To keep or sell our SFH rental in Denver?

Question

Hi all. Thanks in advance for your time. We own a SFH in a hot neighborhood in Denver. It has always rented quickly in the past, but it is vacant now and we're struggling to find a tenant. Current lease is up 7/1.

We bought this property for $499K as our primary residence in 2008. We decided to keep and rent it out. Our monthly payment is about $2000 (which includes PITI). Our last tenant paid $2750/month. So yes, it generates a very nice cash flow. Problem is that it's OLD and starting to get run down. I think this is why we're now having trouble renting it. Making the updates it'd need is out of the question....it'd be too much investment at this point. Plus, I think it's a matter of time until something major needs repair.

The good news: we can probably sell it for $650K. It's a small place, so I'm not sure it'll ever be worth much more than it is right now. Take away all the taxes and we're likely to net $270K, which we'd use to pay down the loan on our current primary residence mortgage, saving a boatload in interest. We're not interested in purchasing other rental property at this time. Too much work to self-manage.

So the question is: keep or sell?

Dorothy Ma · Answer

@Heather Harelik I have a similar situation to your, except it has been an investment property and never a primary. We've been renting it and cash flows great, but it's an older house and a lot of things need updating or are coming to the end of their life expectancy - Roof, Furnace, water heater, etc. We actually listed it and it went under contract the first weekend with multiple offers and significantly over asking. We've disclosed to the buyers that it needs work and we are not looking to fix most of it - which is why we put it on the market at that listing price. However, I will tell you that my experience has been that once you get under contract and buyers have an inspection, they're going to ask you to fix all that stuff anyway even if they gave the impression that they understood the situation and won't ask for much during inspection. So my advice is to be prepared to either price it with the repairs all in mind, and be ready to at least negotiate some of the repairs or give credits for them in your inspection resolution negotiation. For example, if your roof is really old, some insurance companies will not insure the house until this is done for the new buyers.

I'm guessing the reason you are struggling to find a tenant is because a single family at that price point is pushing it - even in a HOT neighborhood, and as you mentioned with the required repairs, the price is probably a little high.

My question is where does the $650K number come from for listing price? Is this based off comps that are in older condition like your home? If so, that's great news. Otherwise, I would make sure you have an agent pull recent and legitimate comparables (not zillow estimates) and you can re-evaluate your numbers there.

I'm guessing the reason you are struggling to find a tenant is because a single family at that price point is pushing it - even in a HOT neighborhood, and as you mentioned with the required repairs, the price is probably a little high.

My question is where does the $650K number come from for listing price? Is this based off comps that are in older condition like your home? If so, that's great news.  Otherwise, I would make sure you have an agent pull recent and legitimate comparables (not zillow estimates) and you can re-evaluate your numbers there.

Adilah Curry · Answer

@Heather Harelik Very good question! We all know how HOT the Denver market is right now. I would do a simple pros vs. cons list to help solidify a decision.  So here it goes:

PROS:

• Inventory continues to be an issue right now in Denver (i.e. there are more buyers that there are homes on the market) SFH prices jumped almost 9% last month as a result . So, it's a good market for selling the property.
• Even though it's old & starting to get run down, that may be appealing to buyers looking to renovate to their specifications. Qualifying for a 203k loan which provides funds for renovation is easy with the right lender and attractive to buyers looking for a home, but can't find one they like because of the shortage in inventory.
• A Fast Turn Around - Average days on the market right now is 25, this is important because it can minimize your holding costs. If it's sitting vacant, you're paying $2,000 with no cash flow & the potential for additional expenses once the current tenant moves out & to get a new tenant into the property (new paint, carpet, marketing, etc.)
• Pay down the loan on your primary residence!!! Saving money in interest, lowering your current monthly payments. Freeing up monthly cash to do other things - what's not to love about that???? :) 
• It's A Sellers Market - You have leverage & buyers are willing to pay more for the right property.

CONS:

• You'll most likely need to spend time & money getting the property ready for a new tenant.
• With interest rates as low as they are now, more & more people are looking to buy as their monthly payments are lower in many cases than rent. So you'll have a smaller pool of renters to choose from vs. a larger pool of buyers.
• Potential for more expenses due to the age of the home. You never really know when you'll have to have something repaired or replaced.
• Updates/ Renovations are costly 
• Dealing with tenants & rental property. Being a property manager can be hectic & stressful at times. Ask yourself: Is the added stress worth the $750/mo.? How will things improve/ be better if you kept the property & rented it out?

The robust appreciation in the Denver market will not be sustainable indefinitely AND interest rates are still pretty low, but they've started going up recently so, you never know when higher interest rates will slow down home buying. Selling while interest rates are still low is better than waiting to sell after interest rates have increased. There will be fewer buyers looking at homes in your price range once interest rates increase.

You could certainly hold on to the property for appreciation & monthly cash flow once its rented assuming you don't have to spend a lot for repairs & replacements. Another option is refinancing for a lower monthly payment.

Sorry for the long winded reply, but it's a big decision & i just wanted you to be able to see the Pros & Cons clearly :) I hope this helps. Best of luck to you!

Adam Kroll · Answer

I put together a spreadsheet for one of my clients and I've used it several times since. In almost all cases I've reviewed, holding is the best option. These were not savvy investors, so the alternative investment was not as attractive for them. I'd be happy to share if you pm me your email

Travis Sperr · Answer

Sounds like you have already made up your mind on this property.

Nate Wightman · Answer

have you rented for 3 or more years??

you are 22 years from $ 25k  +- annual income

any way to add rentable value to it ... livable outdoor space,

steam shower, new appliances or small kitchen redo,  AC ???

maybe try management for a while and see how that works

you may not clear 100% but the payoff would  be nice

and remember this is a really good problem to have

laugh lots

Tyler Howell · Answer

@Heather Harelik What kind of approach are you using to find a tenant? Craigslist only? Other sites / signs in the yard? This can be tough if you're attempting to sort through hundreds of email and then do one-off showings in your spare time. There are some good ways to filter through to well-qualified tenants and then maximize your time in regards to showings, glad to share some insights via PM if interested.

I think the real question is whether you want this home to be part of your long term / retirement strategy. 20 or 30 years down the road, the property will likely provide far more value for you than the $270k you may be able to pull out now. For instance, if both this property and your primary residence is paid off in 15-30 years, depending on your retirement window, think of the value provided there in terms of regular income and equity available for liquidation. However, if the whole idea of rental property is burdensome to you, you may not want to entertain that strategy.

Adilah Curry · Answer

I like @Adam Kroll's thoughts on this as well. Holding onto an asset can be a great strategy depending on your investment & financial goals.  I would also agree with @Matt M. regarding checking with your accountant on the tax implications. A 1031 exchange could also be an option as a tax benefit if you're open to it. At the end of the day, it really depends on your goals for the future.

Just a quick clarification regarding my above post - the average days on the market is around 25 days give or take a few....last month, the average was 31 - so about a month :)

Matt M. · Answer

Would it be worth updating to sell? I've been actively looking in this price point for some clients of mine, and there is some softening that I'm noticing in this price point. Lots of price decreases across Denver.

Have you spoken to your CPA about the tax hit you'd potentially take on the sale of this home? Do you want to have any real estate investments, or just lower the amount you owe on your primary?

To keep or sell our SFH rental in Denver?

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