Advice for sell vs. hold on rental property in hot market

36 Replies

Hi All,

Back in 2013 I purchased a rental property in Denver, Colorado due to not being able to close on anything locally in the San Francisco Bay Area (where I currently reside and still continue to rent). My goal was originally to find a home to use as a primary residence but competition in the Bay Area was just insane and after losing out on a bunch of properties I decided to look out of state for an investment property so that I could at least lock something down and finally diversify into real estate. Now I’m at a juncture where I’m reevaluating what to do with this property and am looking for advice on what the best options are from people who’ve had much more experience than I have.

Details on the property:

2bd/2ba condo (includes 2 garage parking spots) in prime downtown Denver location

Purchase price: $380k

Current value: $550k (approx)

Loan: 30 year @ 3.625%

Remaining loan: $256k (put down 20% originally)

Current rental rate: $2500/mo

HOA: $421/mo

Renovations: $25k spent to date

Property management fee: $0 (currently manage it myself from out of state) - if I do decide to pick up a PM company in the future it'll likely be a 7-8% fee)

Vacancy rate: Not really sure how to calculate this accurately or if there is a general number to use (but I've had about 1.5 months where the unit wasn't rented in the last 5 years)

My original idea was for me to keep this forever and use basically have it cash flow nicely after the mortgage is paid off. To me the cash flow right now isn’t great (could someone reconfirm this for me?) but not terrible I suppose. 

These are what I think my options are:

  1. Hold and continue to rent
  2. Sell outright (get killed in taxes/commissions/etc) - while I’ll make some money this doesn’t seem like what most RE investors do. Paying taxes sucks and profit will be drastically reduced. However, this may be a good time to make a profit and reinvest/diversify into lower risk investments (T-bills, etc) to protect against a potential down turn.
  3. 1031 exchange (but into what? And where?) - timing this will be difficult.
  4. Cash out refi/HELOC - does this even make sense with the current higher rates? Doesn't seem like it to me but sounds nice to lock in some equity?
  5. Other options?

As mentioned earlier, I currently rent since prices in the Bay Area are stratospheric and buying just doesn’t make sense to me right now. My goal is buy a primary residence but am unable to afford anything at this point and I don’t see any value around here in the Bay Area. So the next goal is to see how to best maximize this investment. I don't have much RE experience and have pretty much just grinded it out for the last 5 years and learned on my own. 

Looking forward to everybody’s opinions and thanks in advance!

My advice is sell it, move into something with better returns. That combo of rents, HOA, and current value is not nearly as strong of a return as you could get if you 1031ed into a 4-10 unit multi using your proceeds for 20% down. Even if you exchanged into a middle of the road MLS or loopnet deal you could almost guarantee better returns, even in this hot market.

I'd hold off until Amazon makes their decision this year. If we get HQ2, then you need to keep it for a bit longer. 

Originally posted by @Brendan Morin :

My advice is sell it, move into something with better returns. That combo of rents, HOA, and current value is not nearly as strong of a return as you could get if you 1031ed into a 4-10 unit multi using your proceeds for 20% down. Even if you exchanged into a middle of the road MLS or loopnet deal you could almost guarantee better returns, even in this hot market.

The numbers certainly aren't as strong. HOA on this property has been a letdown and has been poorly ran. Initially when I purchased the unit it was $261/mo and then the residents voted for mandatory internet/cable (discount provided for the building) which jumped it up to $350/mo. Then recently starting in 2018 there was an HOA hike to the current $421/mo. Rent seems to have stabilized with all the new rental units that have come on board recently in Denver (maybe someone can correct me here if I'm wrong).

A 1031 into something else seems to be the best option but unsure of how to really time this with the current tenants (although they are currently month to month and trying to decide if they want to renew so may be an opportunity soon). Also, identifying a property to exchange into seems to be pretty daunting for me (although I'm willing to do the research and put in the time). Nothing in California will be worth it so I'm likely looking out of state again presumably. I do have a good friend that works in commercial real estate that lives in the Boulder/Eerie area and have been talking about partnering on something on that front (maybe multifamily or apt complex and not necessarily CE).

