Sell or keep as rental - Denver

25 Replies

Hi all,

First post after having discovered this site about 6 months ago. Love the podcasts and looking forward to broadening my knowledge and hopefully building a decent portfolio over time. 

I have a question on whether I should buy or sell my current home in Denver (Clayton). The home was purchased in 2010 for about $200K (owe $165K) and would sell now for about $325-330K. My wife and I are building new construction (about $425K) and are undecided about what to do with the other home. Our mortgage is a bit under $1K and the rental income would be about $1800 (after paying PM). However, we will be taking a HELOC of about $55K to assist with the 20% down on the new place.

If we sell and net ~ $145-150K, we could use that and our savings (about $30K) to put the 20% down and have roughly $90-95K to begin looking for another rental (or 2?).  We would probably sit on the cash or potentially look at other markets as the Denver market is pretty crazy right now.

The only other debt we have is a student loan and we are able to save about $2-2.5K most months, which we plan to use towards properties in the future.

Thanks for any advice and can't wait to read more on the site!

Dan

@Dan Torluemke   - won't say keep or sell - I love rental property, a few items stick out on this one that would concern me.

What is the new payment with Heloc for down payment? Interest only? any plan to reduce that debt?

In Clayton - have to assume a pretty old house? Usually not best for rental property - maintenance.

Seems like the cash is better used as a down payment and ability to do a couple more deals. The market in Denver is nuts - but I would rather own property here than in other markets - especially with your limited experience - there is never a bad market to buy rental property up or down, as long as you have a long term objective.

Best of luck!

Depending on your plan on acquiring new properties one big determining factor would be your DTI. With the new home at 425k it will definitely make an impact on your ratio compared to your current payment. Are you positive you can keep the current property while still qualifying for the new one?

Lots of people would pull even more than the 55k for the HELOC and utilize that extra to get the other rental properties. If you get a 90% LTV HELOC before you move then you would have 120K to play with. Take off 55K for your down payment and there is still 65K to use if needed. The number I was told on a HELOC was to not go above 75% usage. So on 120K don't use more than 90K. That still gives you 45K to play around with and find a property or 2.

Originally posted by @Travis Sperr :

@Dan Torluemke  - won't say keep or sell - I love rental property, a few items stick out on this one that would concern me.

What is the new payment with Heloc for down payment? Interest only? any plan to reduce that debt?

In Clayton - have to assume a pretty old house? Usually not best for rental property - maintenance.

Seems like the cash is better used as a down payment and ability to do a couple more deals. The market in Denver is nuts - but I would rather own property here than in other markets - especially with your limited experience - there is never a bad market to buy rental property up or down, as long as you have a long term objective.

Best of luck!

 Thanks for the response Travis. I meant to include that our plan is to amortize over 10 years and lock a rate under 3.5%. The payment would be about $550/month.

Our goal is to buy at least one rental every 2 years, if possible. 

Originally posted by @Matthew Schroeder :

Dan,

I also own a property in Clayton & asked a similar (but different) question less than 2 weeks ago.  @Bill S. and @Walker Hinshaw were very insightful.  Walker lives in your neighborhood.  For your reference, here is the thread.  I hope that is helpful.

http://www.biggerpockets.com/forums/311/topics/190265-denver-what-would-you-do

Thanks Matthew, that is very helpful!   

All the best.

Originally posted by @Dan Mackin :

Depending on your plan on acquiring new properties one big determining factor would be your DTI. With the new home at 425k it will definitely make an impact on your ratio compared to your current payment. Are you positive you can keep the current property while still qualifying for the new one?

Lots of people would pull even more than the 55k for the HELOC and utilize that extra to get the other rental properties. If you get a 90% LTV HELOC before you move then you would have 120K to play with. Take off 55K for your down payment and there is still 65K to use if needed. The number I was told on a HELOC was to not go above 75% usage. So on 120K don't use more than 90K. That still gives you 45K to play around with and find a property or 2.

 Thanks Dan, yes we qualify without selling. We are under contract and will be moving in July/August once the home is completed.

Unfortunately the HELOC appraisal was pretty conservative (a bit under $300K) and 85% LTV so we don't have that kind of extra to play with. The house is a 3/2 (1350 sq ft all above ground) with a 2-car garage. With the recent sales in the hood I'm fairly certain we can get a good deal more than the bank appraisal though.

BTW, you guys are all great, what a wonderful resource BP will be as we move forward in our real estate ventures!

It is probably going to be better to sell and look for a property that is better suited for a rental.  It might take a while of looking to find something, but you should be able to get an investment with nearly 100K at some point.

If you own both properties, you will be at 75% leverage in a hot market.  While that is great if appreciation continues, it can be very bad if things go the other way.

How does you monthly surplus look with the mortgage payment on the new house?

