To Sell or to Rent? That is the question *Denver*

[SenoritaStache]

Hello Mustachians!


I need advise on a particular rental I own.  I live in Denver, and the current housing market is hot.  Its hard to find a rental home, what is available is expensive.  Buying a home is also crazy, houses sell pretty fast.  They are listed and under contract a few hours later, often for over asking price, as far as I know up to 20K+.

Home was bought in 2012, for $106K, and is paid off.

Here is my situation.

Option 1: I have a House that was leased for $1,700.00 per month.  The tenant has been there since I purchased the home back in 2012.  If I rent this house out again I would ask for $1,800.00 per month.  The amount to re-establish the place would be around 5K or less, since that one tenant has been there and not many updates have been done. 

Option 2: I sell.  Looking at a few comps around where this property is located I estimate that we could list this house for around $260K-$270K.  This is only my personal estimate, from my own personal research.  My hope is that this price fetches over bidding and I end up getting close to my goal number of $280K.  If I go this route, I need to invest about $15K-$30K in getting this property ready to sell.  New kitchen cabinets, countertops, paint inside and out, and general updating.

My reasons for wanting to keep it is because its paid off and overall I spend around 5K per year in maintenance (including taxes and insurance), after that I save the rest for future *whatever-shit-may-happen* money.  I dont rely on this money for anything, Its simply just making money for it self and I could use it if I if wish, but havent in 5 yrs.

My reasons for wanting to sell it is because I think it would be nice to cash out.  But there is no need to cash out.  I don't need the money for anything.  My guess is that I would just invest it in the stock market. 

I've been a landlord for 9 yrs, sometimes is nice, sometimes its annoying.  I don't mind being a landlord, however I am currently childless, and in a near future we want to start a family, since being a landlord takes time and effort, I'm not sure how well it would work out having kids.  In a perfect world, I would sell all my investment properties and stick it all in the stock market to simplify my life and stress.  Here is a few more facts.


Income:

Property in question $1,283 per month, after expenses (if I keep and raise rent it would be $1,383 per month)

Property 2 (keeping not selling): $1,120 per month, after expenses.

Also have about $150K invested at Vanguard.

Expenses:

$1,000 per month, give or take including everything. 



Curious to see what you would do in my shoes, would you keep renting this house out? if so why?  Or would you just sell it to cash out, even if you have no need for the money?  or any idea of specifically what you would do with it?  Or how would you use the proceeds? 

[tralfamadorian]

I think you're in a great, no-lose situation.  Your property is profitable, attracting long-term tenants and purchased at a time that allowed for strong appreciation. 

To crunch a few numbers:

Option 1 (most active): Offer to rent for $1,800/mo, bringing in a monthly income of $1,383 or 16.6k/yr.  Year 1 reduced to 11.6k due to 5k updating costs.  Maintain landlording tax benefits going forward.

Option 1a (in the middle): Offer to rent for $1,800/mo with the use of a property manager so you don't have to deal with the day-to-day hassles of landlording, bringing in a monthly income of $1,203 or 14.4k/yr.  Year 1 reduced to 9.5/yr due to 5k updating costs.  Maintain landlording tax benefits going forward.

Option 2 (100% passive): Sell for $270k with 8% closing costs and 22.5k fixed costs of bringing to market.  Net $225.9k then capital gains tax on the $164k gain and 25% tax on the depreciation recapture.  For the sake of argument I'm going to presume that you will be in the 15% bracket on the capital gains and that your depreciation recapture amount is 9.6k (50% land/improvement ratio on purchase).  This would bring your walk away with amount to about 198.9k.  At 7% average stock returns, that's 13.9k/yr.  Lose tax advantages of rental and pay a healthy bit to uncle sam.

I made a bunch of presumptions:
-I wasn't sure on summary financials at the bottom of your post- is the $1k/mo expenses included in the property expenses?  I assumed so.
-Your income and subsequent tax levels pretty significantly impact how beneficial the tax benefits of keeping the rental are and the costs of moving the investment from real estate to stock.  The more you make now, the stronger the benefits of keeping the rental and avoiding the taxes are. 

