To sell or hold in Denver

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Hi Folks. 

I know the Denver market is complicated but looking from advice from experienced investors. 

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. We are getting by but deffeintly not ahead. Sick baby long NICU stay and such. 

I’d Ike to sell the DENVER house as we could cash out with about 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 back to his 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. For the just in case. 

Any advice?? We just can’t agree

Thanks in advance

Corrie 

I'd sell it and move on if you are not coming back to Denver. Shore up your finances and get your safety net in place. Then once you are one more solid ground you can look to invest again. 

Thanks Matt

Yes we have no plans on returning back to Denver.. sadly.. My husband is a pilot ( so we have flexibility of where we live ) and we had talked about moving back into the house for the 2 yrs to meet the capital gains tax requirement but heard recently it may change to 5 yrs? 

That would be a stretch with 3 small kids and it seems like a long time to be there and with the cost of living and traffic there I just don’t know.. 

Great question, I think having a rental in Denver is awesome, but you are speculating to much about what ifs. I agree with what Matt says, especially if it will help you get on your feet. If i were in your position I would sell and buy rentals in my own market close to home. but If you plan on coming back to Denver then it never hurts to get out at any point where you will make a return of even $5000, becasue at least you made some money. 

Hi Corrine, I think the best bet would be to make a sale. With the profit from the house you could get settled and then maybe buy a new rental in a place where you can get great returns. 

I think it would be important to include this piece. If you could get a great monthly income in a different locale then you are not really getting rid of the rental but geting a rental that can give you money to live off of as well as helps put you guys in a better place.  

As a numbers person, if I knew that I could invest somewhere a get double digit returns and be able to pull the equity out of the home and make your current situation better, I would go for that. I am not sure what your rental currently nets you each month but it sounds like it is not enough to live off of. As a parent of three small kids myself, I would do what I can to make their life easier. 

Good luck with your plans. 

@Corriene McKeown

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

Sorry, but I don't see how you avoid taxes on this property, even if you have no other income that year.  You won't net $300K, but you'll still have a big gain.  First, if you sell it for $470K, you'll have about $40K in closing costs, mostly real estate commissions and owners title policy.  You will likely need to do some fixup, too, because its been rented for several years.  How much you own on the loan is irrelevant for determining the taxable gain.  Its your basis that matters.  That's what you paid for the place in 2009 (bad times then, I wish I'd been able to buy 100 houses then, or even 10).  Then add purchase closing costs and any capital improvements.  Subtract depreciation taken (or allowed, if that's greater) while its been a rental.  That's your basis.  From the selling price subtract selling costs and the basis and that's your gain.  Taxes are first figured on the depreciation.  That's taxed as ordinary income, up to a 25% maximum rate.  The remaining gain is taxed at 15% for long term capital gains.  I don't see how you avoid that just because you have no other income that year.  Some of the taxes, perhaps, but not all of it.

The alternative would be to do a 1031 exchange into another property.  I sold one last year and paid all this tax.  I have another here I'd like to sell but want to do a 1031 into something.  In case its not clear, I think now it a time to be a seller.

You appear to be well grounded and have realistic logical thinking. Your husband is not being realistic.

Sell.

I’m not sure how to reply to each persons resonse. 

Mark- Yes we love having the DENVER house and really hate to sell our first home. We got lucky with this investment and am not sure about buying more rentals as we may return overseas.. it’s been hard to manage 3 properties from Asia! 

But yes any return is a good return 

Kevin- we make great returns on the Denver property. That’s why my husband doesn’t want to sell it. It’s in great shape and always rented. It is an added income and that’s why he wants to keep it. I think we would be hard pressed to find another that is as profitable. 

We are making ends meet and have emergency funds. No credit card debt.  We did spend quite a bit of our savings with the international move and having to buy cars and such to get reestablished. So that’s where I’m a bit worried. That and it may take my husband some time to find another job making close to what we were. But cost of living in Iowa is cheap.. 

My point is that he’s taken a job that’s low paying job to allow him to be home with me and the kids vs traveling as a pilot. Sick kid, big move  and I need the help.its a 1 yr contract so that’s why I figured if we can meet that 0% captain gain tax this would be the time to do it..to cash out and not loose out on this as we would surely be back into the 15-25% bracket 2019. 

Our tax accountant seemed to think it would work but I’ll check with a tax attorney to be safe. 

Thanks Thomas 

I would rather put more money in our retirement and college funds for the kids and pad our savings again rather than just getting by..

But husband thinks this place will go up and up and we will regret selling

Jon- 

Yes I’ve been doing my research and  have my accountant looking at the deprecation that we have taken on it in previous years. So yes we may have to pay taxes on that. 

It’s been well maintained with a property manager and we have done a few spot checks when we have been in the country. It’s an old bungalow so things like old pipes we will just say no. It was a filp and fix when we bought it in 09 so was well done. 

