Colorado Springs Rent by the Room House Hack

[Ben Einspahr]

I first connected with Miller McSwain about a year ago when he first got the real estate bug living in Mississippi with the plan to move to Colorado Springs to House Hack. Well fast forward a year and he just recently closed on his first rent by the room house hack in Colorado Springs. 

Side note- if you love diving deep into the numbers, you'll enjoy the deal analysis screen shots below

Here are the details.

Investment Info:
Single-family Rent-by-room HH in Colorado Springs
Main level: 3bed/2bath (shared areas furnished)
Basement level: 2bed/1bath (separated entries, independent kitchen/living room, occupied by me and my wife)

5 bed /3bath total

Purchase Price:
$460k

Cash Invested:
$36,787 (Down payment, Closing costs, Repair/Furnishing costs)

What made you interested in investing in this type of deal and strategy?
House-hacking was a no-brainer because we have to live somewhere. So why not buy a property and have tenants help pay the loan? If we weren’t house-hacking, we would either be paying the mortgage ourselves or renting. We would at least be building equity if we were paying the mortgage ourselves but having tenants pay for most of the mortgage is very nice.
We chose rent-by-room because we definitely wanted to have some cash flow, or close to it, so that we could save for our next property and build our house hack stack. In Colorado Springs/Denver, cash flow is very hard to come by with a traditional long-term-rental (rent to a family) type of situation. So we investigated enhanced cash flow strategies: short-term-rental, medium-term-rental (corporate rental), and rent-by-room. Ultimately, we chose rent-by-room because we didn't want to deal with frequent turnovers associated with short/medium-term, and because Colorado Springs doesn't allow (for the most part) STR's to be owned/operated if you don't occupy the property. If we had chosen the STR strategy, we would have to change strategies when we move out. Might as well get the rent-by-room management reps in while we live here!

How did you find the deal and did you or the agent need to do any negotiating?
We found it with our Envision Advisors agent, Leah Keeling, on the MLS. We closed in April 2022, which was near the peak of demand, so we were in a very competitive market. Therefore, we didn't do much negotiating. In fact, we mostly gave into the seller's requests as we increased our offer amount and offered a limited inspection contingency. I think the most appealing part of the contract to the seller was that we offered a 15 day close with Cornerstone Home Lending.

How did you finance the deal?
5% down, 30-year fixed, 4.875% interest conventional loan

Did you add any value?
We added flooring and cabinets to an unfinished part of the basement. Maybe this added some value??? But the motivation was to use this area as our kitchen in the separated basement. We also added a countertop stove and oven.

What was the outcome?
We have the 3 rooms rented upstairs, and that income covers ~85% of the mortgage. So we are paying for some of the mortgage and for any repairs, updates etc.
For now, we enjoy the place we live and get to live for a reduced cost while getting tax benefits, appreciation, and loan paydown! After we move out, we look forward to actually collecting some cash flow :)

Lessons learned? Challenges?
The main lesson I learned was to be less stubborn. When we first listed the rooms, I started with a high rate just to see if anyone would bite. Then I SLOWLY backed the rate down until we got lots of interest. This resulted in ~2 months of vacancy which is ~$5,000 in lost rent.
Other than that, we have enjoyed setting up the upstairs unit, adding the basement kitchen, and being REAL ESTATE INVESTORS!

[Miller McSwain]

We've been super happy with our first investment!

If anyone is interested in learning more, check out this podcast episode where I discuss how we were able to get a loan before graduation, which supplies we provide to our tenants, and more!
https://open.spotify.com/episo...