What would I do? 
Option 1b: Do a cash out refi of 75% LTV, which at 270k assessed would be $202.5k.  With a 1.5 points and 4.0% rate (available today according to aimloan), you would walk away with 196.5k and a 965/mo payment.  Pass rental to property manager for a rental profit of $238/mo or 2.8k/yr.  Put 196.5k in market for yearly gains of 13.8k/yr at 7% average stock market.  Total income of $16.6k/yr.   
Pros:
1) I didn't plan the numbers this way but with a cash out refi, you walk away with almost the same amount of cash as with the sale but you still have the rental. 
2) Again, I didn't plan it this way but you would make the same amount of yearly income without the day to day landlording hassles of option 1. 
3) If you find out that investment is still too active for you even with a property manager, you can sell after you FIRE and hopefully the property will have appreciated more and that a large percentage of the gain is in the 0% capital gain bracket.
4) Inflation hedge. 
5) Tax benefits maximized- property depreciation and mortgage interest deductions while keeping the stock investment income unrealized until you are FIREd and in a lower bracket. 
6) Diversification.  You can take the same advantage of the potential rent growth and property appreciation in the rental's market as you would have had in 1 & 1a while taking advantage of the stability of a diversified vanguard stock portfolio. 

[Cwadda]

kellyincville has posted great advice. The only other advice I'd add to that is if you do end up selling, consider NOT using a realtor. You will save quite a bit of money.

[Dicey]

kellyincville has posted great advice. The only other advice I'd add to that is if you do end up selling, consider NOT using a realtor. You will save quite a bit of money.

OR maybe use something like help-u-sell or redfin? There many expensive mistakes available to be made in any Real Estate transaction.

[Heroes821]

Personally, I had a similar situation with Denver a few years back.

I had an amazing realtor name Euan Graham who I highly recommend if you need a realtor in Denver.

I purchased the house at $130,000 in 2012. Sold in 2015 for $217,000.  Zillow Says house was sold again in 2016 for $250,000. This was East Aurora near the Airport. Adams county.

Denver is HOT right now.  I can't see the housing prices staying this high for years to come.  The original owners of my house turned down $240,000 offers in 2006 and we all know how 2009 went.  I can't imagine making better rental income than $1800-$2000 off a $100k purchase.  I would probably rent it out long term or sell sooner rather than later.

[Cwadda]

kellyincville has posted great advice. The only other advice I'd add to that is if you do end up selling, consider NOT using a realtor. You will save quite a bit of money.

OR maybe use something like help-u-sell or redfin? There many expensive mistakes available to be made in any Real Estate transaction.

What kind of mistakes could there be outside of what a good lawyer handles?

[SenoritaStache]

Thank you all for your replies, I really appreciate it!

@Heroes821 Very similar situation, the house I'm taking about is also near the airport in the Montbello neighborhood, which surprisingly is in high demand.  What was your reason for selling? And if you don't mind what did you end up doing with the money obtained from the sale? I'm so on the fence about keeping or selling it because your right,  the rents will not stay this high for ever, they will either stabilize or drop, especially with all the new construction EVERYWHERE!  A reason I'm concerned to keep it because it seems to me that the new constriction of apartments and new houses is going to catch up with the Denver housing shortage.  If I remember correctly there was a time where the exact same house like mine would rent for about $850-$1,000.  Thanks in advance

[Heroes821]

I sold because I left the Air Force and moved to Texas for a new job.  The proceeds went half to stupid spending before finding MMM and the remainder got shoved into Vanguard taxable account.

Personally I think that with numerous companies moving their HQs from Cali to Denver that Rents going down will not be a concern for awhile if ever.  As much as the sale was a great shot in the arm of money long term I think it would of rented out better due to how cheaply I bought the house (and yours was even cheaper).  The nice thing about that location is the Air Force Base.  If you have Active duty tenants and they fail to pay or break something it is extremely easy to get your money from them.  One call to their squadron first Sergeant will set a fast ball rolling on garnishing their wages.  That aside most military people I know take better care of places than others. 

If the housing market in Denver crashes again soon, renting will probably be significantly easier in a crash than qualifying for a mortgage.

[SenoritaStache]

I think you're in a great, no-lose situation.  Your property is profitable, attracting long-term tenants and purchased at a time that allowed for strong appreciation. 

To crunch a few numbers:

Option 1 (most active): Offer to rent for $1,800/mo, bringing in a monthly income of $1,383 or 16.6k/yr.  Year 1 reduced to 11.6k due to 5k updating costs.  Maintain landlording tax benefits going forward.

Option 1a (in the middle): Offer to rent for $1,800/mo with the use of a property manager so you don't have to deal with the day-to-day hassles of landlording, bringing in a monthly income of $1,203 or 14.4k/yr.  Year 1 reduced to 9.5/yr due to 5k updating costs.  Maintain landlording tax benefits going forward.