Originally posted by @Matt M. :

I'd hold off until Amazon makes their decision this year. If we get HQ2, then you need to keep it for a bit longer. 

That would certainly make things interesting.

I agree with @matt m. Hold onto until amazon makes their decision. Then 1031 and do multi family but not here its to expensive to cash flow especially out of state investing. I think holding on long term isn’t a great idea especially with an HOA that can add random assessments and will hike up dues with inflation. Which property is your condo in if you don’t mind me asking?

@Simon C. your words "nothing in California will be worth it..." Well, you said that in 2013 and look what happened. If you had bought a  $380K condo in 2013 in the SF Bay Area, it would've been worth at least double by now. Not only that, you'd likely be cash flowing much more than you are now. 

You overlooked the Bay Area in 2013 and you missed out on the appreciation train. Granted you gained some equity in Denver, but nothing like you would've saw close to home.

Don't make the same mistake again. 

Originally posted by @Saj S.:

@Simon C. your words "nothing in California will be worth it..." Well, you said that in 2013 and look what happened. If you had bought a  $380K condo in 2013 in the SF Bay Area, it would've been worth at least double by now. Not only that, you'd likely be cash flowing much more than you are now. 

You overlooked the Bay Area in 2013 and you missed out on the appreciation train. Granted you gained some equity in Denver, but nothing like you would've saw close to home.

Don't make the same mistake again. 

 Hey Saj - I think there was a misunderstanding of my words and did not intend to convey that "nothing in California is worth it." I looked back at my statement and I don't believe I said that but what I did say was that the Bay Area specifically doesn't make sense to buy from a cash flow perspective (current market). Rental rates simply don't cover the mortgage/expenses at this time from my calculations and you are only banking on appreciation which doesn't work for me.

And I certainly did not overlook the Bay Area in 2013 but it's just that I wasn't able to close on anything and was outbid every time. I sorely wanted to get something but just wasn't able to land anything. I'm a non engineer (also single income) and graduated in 2007 right as the GFC was hitting so did not have that much capital in 2013 to really compete (I don't have access to outside capital or mom and dad funds like most people I know around here). I only dream of if I was able to get ANYTHING that I put a bid on back then which as you mentioned would be 2-3x by now but unfortunately that ship has sailed. I certainly tried.

The current Bay Area housing market is simply unaffordable for me at this point and even if I wanted to get something I wouldn't be able to due to 1. competition 2. not enough funds 3. rents don't cover mortgage/expenses

@Simon C. look at your post above responding to @Brendan Morin ...."Nothing in California will be worth it so I'm likely looking out of state again presumably." 

You put 20% on your condo in Denver right? So I am not sure when you say you didn't have the capital to compete. What does being an engineer have to do with it? You bought something in Denver so surely you had a job. There were condos in SF selling for $350K in 2013 that are worth $700K+ now. You could have afforded one. 

I've only lived in the Bay Area since 2007, but after talking with a lot of old timers, they say that Bay Area real estate always seems expensive. Even guys like @Jay Hinrichs thought $100K for a home in Palo Alto in the 1970s was unsustainable. 

Prices are definitely high right now, but so are rents. There's definitely cash flow possibilities here. But you won't find them in condos, which almost never cash flow. You'll need to make a jump to MF, but you can start small with a tri or quad-plex. Those cash flow beautifully. 

Originally posted by @Saj S.:

@Simon C. look at your post above responding to @Brendan Morin ...."Nothing in California will be worth it so I'm likely looking out of state again presumably." 

You put 20% on your condo in Denver right? So I am not sure when you say you didn't have the capital to compete. What does being an engineer have to do with it? You bought something in Denver so surely you had a job. There were condos in SF selling for $350K in 2013 that are worth $700K+ now. You could have afforded one. 

I've only lived in the Bay Area since 2007, but after talking with a lot of old timers, they say that Bay Area real estate always seems expensive. Even guys like @Jay Hinrichs thought $100K for a home in Palo Alto in the 1970s was unsustainable. 