I have a good friend who’s a realtor there and he said he would do it for 4% and possibly with the market being as it is buyer pays closing costs. We have heard houses going for over asking price also. 

As for the long term capital gains tax our accountant said as long as our taxable income is below 74.6k for married couple we should qualify for the 0% tax. I’ve looked it up and have seen it listed. 

I’m guessing that yes we won’t keep all the 300k but quite a bit

But I’m going to think twice if we have to pay the 15-20% tax. It’s just not worth it to sell if that’s the case

I looked into the exchange and I’d rather keep the house than invest all of it into something else. If there was a way where you could invest some and keep some that would be ideal but that didn’t seem to be the rules. 

Great advice Jon

Let me know if I’ve missed something or am off based. 

Thanks again 

Corrie 

Hi Corrine, if it is a safety net you are looking for, can you apply for a heloc or maybe refi and pull a little equity out? 

Hi Kevin-

Yes I originally was looking at doing a HELOC and that's still a option. Just for a safety net/ peace of mind but that's when I realized that we may qualify for a rare chance at a jumbo tax beak.

That’s why selling seems to make more sense to me as I can’t see us qualifying again for this until possibly retirement. 

I’d hate for us to find ourselves needing to sell and being stuck in the 15-20% gains tax bracket. 

My interest rate is 3.7 so don’t think I could do better than that

@Corriene McKeown I will ask you what Dave Ramsey would ask: "If you didn't own a rental in Denver and had $470K in cash sitting on your kitchen table would you go buy a rental property in Denver?" Every day that you keep it, you are in essence buying it. I would sell it and the condo in CS that isn't doing well. This is the hottest market in history. Sell high right? You can re-invest the profits in Iowa and get more per dollar there anyway.

Anthony 

That’s a great way to put it! 

Could you call my husband and explain it to him like that 😀

I think my husband is hung up on this particular property as he built and sold a house in Perth Australia years before we meet and he sold low and has been kicking himself since.. 

I’ve got my tax accountant doing up the exact numbers and our finical planner on my side.. just hope I don’t need a divorce lawyer to get my point across.. kidding.. sort of .. 

I don't think there has been a better time in history to sell a property in Denver or CS than right now. The inventory is crazy low, so it will sell very quickly. Ask him, " At what price would you be willing to sell?" If he says not at any price, say "If someone offered us a million dollars for it, would you sell?" He will say YES, which means there is a price. You could list it for  more than you think it will sell for and see what happens. Put it up for $499,900. What if the market makes a downward correction? BTW, it will at some point.

I'm going to side with keep it. Why? You aren't making much money right now in your W2 jobs and this is just another stream of income and is somewhat replacing your husband's income.

You say getting re-established cost a lot with cars and such. Do you have payments on your cars? Maybe you can sell those and buy some older vehicles you can pay cash for.

If you need cash for some reason, you could cash-out-refi the Denver property.

The only issue would be, do you have money for capex if something were to go out and you need to fix it? Maybe the refi is that cash.

Selling and then investing in Iowa is fine but you say you aren't sure you'll be in Iowa long-term. So then  you would be in the same situation as Denver (long-distance landlord), which has gone fine but you don't seem to want to do but your husband does.

You could sell the condo if it isn't making much and need some cash or AirBnB it if it's near you and make sense to do that to increase the cash flow.

I'm in Denver market and most RE pros that aren't trying to sell me agree we are peaking and entering a down market pretty soon. Vacancies are trending up which is always a sign that we've reached top of market. If I were in your position I would definitely sell. Real Estate is very cyclical.

@Corriene McKeown as a young whipper snapper I'm a firm believer in keeping assets, especially if it is producing cash at it's current rental rate.  It is totally up to what feels right in your current situation, but your primary residence is not a (cash producing) asset, it is a liability, and I'm never a fan of selling an asset to buy a liability.  

If real estate investing is not your thing, and you plan on having other means of retirement, go ahead and sell.  Another thing you could consider would be to rent to a professional management company on a long-er term basis and allow them to rent it out on Airbnb.  Would be happy to share more info on this if you're interested. 

Hi Greg- 

Was hoping to hear someone take my husbands view/ side.

I don’t think I’d re invest in Iowa. We have a modest house here that we bought as a vacation home and works well for now. Could use some improvements to make it more comfortable. Like new kitchen 

If anything we would buy a primary residence in another state or stay here and buy a place  on a lake or ski condo. Something we could at least get use out of and enjoy.

We live rather modestly. No new fancy cars but anything reliable that can seat 3 car seats is expensive even used. So we do have one small car payment. We have our emergency funds for the other properties and still savings. We aren’t desperate for the cash out 

The re fi is possible but I’d rather just sell and be comfortable and not have to worry about keeping to a strict budget or worse me going back to work! 

The property only brings in about 800 a month so it’s not like it’s a huge cash cow..