Option 2 (100% passive): Sell for $270k with 8% closing costs and 22.5k fixed costs of bringing to market.  Net $225.9k then capital gains tax on the $164k gain and 25% tax on the depreciation recapture.  For the sake of argument I'm going to presume that you will be in the 15% bracket on the capital gains and that your depreciation recapture amount is 9.6k (50% land/improvement ratio on purchase).  This would bring your walk away with amount to about 198.9k.  At 7% average stock returns, that's 13.9k/yr.  Lose tax advantages of rental and pay a healthy bit to uncle sam.

I made a bunch of presumptions:
-I wasn't sure on summary financials at the bottom of your post- is the $1k/mo expenses included in the property expenses?  I assumed so.
-Your income and subsequent tax levels pretty significantly impact how beneficial the tax benefits of keeping the rental are and the costs of moving the investment from real estate to stock.  The more you make now, the stronger the benefits of keeping the rental and avoiding the taxes are. 

What would I do? 
Option 1b: Do a cash out refi of 75% LTV, which at 270k assessed would be $202.5k.  With a 1.5 points and 4.0% rate (available today according to aimloan), you would walk away with 196.5k and a 965/mo payment.  Pass rental to property manager for a rental profit of $238/mo or 2.8k/yr.  Put 196.5k in market for yearly gains of 13.8k/yr at 7% average stock market.  Total income of $16.6k/yr.   
Pros:
1) I didn't plan the numbers this way but with a cash out refi, you walk away with almost the same amount of cash as with the sale but you still have the rental. 
2) Again, I didn't plan it this way but you would make the same amount of yearly income without the day to day landlording hassles of option 1. 
3) If you find out that investment is still too active for you even with a property manager, you can sell after you FIRE and hopefully the property will have appreciated more and that a large percentage of the gain is in the 0% capital gain bracket.
4) Inflation hedge. 
5) Tax benefits maximized- property depreciation and mortgage interest deductions while keeping the stock investment income unrealized until you are FIREd and in a lower bracket. 
6) Diversification.  You can take the same advantage of the potential rent growth and property appreciation in the rental's market as you would have had in 1 & 1a while taking advantage of the stability of a diversified vanguard stock portfolio.

Believe it or not, for some odd reason to refi and cash out had not even crossed my mind!  Thanks for your input! :)

[SenoritaStache]

As far as selling my self, I'm very hesitant to do so since this would be my very first time selling real estate.  I've only just purchased but never sold, I don't know the process and I kinda do want my hand held at least on this very first one.  Sucks that, that will cost thousands of $$

[Cwadda]

As far as selling my self, I'm very hesitant to do so since this would be my very first time selling real estate.  I've only just purchased but never sold, I don't know the process and I kinda do want my hand held at least on this very first one.  Sucks that, that will cost thousands of $$

My counter argument is this: would you be willing to learn? Usually a realtor will cost you 6%. If you get $260k for it, you're looking at $15,600. Would you be willing to spend time learning? If you spend 50 hours learning that's $312/hour.

[SenoritaStache]

I would not mind learning, in fact I plan in becoming a licensed real estate agent later this year.  I guess I would not know where to even begin, and I'm so intimidated by selling on my own.

[Cwadda]

I would not mind learning, in fact I plan in becoming a licensed real estate agent later this year.  I guess I would not know where to even begin, and I'm so intimidated by selling on my own.

I would try looking at Biggerpockets.com and listening to some podcasts. It's a great, free way to get started.

[SenoritaStache]

Thank you for that info I will definetly look into it

[ChasingStache]

A reason I'm concerned to keep it because it seems to me that the new constriction of apartments and new houses is going to catch up with the Denver housing shortage.  If I remember correctly there was a time where the exact same house like mine would rent for about $850-$1,000.  Thanks in advance

Here is a fairly recent article on area inventory: http://www.bizjournals.com/denver/news/2017/03/03/all-time-record-low-home-inventory-in-metro-denver.html

I wouldn't start worrying too much about inventory catching up with demand right now. The numbers in the article are almost 25% of the historical normal average inventory available in the Denver metro, so there is a long way to go.