Prices are definitely high right now, but so are rents. There's definitely cash flow possibilities here. But you won't find them in condos, which almost never cash flow. You'll need to make a jump to MF, but you can start small with a tri or quad-plex. Those cash flow beautifully. 

@Saj S - ok I see now where I made that statement so sorry for the confusion on my part. All your points are valid and was only trying to make a point in that I did not have a strong income back then and though condos in SF were selling for $350k (and townhomes in the south bay which I was looking at) I still wasn't able to compete due to all cash offers and/or not having a strong enough income to approve for a higher loan amount. But you're right in that there were options here locally but unfortunately for me I wasn't able to secure any of them. I didn't have the foresight to buy in up and coming areas as well and only wanted prime locations. Seems like everything is prime now!

I've tried to look for MF units and everything I've seen is overvalued or rents do not meet the expenses for positive cash flow. Though I'm likely not looking in the right places or have the right connections to find the right properties as I'm sure they exist as you mentioned.

My advice: buy and hold. You have a great investment. Unless the population of Denver is decreasing the grass is not necessarily greener. You have virtually no vacancy factor which tells you that this is a great location. Hold tight. In the future you can take some cash out to buy another investment or a personal residence. Jerry Orbach was famous for never leaving a broadway show. Sam Waterson said of him : "Someone told me Jerry never quit a show that was running," Waterston said to general laughter. Why sell a winner for a few hundred dollars more in cash flow and no assurance of more appreciation. If it costs 50K to sell and you get $300 more a month in cash flow  it will take you 166 moths to break even., over 3 years. If you get 5% appreciation a year in Denver and 1 % in someplace like Oklahoma on a 500K property you would lose 20K a year. Sorry the numbers just don't add up to me.

Originally posted by @Simon C. :
Originally posted by @Saj S.:

@Simon C. look at your post above responding to @Brendan Morin ...."Nothing in California will be worth it so I'm likely looking out of state again presumably." 

You put 20% on your condo in Denver right? So I am not sure when you say you didn't have the capital to compete. What does being an engineer have to do with it? You bought something in Denver so surely you had a job. There were condos in SF selling for $350K in 2013 that are worth $700K+ now. You could have afforded one. 

I've only lived in the Bay Area since 2007, but after talking with a lot of old timers, they say that Bay Area real estate always seems expensive. Even guys like @Jay Hinrichs thought $100K for a home in Palo Alto in the 1970s was unsustainable. 

Prices are definitely high right now, but so are rents. There's definitely cash flow possibilities here. But you won't find them in condos, which almost never cash flow. You'll need to make a jump to MF, but you can start small with a tri or quad-plex. Those cash flow beautifully. 

@Saj S - ok I see now where I made that statement so sorry for the confusion on my part. All your points are valid and was only trying to make a point in that I did not have a strong income back then and though condos in SF were selling for $350k (and townhomes in the south bay which I was looking at) I still wasn't able to compete due to all cash offers and/or not having a strong enough income to approve for a higher loan amount. But you're right in that there were options here locally but unfortunately for me I wasn't able to secure any of them. I didn't have the foresight to buy in up and coming areas as well and only wanted prime locations. Seems like everything is prime now!

I've tried to look for MF units and everything I've seen is overvalued or rents do not meet the expenses for positive cash flow. Though I'm likely not looking in the right places or have the right connections to find the right properties as I'm sure they exist as you mentioned.

It's hard to find cash flowing deals here but they exist. They won't pencil out on paper with current rents, and usually you'll need to do a combination of forced appreciation, re-leasing at market, or change in use. If you simply go off the current rents that MLS/Redfin lists, then you'll never find one. You'll need to be creative, and it will take work, but imagine the end result - a cash flowing property in a highly appreciative market.

