moving out.

There are a few ways this can be accomplished, that we steer our clients towards. The simplest way is to continue renting by the room, and just add your space to the equation. This is going to see the most cashflow, and you are already set up for it, as you probably already have the rooms rented out. The issue with this formula is that it is significantly more work than a traditional rental. There are also not a lot of property managers out there that excel at the rent by the room model.

The second way is to plan for it when looking at properties and finding ones that can be easily separated off and turned into two units (say basement and top floor), then by adding a kitchen to the separate area you can rent both areas, instead of the whole home as one. This way you tend to see a significant increase in rental income, say $1900 + $1750 for one of my recent ones, instead of around $2200 for the whole home. This is what we tend to push our clients towards, as it is easier to manage, and requires usually minimal work. Just takes a little more creativeness upfront to find compatible properties.

Of course, there are other options, and there is no one size fits all. You could look into short term rentals if the area allows for it, sometimes it will also work to rent the whole property as one, but you will definitely see the least cash flow this way unless rents have increased enough since you purchased the property. But yes, you should always make sure that the property will work in some way after you move out, otherwise, it is not a good deal, as the whole point is to accumulate one house hack every year. This is why we always analyze properties as rentals first and then add the house hacking portion.

James Carlson · Answer

@Richard Updegrove

It blows my mind, but we've seen on the ground what you're saying about short-term rentals/Airbnb in Colorado. Our clients in Denver and Colorado Springs who run Airbnbs -- either in investment properties or by house hacking in their basement apartments/mother-in-law suites) have been as booked as they want to be during this time. I think there's a lot of pent-up demand being met by staycation visitors. (Not as many from way out of state, but more from in Colorado or neighboring states.)

I hear you about the medium-term rentals as well. We do that in all of our properties and have seen good demand. It sounds like you don't want to do Airbnb, but I'm sure you know that Arvada now actually allows for you to rent your non-owner-occupied property as an STR. It's work, but dang, the money is enticing ... Good luck on your next purchase!

Stuart Grazier · Answer

Thanks for the insight @James Carlson. I'm curious if the impact from COVID may help change cities' opinions towards using investment properties for STR's, as there is a health concern element to staying in hotels/motels where there are definitely more risks involved in exposure. I just read an article in Forbes that predicts the uptick in short term rentals being used for family vacations where people can still "get away" and not have to travel via airlines and stay in hotels, but still have a nice place to stay.

Luke Trovinger · Answer

Thanks @Stuart Grazier! A little creativity can go a long way in the house hack space.

Regarding areas where non-occupied Airbnb would be appropriate as a backup plan for house-hacking (or in general), there are a few areas in the Denver metro area where this can currently work that I have some familiarity with. I definitely find it easiest, and would recommend, getting the cities on the phone to discuss fine details (zoning, unrelated persons, parking requirements, etc.). But here are some general city overviews other than unincorporated Adams County. All require a permit/license.

I would definitely point you in Arvada's direction, as they've just put updated regulation into place allowing up to three owned properties to be run as short term rentals. I think from a longevity standpoint, Arvada is most secure given they just updated their regulations last month. Here's a link for more on requirements to do so: https://arvada.org/business/permits-and-applications/short-term-rental

Littleton is also an area where non-owner occupant is currently allowed, but there is talk of potential additional regulation. Here's a link for more as well: https://www.littletongov.org/i-want-to-/sample-pages/search?q=Short%20term%20rentals

Englewood is another that offers the possibility of non-owner occupant depending on the zoning, and the ability to request a waiver for zoning requiring primary residence. Link: https://www.englewoodco.gov/government/city-departments/community-development/short-term-rentals

But you're absolutely correct that it's becoming more and more difficult for the non-owner occupied strategy to work around the metro area as more cities add regulation. For the post's longevity's sake, here are some of the other major metro areas where primary residence is required and links for additional info.

Lakewood is primary residence only with a license: https://lakewoodspeaks.org/media/W1siZiIsIjIwMTkvMDIvMTUvMTcvNTAvMjYvM2Y5NTQ1YzItYTJlZS00ZWIwLWJiMzctZGMwNGM2MjYyZmI0L08tMjAxOS0zLnBkZiJdXQ/c80cc5610dd8bae1/O-2019-3.pdf

Aurora is primary residence only with a license: https://www.auroragov.org/residents/water/pay_my_water_bill/landlord_resources/short-term_vs__long-term_rental

Denver is primary residence only with a license: https://www.denvergov.org/content/denvergov/en/denver-business-licensing-center/business-licenses/short-term-rentals.html

Hopefully there's some value here and at least a starting point for some additional research!

Thanks,

Luke

James Carlson · Answer

@Stuart Grazier

Everyone else sufficiently discussed the plan Bs that we talk to with our hack hacking clients in Denver and Colorado Springs. (Continue to rent-by-the-room, turn into to two rentals, if you have the right zoning.) I'd also add medium-term rentals for the right property. We've had success with our own properties and seen clients have success with traveling nurse/remote worker rentals. (We've personally owned everything from a studio, a 1br condo, a 3br condo and a 4br house -- all that worked as mid-term rentals.)