Originally posted by @Jesse T. :

It is probably going to be better to sell and look for a property that is better suited for a rental.  It might take a while of looking to find something, but you should be able to get an investment with nearly 100K at some point.

If you own both properties, you will be at 75% leverage in a hot market.  While that is great if appreciation continues, it can be very bad if things go the other way.

How does you monthly surplus look with the mortgage payment on the new house?

 That makes great sense, and we are buying in an iffy area so being conservative might be the proper approach.  If we clear $1800 in rental income, we will have about $1500-2000 monthly surplus.

@Dan Torluemke regarding the value used for your HELOC. Not all banks do it the same way so not all values are the same. Shop around. Most can give you the nitty gritty in about 15 min. Westerra Credit Union has fairly liberal desktop property valuation software so you might get to push the value with them. The kicker is when your HELOC is above 100k they want a full appraisal. You also might try and owner occupied refi before you move out.

To your original question. You should take a good hard look at what you could buy if you sell. Keep in mind you would have transaction costs. You can lose about 10% after you pay the RE agent fees, closing costs, and seller concessions. Then you are going to be shopping in a hot market so you would be paying a premium. I would keep it and save for the next purchase. I am a value buyer.

@Dan Torluemke

I am with @Bill S. on this one unless you are serious about looking into other markets. 

All the markets across the front range are hot or heating up right now so your options if you want to stay away from the hot markets are either places like Pueblo which is about a 2 hour drive, or out of state. 

What good is that cash going to do if you end up sitting on it? Makes more sense to me to continue to cashflow and have a tenant pay down the mortgage. I also think that the Clayton neighborhood has a good chance to continue appreciating. It is close to downtown and has convenient access to I-70 as well as City Park, City Park Golf Course, and Park Hill Golf Course. Get rid of some of the riff-raff, put in a couple of decent looking shops and restaurants and suddenly you have a great neighborhood.

Originally posted by @Walker Hinshaw :

@Dan Torluemke

I am with @Bill S. on this one unless you are serious about looking into other markets. 

All the markets across the front range are hot or heating up right now so your options if you want to stay away from the hot markets are either places like Pueblo which is about a 2 hour drive, or out of state. 

What good is that cash going to do if you end up sitting on it? Makes more sense to me to continue to cashflow and have a tenant pay down the mortgage. I also think that the Clayton neighborhood has a good chance to continue appreciating. It is close to downtown and has convenient access to I-70 as well as City Park, City Park Golf Course, and Park Hill Golf Course. Get rid of some of the riff-raff, put in a couple of decent looking shops and restaurants and suddenly you have a great neighborhood.

 Thanks Bill S and Walker, your local insight is very helpful.  I think we have decided to keep the property for now and see how it goes.  I do agree that Clayton has a lot of potential...the retail strip on Bruce Randolph and St. Paul is for sale so hopefully someone will come in and put in a couple of decent new places.  Who knows, maybe the 2 brothers who own the strip on each side of Bruce Randolph at York will eventually cash out and some of the riff-raff will make its way out of the hood. A grocery store in the area would be huge as well. 

All the best.

@Dan Torluemke

One other thing that hasn't been mentioned yet that could seriously affect your decision on when to sell is the tax implications. If you sell it now, or in the next 3 years after you move out, you should not have to pay capital gains tax on any of the gains (up to $500k). If you keep it as a rental property and start depreciating that will change. Capital gains tax on a $200k+ gain is no small number. 

http://www.irs.gov/taxtopics/tc701.html

#nottaxorlegaladvice - I'm not an attorney or CPA

I am bumping this thread from over a year ago. 

We ended up keeping the home and currently rent it out for about $2,050 month (using a PM we net about $650-700/mth on average...not counting HELOC payment). We have decided on turnkey properties in KC for our next home purchases, but I'm still unsure if selling this property is the correct route to fund our KC homes. We owe about $160k on this property and another $50k in a HELOC that we used to purchase our new primary residence. We did a 20-year refi on our primaryy 2 months ago and at 85% LTV we could obtain another $75k on a HELOC.

If we sell we would net approximately $150k after paying all costs (it was our primary residence from 2010-2015) and use about $100k to purchase 5 or so homes in KC in the 12 monhts with anticipated cashflows of $200-300/mth per property.

I don't see a ton of upward appreciation left in the Denver property but we get decent cash flow with a 3.5%, 30-year.  

Should we sell or look into obtaining HELOC on our primary to fund our purchases? I'm totally torn on the better route. Our primary objective is cash flow to fund early retirement.

Thanks for any advice.

I'm assuming the 650-700 is before maintenance, capex, etc?

Clayton is having some nice increases right now. Some of the flips there have hit the 400k mark now which is a good sign for you. 

For the KC properties they may not have the holding power that the property here will, but if your goal is cashflow then that's what I would pursue. Are your 200-300 per unit numbers after all expenses?