If you want to limit competition, try to find something off-market. Go on Loopnet and see which brokers are posting deals in the areas you like. CALL (not email) every single one, and tell them you are looking for a small multi-family in these specific sub-markets. They'll generally have a few off market deals, or will put you in their database and will contact you when one pops up. In January I bought a 5 unit property in Oakland for $700K, off market from a big time East Bay broker. It was listed for $750K but with no other bidders I got it for $700K. It appraised for $920K at the time of purchase, and once I'm done with the renovations, it should easily be worth $1.4M, and will cash flow $4,000/month. That's real wealth. Not that piddly $100/month cash flow you'll find in the midwest.

Deals are out there, but you'll need to roll up your sleeves to find one.  

@Simon C. What is your payment PITI? How much are you cash flowing? Now look at how much cash you would be sitting on if you sold it. If you were holding that cash in your hand, would you exchange that for the Cashflow? If not, sell and get better returns elsewhere. We sold our house for $75k profit. Cashflow was $1,000/Month. I took that $75k, reinvested it, and now added 2,500/month Cashflow from that move.

@Simon C.

Depends on what your long term goals are. Do you want to buy 1 property here and there every few years or do you want to get serious and treat REI like a business? There is no wrong answer since everyone's situation is different.

If it's the former, then I would hold since you have an asset in a great market.  Buy properties here and there over time as you have money saved up.

If it's the latter, then I would 1031 into MF since condos are not the best for serious scaling. You would need to do some serious hustling - calling commercial brokers, networking with commercial lenders, investors, brokers, researching markets, trends, just immerse yourself into that world to get the best deals It's not a hobby and if treated as such, you won't get far. Lenders will ask you - do you have experience in acquiring and managing commercial properties. If not, partner up with someone who does but you would have to bring something to the table to make it worthwhile for them - cash, the deal, hustle, whatever. Analyze properties, ask for rent rolls, P&L, trailing 12, figure out DCR, current cap rates, pro forma. Do your own numbers and don't depend on what the slick OM presentation shows. Walk properties, make offers, etc. Start out with 10-30 units and grow that into 100+ over time. I buy and hunt deals in California and other states. Deals are there if you search hard enough.

BUT if you don't want to do all that, then I would stick to plan A.  

@Saj S. Really appreciate the advice here!  I think everything you said is spot on and haven't really thought of ways to get off market properties. Rolling up my sleeves and really putting in work to hunt down a deal is something I'm more than willing to do so I do love the motivation you gave me. 

@Paul Choi As you can tell I'm pretty new to this and haven't really thought about exactly what type of real estate portfolio I want to build but the more I think about the more (esp after @Saj S. 's response) a MF unit is the really the next logical step and I do want to eventually want to get serious and build a real portfolio (not just picking up properties here and there). I have a lot more homework to do.

@Robert Herrera PITI (including HOA) looks to be: $2282. Using a cash flow calculator with a 2% vacancy rate and 10% maintenance expense I'm right at about break even so looks like cash flow is zero... ouch. The HOA raise has been pretty killer.

Sell, take the money off the table.  You can buy a good quality property in Phoenix for 250k.  If you use your Denver profits as down, you can get positive cash flow of $700-800 a month.  $0 cash flow w $180k equity is a loser.  The next crunch can wipeout your equity.  Cash flow is king!

@Simon C. I would sell if i was making $0 a month sitting on all that equity. Its about cashflow. It's about being able to be financially FREE NOW. I buy in Pueblo, Colorado. Great price points and plenty of cashflow. Go to Pueblo West if you want some nicer stuff. It's really up to you, buy i would move that money to a cashflowing asset. If you can't, you will lose all that money in the crash with $0 a month to live off of. Better to get cashflow properties that will pay you through the downturn. If you keep adding to your monthly income, you can retire young. If you try and build up a nest egg to live off of, you will just end up pulling it out in Monthly Income anyway. Might as well do it now.

@Alan Grobmeier @Robert Herrera

Selling seems like it might be the best option now. Not sure if should try to 1031 one into something else or possibly even 1031 into something like the 1031 product that RealtyShares or one of those similar REIT's offer. It just seems like given the time restraints on a 1031 it'll be hard to find a property in that short amount of time or even at all.

