Denver House Hack Deal Analysis Example

Intro

One of the ways I keep a finger on the pulse of the Denver market is by attending open houses from time to time.  Open houses provide a glimpse into buyer and seller perspectives, and always offer a unique application of common strategies to learn from.  One recent open house I attended provided a great example of how a house hacker can get creative and leverage Denver’s short term rental regulations to get into real estate with less than $25K, if they are willing to put the work in.

The Property

The property included a 605 sq. ft. 2BR/1BA bungalow, with a separate 518 sq. ft. 1BR/1BA ADU.  Each unit includes its own garage and is in rent-ready condition, with value-add opportunities.  One key detail of the property is its E-SU-D1 zoning (Single Unit, Detached Residential with Accessory Dwelling Units).  Under Denver’s zoning laws, if the owner occupied the primary 2-bedroom unit, they can get a short-term rental license and list the ADU on sites like AirBnB for extra income.  They could also choose to live in either unit and rent the other on a long-term lease, but its best use is probably as a short-term rental.

Evaluating the Deal

With a list price of $465,000, a qualifying buyer with $20K-$25K to invest could use an FHA loan to put $16,275 down and take on a mortgage payment of ~$3,600/month, including escrow payments.  They would likely then need another $5,000 to pay for closing costs and furnish the ADU.  The key question:

How much of this $3,600 mortgage can be covered by the short-term rentals of the ADU?

Projecting Monthly Cash Flows

AirDna, the go-to analytics site that projects potential AirBnB revenues, estimates the ADU would generate ~$34K in revenue per year if you manage it well. 

To be conservative, I’m going to assume I can only generate 60% of that, or $21K.  After expenses, you can likely net $16.4K per year to offset the cost of the mortgage, or $1,369 per month. 

That leaves the investor paying $2,200 per month for the 2 Bedroom.  Comparable rentals in the area are going for $2,200-$2,500 per month, so in this case the investor would roughly break even on housing costs.   Meanwhile, if you assume a 3% annual appreciation rate, the investor is gaining more than $1,500 in equity each month - $367 from amortizing the loan, and $1,150 from appreciation.  Over the course of each year, they are gaining more than $18K in equity, against an initial investment of $20K. 

Value Add Opportunities

In addition to the cash flow and natural appreciation a property offers, I also look for high ROI value-add opportunities for FORCED Appreciation.  This property had a few worth noting that could be completed over time to further increase the value of the home:

Opportunity to repair/install garage doors with high ROI:

Opportunity to restore yard and add landscaping:

Conclusion

For the scrappy house hacker looking to break into real estate without a large down payment, this could be a great opportunity if you’re willing to invest the time in managing the ADU as a short-term rental and capturing the value-add opportunities of the property!

Deal Value Score: 7

This score reflects the value of the opportunity in terms of financial ROI and Cash Flow.

Deal Scrappiness Score: 9

This score reflects how much opportunity the deal provides to make the investment successful through the commitment of time and effort in exchange for a low down payment.

If you are looking for opportunities to get into real estate, I can help you find the right deal based on your needs and position you for success.  Please reach out and I’ll be happy to help you get started! In the meantime, if you'd like to learn more about House Hacking in general, check out my Denver House Hacking Guide HERE