About Airbnb ... Like @Luke Trovinger talked about, there are actually some Denver area cities that allow Airbnb investments or non-owner occupied short-term rentals. Arvada passed a law in August to allow it. Even more recently, Littleton just passed a law in November to allow it unfettered. (Talking to the planning department staff in both those cities, I sense a narrow window in which to get in as they plan to readdress the issue in a year or less and could outlaw it at that point.) Centennial has allowed Airbnb/STRs in investment properties for awhile. Colorado Springs does as well, but their limits make it all but impossible in practice.

Arvada and Littleton surprise me as the Airbnb laws have tended toward more restrictive, so it's interesting to see a city take a different tact. And we're certainly seeing clients want to pick up investments there for STRs. How long that will last, who knows.

Stuart Grazier · Answer

Wow, awesome @Luke Trovinger! Thank you!

Stuart Grazier · Answer

Good stuff @Ben Rhodin and @Luke Trovinger Thanks for the replies! Love the idea of AirBnB, however I know that is getting harder and harder to do around Denver. Besides Adams County, are there other areas around the major Colorado metros that are still allowing short term rentals on non-owner occupied properties?

Luke Trovinger · Answer

Hey Stuart,

I definitely agree with @Ben Rhodin above, and wanted to add a little color to it with a home I recently analyzed.

I think that one of the main draws of house hacking (other than having low/no housing expenses) is the flexibility it allows the owner. If one runs into a circumstance where they want or need to leave their house hack, that opens up another room/unit for them to rent out, increasing their return/cash flow potential.

In the Denver metro area specifically, cash flow is hard to come by in 2-4 unit residences which is the more “traditional” house hack but can definitely cover a portion of a mortgage doing so. However, cash flow is much easier to come by in the Denver Metro market when someone rents their home by the room.

Here’s an example of a rent by the room situation:

There is a 5 bed, 2 bath home currently on the market in the Thornton area for 375k. I currently have a mortgage quote of my own at a 2.75% rate. Putting a 3.5% down payment down, my PITI is estimated at ~$1,930 inclusive of mortgage insurance.

According to a Facebook Marketplace search, rooms are renting anywhere between $650-$900 in the area depending on the finish, size of room, etc.

For example’s sake I’ll use $700.

Now depending on a person’s comfort to profitability scale, they may decide to rent all or just a couple of the rooms when they live in the home. In the situation you described, all rooms would be available to rent because the owner had to / wanted to move out.

In a perfect world of renting all rooms out 100% of the time, I would be bringing in $3,500 per month, which offers significant cash flow above and beyond my PITI of $1,930.

Obviously the world’s not perfect, but I would only need to average 3 bedrooms rented out at $2,100 a month for the year to cover my PITI, and have a few extra dollars for maintenance. Anything above and beyond is added buffer and potential cash flow (and definitely achievable), not to mention principal pay down and tax write offs.

Here's some additional backup plans:

It is definitely recommended to have backup plans going into a house hack investment. For a long term rental, in a quick Zillow search of the same neighborhood, I couldn’t find any 5 bedroom rentals listed. But there is a 4 bedroom townhome at $2000 and a 4 bedroom house for $2100. Assuming a 5 bedroom could land me $2,200-$2,300 this long term rental approach isn't as good as rent by the room, butwould likely allow for break even but i

Another backup plan that was popular prior to the happenings of this year, was to Airbnb a space in the home. This house is located in unincorporated Adams County, so Airbnb is not restricted in the same manner as Denver County. This house has a back door that can be locked off from the main floor (like Ben mentioned above), allowing the basement to serve as a non-conforming second unit which could be “Airbnbed”. Obviously this year’s a tough one for Airbnb, but I just gave it a look for a similar instance. I found two listings for a basement unit in the area, one at $70 and one at $104 per night. If I was able to rent out the basement (2 bedrooms) at $80 a night for 15 nights of the month, that’d be $1,200 a month just for the bottom portion. If I achieved 20+ nights a month, that’d be $1,600+ for just the bottom unit. Coming out of the pandemic, both would be plausible.

In that same manner, you could rent the basement unit out in a long term manner for about $1000 a month, leaving three bedrooms upstairs to rent at ~$1,700 for a long term unit. Total of $2,700 covering the PITI.

I apologize for the long winded post, but just wanted to put it out there that there are definitely ways that would allow the owner to hold onto the unit should they need or want to move out in an expensive market. It’s important and recommended to go into an investment with a backup plan, and obviously it’s important to follow local guidelines/laws (Airbnb, egress windows, etc.), but if one can get creative it’s possible to hang onto their investment and even cash flow with the right deal when the owner leaves the residence.

Colorado House Hackers - What's the backup plan?

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