I own a home in the Firelight subdivision in Highlands Ranch, CO. My wife and I are planning on moving closer to the DTC within the year (Centennial or Aurora).
The house is approximately worth 400k - rents (best guess) around 2300 - 2500 / month. We would pull money out as owner occupied to get down payment on new place so assume 320k would be financed around 4%. I'm assuming insurance would be $100 more per money for rental. PITI 2k per month. Assuming 3k vacancy and 6k capex / maintenance per year.
I would be coming out of pocket 3k -5k / per year on average.
House has 2 year old appliances - painted 2 years ago - new roof / gutters this year. Will need AC unit ($3.7k) - water heater ($2k) sometime soon - Carpet is end of life - would replace after 2 or 4 years of rental ($6k).
I know this isn't a deal you would buy for a buy and hold because it is most likely an alligator and the transaction costs would be a killer. I've already bought and already have the transaction costs regardless.
I would like to get feedback on potential vacancy rates on the higher end of the market. This is my biggest concern. If it doesn't rent out June - August is there still a market for it? I would guess 98%+ of homes in this area are owner occupied and most people would rather buy then rent.
I would basically be speculating that there is 15% more market appreciation in the next 3 years before it levels off and I would be paying 9-15k for $60k potential on the back end.
Is that too thin for the risk?
Thoughts and feedback welcome - Thanks
Not a play I would make. Take your cash and put it into property that will cash flow.
I never buy on appreciation, you are betting on the next three years - but if you hold it any longer you will lose your capital gains exemption not meeting 2 of the last 5 years rule.
I just bought a property earlier this month in Denver on the MLS that will gross cash-flow $800 a month with 25% down - I share that because "there are no deals in Denver".
You close with $60k in potential on the backend -minus- 3-5k negative each year, higher costs to sell, (although minimal) potential rehab to resell. Of course the biggest unkown - what the market will do.
You might make some money on the deal - but I would rather park it in better deals for longer term hold.
@Travis Sperr Has good advice, especially regarding the tax implications. In addition, I would be very careful assuming that we will see 15% appreciation over the next 3 years given the substantial growth we have seen over the past 3 years. Just my opinion though.
I agree with the above and would add. You do have transaction costs. The refi to take cash out costs. It's not like the RE commission to buy and sell but it's a cost none the less.
High end properties like that tend to have high turn over compared to more modestly prices SFR. People that can pay $2,500 per month in rent will usually buy or move away in a year or so. After a couple of turn overs your place starts looking a bit tired so you end up with vacancy while sprucing it up as well.
Probably a lot of things that you can do in Denver that would not have anywhere near the negative cash flow.
@Travis Sperr can you give more specifics? Purchase price and interest rate, and whatever else might be relevant? I am sure there are still deals out there in the Denver market. It's just nice to see the details.
@Shawn Loftis If you're going to make an appreciation play, you need to be very, very sure about the appreciation. That probably means having information that the general public does not. It's a personal decision, but given the risks and potential rewards you've laid out, I personally wouldn't do it. I have to imagine there are more productive uses for your equity that involve less risk.
@Bill Hamilton I don't want to high jack this fella's thread - shoot me a note or email and I will spill all of the details.