Denver's Hot Housing Market - Dazed and Confused - Advice Appreciated

[Jeffrey Sherman]

Hi all,

I came across this forum researching a particular real estate investment opportunity that I've been debating, and figured I should try to solicit some input from the Pros, especially since my background is void of any real estate investment knowledge.

I bought a 3,200 SQFT house in April of 2014 for $305K in Arvada, CO (80004 zip-code).  The house was completely re-modeled upon purchase and in a way that made renting out the bottom seamless: 1,600 SQFT up and 1,600 SQFT bottom, BOTH having 3bd/2ba, each having FULL range kitchens, laundry rooms, living/family rooms, dining rooms, completely separate entrances (walk-out basement accessed around side yard), and bifurcated parking spots.  Financing was a little tricky since I had to convince the bank that a single-family was going to occupy the house (not zoned or legally grandfathered in for multi), but it all worked out at the end.  It was perfect to lease out the bottom our first year, which covered a substantial portion of our $1,800/month mortgage, but we recently had to 'boot' the tenants downstairs so that we could take over a couple of the rooms (baby number 1 on the way and I needed to move my office to make room for our little guy - crazy how time flies and space requirements double ;-) ).

The hot Colorado rental market got me thinking.  Is it time to buy another house and rent out our existing one in a duplex style manner.  The property management company that I met up with the other day is convinced that I could squeeze AT LEAST $3K/month from renting ($1,700/month top and $1,300/month bottom).  Our current principal balance on our existing mortgage is $284K on a 30-year, 4.49% fixed-rate and my lender is confident that the house would reappraise (if needed) for at LEAST $410K.

The positive cash flow from renting is apparent, but I am not sure if buying another house is the 'right move' , especially since I am boggled by the extremely overpriced homes on the market due to low inventory and high demand. I don't want to overpay for a new house to raise a family in, especially if we're experiencing a bubble. We did just prequal with our lender the other day without a problem (NO HELOC or no proof of renters needed) and are looking to spend sub $450K on the new house.

Is this a 'smart' real estate investment decision to buy another and rent our current house, or should I wait?  The other option would be to sell and rebuy, but I would probably have to remodel the basement to make the layout make sense for a single family in order to get the most out of the market...and for it to appraise.  Another option would be to rent for another year and then use the cash to re-model to a single-family and just live in it while our family grows.  Love the area, as we have awesome neighbors, and the demographics are only continuing to shift favorable, but we are definitely not emotionally attached to the unit.

Wish I had the real estate background to make this easier, but that's why I am here now - to learn as much as I can from others in order to make a wise decision down the right direction.  I appreciate any and all advice!