Value-Add Rent by the Room | Denver House Hack

[Ben Einspahr]

Hello Fellow Investors,

I want to share a success story of a local “rent by the room” house hacker we had on our House Hack Mastermind Podcast back in 2021. @Andrew Lloyd purchased his first house hack in Lakewood CO November of 2020.

Investment Info:

3 bed/ 3 bath single family home.

Spoiler alert. The property is now a 6 bed/ 3 bath after a small $5,000 investment.

Purchase Price:

$460,000

Cash Invested:

$24,000

What made you interested in investing in this type of deal and strategy?

As a first-time investor without much capital, house hacking offered Andrew the lowest risk paired with the highest return. He chose the “rent by the room” to maximize cash flow which everybody loves. This was very important to him because he wants to continue investing in more real estate and felt the high cash flow would be crucial in speeding up the time until his next house hack purchase, even if it meant a little more work.

Did you work with any real estate professionals?

Lauren Valinoti with Envision Advisors

How did you find the deal and did you or the agent need to do any negotiating?

The deal was sourced from the MLS and Lauren was able to negotiate a $10,000 seller concession and used this to buy down interest by half a point with the rest going to closing costs.

How did you finance the deal?

3.5% down, FHA loan, 30-year fixed, 2.25% interest (wow!!).

Did you add any value?

Andrew added 3 bedrooms to the basement, plus one egress window and added some cabinet and shelf space in the kitchen to support the 6 bedrooms. Adding walls was much easier and cheaper than expected. Hired a contractor to do the work. All in, the wall plus closet cost about $1500 for each room.

As a 3 bed rental= $2400/month

Now, as a 6 bed rent by the room rental w/ the 3 new bedrooms added in the basement= $4,600/month

An additional $2,200/months off of a $5,000 investment. Very impressive!

What was the outcome?

The outcome is a high cash flowing rental that has been pretty painless to manage and has monumentally changed his personal finances for the better. He is now on the hunt for house hack #2 and looking to replicate the same tactics used for house hack #1. (Find a 3-4 bedroom SFH with some space to add additional rooms and creatively increase cashflow)

After moving out of this house, he will rent out the room he is currently occupying which will add an additional $800/month in cash flow.

Lessons learned? Challenges?

One concern going in was if he would be able to fill a 10 x10 room with shared bathroom. No problem there! He also learned that, due to the diligent upfront tenant screening process, having six people share one house is no problem.

One mistake made was not looking for tenants right after closing since he has quite a few renovations to do. In reality most people will start looking for new housing a month plus out so there really was no need to wait.

Furnishing:

If you notice in the picture below Andrew did a job furnishing the living area. When looking at the photo below, you can notice one key thing missing- a television! That's right! When furnishing the main living area when using the rent by the room strategy, do not provide a TV. This is a tactic created by Jeff White that encourages the tenants to stay in the room to hang out. Less tenant interactions, less tenant conflict. 

Great work Andrew!

[Ben Einspahr]

@Jeff White, I think this one might be a runner up to your Custer St. HH. (ding ding ding, round one!)

Pre-college, no. Starting freshmen or sophomore year of college, I would have 100% done rent by the room. Being so young, I would have not been able to qualify for a mortgage or down payment so I would have asked my parents to be co-signers on the loan and asked for a loan from them for the down payment. Ideally, my renters would cover the mortgage. The rent I would have paid would go directly to my parents to start paying off that loan I received from them for the downpayment. Since I would be renting to college students, I would have their parents co-sign on the lease agreements to cover any rent if they cant.  Yep, I have thought about this a time or 2. 

Funny story, at one point when I was in college, my dad mentioned if I wanted to do something like this and it just went in one ear and out the other. Big missed opportunity.