My flip in Clayton just got appraised at $427k. It's a little over 1300 sqft and a 3/2. We close in a few weeks. 

I'd keep the rental since you are living here and pickup 1 rental in KC to see how it goes. You may find that you don't like being an absentee owner. Test the water before jumping in. 

Denver is still increasing especially in that neighborhood. There is a good amount of new build, pop-tops, and rehab now.

Hi Dan, thanks for the reply. The 650-700 includes maintenance but not capex. KC would be after all expenses.  

We plan to purchase in KC regardless of or decision to sell or not, selling would certainly jumpstart our portfolio and give us a nice cushion. Our other option would be a HELOC on our current property to purchase 2-3 properties and then use our income from 8-5 jobs to purchase 1 or possibly 2 additional properties (20% down) in KC each year.

Originally posted by @Matt M. :

My flip in Clayton just got appraised at $427k. It's a little over 1300 sqft and a 3/2. We close in a few weeks. 

I'd keep the rental since you are living here and pickup 1 rental in KC to see how it goes. You may find that you don't like being an absentee owner. Test the water before jumping in. 

Denver is still increasing especially in that neighborhood. There is a good amount of new build, pop-tops, and rehab now.

Thanks Matt, our house is very similar 1320 sq ft, 3/2. Wow...427K??  We figure we can sell our place as is for about $380-385k or do $10-15k in upgrades (some of the windows need replaced, plus remodel the bathrooms and add granite to kitchen) and get in the $400-410k range.

Good advice on testing the waters.

I probably could get more if I listed it on the MLS early next year, but these buyers came in off of zillow during construction.

It's going to depend on your location/block and the finished product. I've used window world on 3 homes this year and have been impressed. Windows were around $3k. Granite was $2800 for a kitchen and 2 baths. A bath is normally $3k for me. 

There is a CU in town that will do a HELOC on a rental, you might look at that. You'll have to be careful with your DTI ratio on the buy side. A good lender in KC should be able to help with that.

Originally posted by @Matt M. :

I probably could get more if I listed it on the MLS early next year, but these buyers came in off of zillow during construction.

It's going to depend on your location/block and the finished product. I've used window world on 3 homes this year and have been impressed. Windows were around $3k. Granite was $2800 for a kitchen and 2 baths. A bath is normally $3k for me. 

There is a CU in town that will do a HELOC on a rental, you might look at that. You'll have to be careful with your DTI ratio on the buy side. A good lender in KC should be able to help with that.

 Thanks Matt, we are on the 3300 block of Elizabeth.  We will look into Window World for a quote if we decide to sell, appreciate all the insight.

That's a good block. Much better than mine. 

Originally posted by @Matt M. :

That's a good block. Much better than mine. 

 Thanks Matt, sent you a PM.

One question you might ask yourself (there is no way to correctly answer it as no one can see the future):

In 3, 5, or 10 years, when you retire early, will this property be producing more or less cash flow, than the properties you buy in KC? In other words, is there are a reasonable chance that rents continue to increase in the area, thus surpassing in a few years the rent you might get in KC? 

I have a duplex in the area (36th and Josephine). I bought it in 2014, and I plan to keep it, because to me, I think there are few places with better prospects over the next few years, plus it's local so it's easy to manage. But, many smart people would choose otherwise.

Hi Folks

I know this is an old thread and the DENVER market is so complicated. 

Just wondering if you can help me settle an argument with my husband about what to do with our rental property we have in city park. 

We bought the home in 09 and due to the economy we moved overseas. The house had been a rental since. 

Now we have moved back to the states and have 3 small kids. We are living in Iowa in our modest vacation home and own a condo in the springs which isn’t doing great but breaking even. 

Anyway due to the move and having 3 kids and husband job isn’t working out well we could use some extra income. 

I’d Ike to sell the DENVER house as we could cash out with 300k. 

We owe 172 k and could list 470k 

Our accountant thinks we can get around the capital gains and get the 0% tax bracket due to his low paying job right now. Or even take a year off in 2018. 

I don’t see how in the future when he gets a regular job we could avoid this and we would be back in that 20% tax bracket for gains. 

He wants to make do with our savings and keep it as a rental as he’s sure it’s going to keep going up and we are going to loose this great investment. 

I just don’t see it making gains as it has and yes maybe it will go up more but no way near the 140% it already has.. 

We would invest the money and get retirement stuff settled and possibly use some for a down payment on a family home once we figure out where we want to be.. 

We have also considered taking a home equity loan on it to make improments on or current vacation home and have some extra savings if needed.. 

Any advice?? We just can’t agree 

Thanks in advance 

Corrie 

@Corriene McKeown best to start your own thread or people who look at this will reply to the original post instead of seeing yours.  Start your own thread and I'll reply.

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