I am also in Denver and kick myself daily that I didn't buy when you did. I have recent started doing some short-term, bridge loan type lending to a couple of new-build deals in the area. Before jumping into this, I consulted a number of people in the real estate market and did a lot of my own research and number crunching. What I convinced myself of was that although home prices are not growing like a few years ago (9% vs 14% per year), there is still growth left in this market for the next couple years. I don't think we are going to see prices crash necessarily, but I do think they are going to level off somewhere between -3% to +3% per year starting in the next 2-3 years. New builds are still booming. The condo builders and developers are fighting hard for the construction defect laws to get clarified and changed because there is so much pent up demand still. They know there is money to still be made.

You are in an awesome spot and trying to optimize. You can't lose on whatever decision you make. Congrats!

I personally would go another year holding the house and feel out the situation again then. You aren't going to lose anything plus it gives you time to get you RE license and can sell yourself when you decide the time is right!

Good luck!
With that being said,

[thedayisbrave]

I don't quite understand the huge push trying to convince OP not to use a Realtor.

The whole "6% or bust" is a myth.  There are plenty of Realtors -- GOOD Realtors might I add -- that will list your home for you and help you through the entire transaction for a flat fee rather than the 6% commission.  You will need to pay the buyer's agent payout still, but you'd pay that regardless of having a listing agent or not (if an agent brought you a buyer).

OP has already stated she wants help through the process.  She is not going to learn how to list a house on her own through BiggerPockets.  She is not going to learn how to market her home, attract a bidding war, or how to properly negotiate for repairs from BiggerPockets.  BP is great but it's a networking site for investors/agents and does not accurately replicate having a Realtor.

Yes, I'm a Realtor.  The value I offer is a service.  If I were in your area, I'd happily help for a flat fee.  I'm sure there are Realtors in your area that would do that also. 

[MountainFlower]

The flat fee realtor would be attractive to me.  We did sell a house by owner and it went fairly well.  We created a website with photos and created fliers that we had outside the home and that we distributed to every local real estate agent.  These fliers were what eventually sold the home.  We offered commission for the buyer's agent. 

What I didn't like were the calls from people with no interest in buying the home just wanting to lookie-loo.  I don't know if people do that when there is an agent, but the agent would screen them out.  There weren't that many...I think I was shocked by the fact that people thought nothing of wasting our time to satisfy a curiosity. 

Anyway, the title company does a lot of the work and we also had a real estate attorney involved. 

Good Luck!  I'd be tempted to cash out too given the crazy market and with wanting to start a family. 

[Scortius]

This whole 6% thing is overly simplistic and not a reflection of what you would actually save.  First, you still have to pay the buyer's agent, which will likely be 3% anyway, so now you're looking at saving 3%.  Then, you have to consider just how much work it is to sell a house, and you have to consider how many different legal pitfalls there can be going through the process.  Finally, a seller's agent will help you sell more quickly and will help you through post-inspection negotiations, saving you some money there.  So, in the end you're looking at saving yourself maybe 2% of the sale price, and you're doing so at the cost of significant extra time working, exposing yourself to some pretty serious liabilities,  and possibly not getting the best deal you could have with an agent.  That may still be worth it to you, but it's not such a cut and try 6%.

[Cwadda]

This whole 6% thing is overly simplistic and not a reflection of what you would actually save.  First, you still have to pay the buyer's agent, which will likely be 3% anyway, so now you're looking at saving 3%.  Then, you have to consider just how much work it is to sell a house, and you have to consider how many different legal pitfalls there can be going through the process.  Finally, a seller's agent will help you sell more quickly and will help you through post-inspection negotiations, saving you some money there.  So, in the end you're looking at saving yourself maybe 2% of the sale price, and you're doing so at the cost of significant extra time working, exposing yourself to some pretty serious liabilities,  and possibly not getting the best deal you could have with an agent.  That may still be worth it to you, but it's not such a cut and try 6%.

In a FSBO transaction, you're technically not the one responsible for paying the buyer's agent though. The buyer is on the hook for this, though they can ask you to kick in 2.5%-3%. You have zero obligation to do that though, if you don't want to.
What kind of legal pitfalls would there be that a good, trusted lawyer couldn't handle and that an agent would?
What kinds of post-inspection negotiations would an agent handle that you couldn't settle face-to-face with a buyer?

[Cwadda]

What I didn't like were the calls from people with no interest in buying the home just wanting to lookie-loo.  I don't know if people do that when there is an agent, but the agent would screen them out.  There weren't that many...I think I was shocked by the fact that people thought nothing of wasting our time to satisfy a curiosity. 

The solution to this is asking for a pre-approval letter before showing the house.