I could always do a straight sale but from my general calculations I'd be liable for about $50-70K in taxes (fed cap gains, depreciation recapture, and state tax). Ouch. 

@Simon C. , it depends on if you want to just take the cash off the table or create some forever cash flow.  Although you have a great property for appreciation, it has been a 'dog' with regards to cashflow.  You WANT both for long term wealth.    

Based on your numbers you could sell your Denver property and buy 2 properties here in AZ (via 1031 exchange), with GREAT schools, for about $500k-$600k ($250k-$300k each).  Based on keeping your debt at $250k, you'd probably make about $700 a month per property, $1400 a month total.  The 'BEST' part is that with that type of debt to income ratios, you would probably pay little if ANY fed or state tax for the next 20 years or so due to depreciation & loan interest.

The best news is that in 30 years those properties will be paid for, and not by you.  Your income will rise by about another $500 per month per property.

Good Luck!   

Everyone is discussing how a 1031 is difficult because it’s tough to find a property in the specified timeframe after close, but this property seems to be tailor made for a reverse 1031 exchange.. No identification period required.

@Simon C.
You have $300k in equity which could easily be used to buy 2 houses for 150k each and have $2,400 a month income.

I just bought a house for 153k and it will fetch $1,450 - $1,600 a month.

@Simon C. , Yes there's no reason to fear the process of a 1031 so much that you immediately cough up $75K.  That would hurt.

1. There's no penalty for starting a 1031 and not completing.  so at the worst you can start the exchange for $750 bucks or so.  Take a look for 45 days and then let it go if you can't find something you like.

2. Denver's hot enough you could sell it on a contingency that the buyer wait until you located your next property.

3. You can always go into contract on the new property before the old one sells.  The statutory order is only that the old property close before you close the purchase of your new property.

4. @Brian Simmons offers a good suggestion as well - a reverse exchange which while more costly than a straight exchange is infinitely cheaper than stroking that tax check.

I’m only guessing from your post and responses about your long-term goals. With that said, it sounds like the first thing you should do is start researching real estate. Narrow your market search. Seems like you’d like to have some cash flow along with the appreciation you’ve been getting. Selling outright would be absolutely foolish due to selling costs and capital gains. After doing enough research in finding the right market for your personal goals I’d then look to find a retiring investor who is selling off their properties via a package deal. I’d then sell the property via 1031 and use the proceeds to fund the package deal. A retiring investor will be far more understanding of the 1031 process and you are far more likely to get discounted properties. It just doesn’t seem like you’re interested in spending all of your time hunting for needle in a haystack type deals given the exorbitant prices in your region

Simon,

Everyone is talking about cash flow while your condo has appreciated over $2,800/mo in the last 5 years assuming you bought it in 2013 without any cash flow. Appreciation is the most passive income one could ask for. 

It sounds like the Denver market has all characteristics of Bay Area real estate. However, I hate owning anything with HOA just like other Joe's so I'm neutral on whether or not you should sell or keep it. I used to own a couple handfuls of condos and townhomes. I'm down to a handful now and looking to unload all of them eventually. I will only keep apartment buildings and SFH to pass down to future generations.

It's so unfortunate you couldn't get anything in our market in 2013. It goes to prove how competitive our market has been even as we came out of the Great Recession. I had to fight hard to get deals between 2009-2013 so I can relate. I stumbled my way through a couple of deals before I got it figured out. IMO, you didn't employ the right technique to land a deal in 2013.

To prove my point, I got this condo a couple months ago for $355k. Rehabbed it and in contract for $540k. There was a $550k offer with $400k down, but I didn't take it because I didn't get a good vibe from the buyer's agent. Scheduled to close next Friday. 

https://www.redfin.com/CA/Union-City/109-Camino-Pl...

I bought another one and in contract to buy another one small deal like this. They'll hit the market in the next couple of months. Deals can be had in any part of the market cycle. One just has to know where to look. Keep learning. You'll get there. 

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