I just still don’t think his argument is strong enough.. 

The condo wouldn’t bring in much of anything and managing air B and B from another state ends up eating up tons of profit. 

good points though but I’m still leaning to sell high and be happy 

Thanks jerry 

Yeah it has to end somethime I’m guessing. I just don’t want to hang out waiting for the next big upswing if we do t sell soon .

Hi Tyler-

I would love to keep the house but I feel we need to possibly diversify our assets and buy selling the house I could that. I’d rather have more cash available and than everything sitting in one place. 

Yes I agree I wouldn’t sell it to just by a new bigger primary residence. 

I would just like to have more of a safety net and live as we have been rather than having a tighter budget. 

I’ve had pretty good luck with my property management company  but yes I did call a round and read up about doing  air B and B/ VBRO. 

Having a company do it for you eats a lot of the profit. And there is always new laws to worry about and permits and furnishings.. 

I get why it works for some but a family home in city park doesn’t seem as easy as a condo.

I think even now if I kept the house I would just increase the rent rather than do VBRO 

Corrine, you say you want more income, we’ll, isn’t that $800/mo more income? Selling it will just be cash, not income. It can also be your retirement, if you so choose. That place paid off in 22 years will be how much income per month when you are X years old?

You also say you are going to invest the proceeds from the sale. What are you going to invest in? The stock market is an all time high, so that’s not really a good option. You should have something in mind that is going to get you a better return than what you currently are from this place.

You also say you want the money so you won’t have to live on as tight a budget. What are you going to pay off to make that happen? What expenses will you eliminate with this money? Otherwise, this is a one-time hit of cash, you’ll live like you used to when you had more coming in and then when it’s gone, you’ll revert to living on a tighter budget again and you won’t have this asset to use as a bank or have the $800 coming in anymore.

What’s the interest rate on your car loan? How many years left on the loan? Could you take the home equity loan and pay off the car and then you get $xxx.xx extra coming in per month. My guess though, is the home equity loan would be more expensive than your car loan right now. 

If you want more income, you have to make more (more hours or a raise, second or side job) or decrease or eliminate expenses. If your husband is staying home, can he be a dog walker? They make good money for little time and effort.

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Selling to me seems short-sighted. Home equity loan or selling condo seems like a compromise so you can get your new kitchen, which is also short-sighted if you aren’t planning on staying there.

My wife wanted to take a chunk of money we had to redo the basement, porch and pay off loans. I wanted to buy more real estate. We decided to pay off a couple of loans, forgo basement and porch for now and invest in real estate.

@Corriene McKeown It seems that the majority are urging you to sell...the main thing that gives me pause is that your husband really doesn’t want to. I was in a similar situation last year - with everyone on biggerpockets and in my family (including hubby, who happens to be a pilot like yours, btw!) advising me to sell a property I was conflicted about, so I sold and while it may have been a “smart” decision that was VERY lucrative, I regret selling and probably always will.

If your husband already has one property that he regrets selling and your family is doing ok without the sale, I’d recommend you not to pressure him to sell if he is telling you it doesn’t sit right with him. You don’t want him resenting the pressure or blaming you later if the market continues to go up.

If Denver wins the Amazon headquarters as many predict, things could really explode...or maybe they won’t. Either way, you are cash flowing nicely and doing ok financially, I wouldn’t push him to a decision that he will possibly regret and resent you for.

If you really feel your family needs the money, that is a different story - sell; otherwise, hold off until you BOTH feel 100% about selling.

@Corriene McKeown so a couple thoughts after getting to party a bit late. 1) You say you want money for your kids college. That house in 15 years will likely put all three kids through college. 2) To "mention" someone (make their name appear in blue) you need to type the @ symbol followed by at least the first three letters of their name and then pause. A drop down list will appear and you pick the person you want to "mention". When you do it right, their name appears in blue. It took me a bit to figure that out. 3) IMO this house is a great savings account. If you break the piggy bank or kill the goose you have no savings, retirement, or kids college fund. Life sucks now and I know being short on funds is no fun. My guess is you are the one that pays the bills and worries about the money and your husband is the visionary. 4) I don't see the single family home market crashing here (available homes are at an all time low) unless it does everywhere so I don't see any urgency to sell to avoid having a smaller net from the sale. I would think that if you move into the higher tax bracket (that makes selling the home more costly), you would have more income and won't be wanting to sell the property. I do see the rental income flattening out and perhaps a month or two of vacancy between tenants. 5) Tough it out another year. Get your landing place figured out and perhaps then you can move some of the equity to more rental property where you live. 6) Don't take a page from our government playbook and borrow more money hoping you can figure out a way to pay it back. That is going the wrong direction with NO light at the end of that tunnel.

My suggestion would be to get a plan together to make things better. You need a light at the end of the tunnel so you can see an end to all your forced frugal living and worrying. 

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