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

[Simon C.]

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!

[Account Closed]

Originally posted by @Simon C.:

Originally posted by @Account Closed:

@Simon C. look at your post above responding to @Brendan M....."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.