Good time to sell, bad time to buy?

Question

My wife and I are putting one of our rentals up for sale due to a high HOA that keeps going up and has cut into our cash flow on the property. We would love to just 1031 into another single family rental but the market here is a bit ridiculous (Colorado). Is it time to eat capital gains, sit on cash and wait for the market to cool off a bit? We would love to hear some thoughts.

James Carlson · Answer

@Tyler Batchelder

I'm a realtor in Denver and Colorado Springs, so you definitely can't trust anything I say ... ;) That said ...

Short story: You should still do the 1031.

Longer story: There's little indication prices are going to slow or decline in the next few years. A few data points:

• Interest rates have risen a bit, but most experts don't think they'll continue to do so. Low rates equal high demand
• Millennials are a bigger cohort than Baby Boomers, and the first of the generation are just now reaching prime home-buying age. As that big number of Millennials continue to enter the market, it will keep demand high.
• Cost of raw materials and labor are through the roof, meaning new construction costs are going up.

Many of these factors would have to flip drastically. And there are other reasons why Colorado, specifically -- and Denver and Colorado Springs, specifically -- will be a target of this increased demand for at least the next few years.

Also, one of the benefits of selling now is to leverage that equity to increase your assets. Ex. We have a 1br condo in Denver that we bought in 2015. It has between $140-$150k of equity in it that's just sitting not working for us. We can take that $150k and use it as a 20% down payment on $750,000 of assets, be that one expensive unit, two smaller units, four units, whatever.

Whatever you choose, I wish you luck!

Candice De · Answer

@Tyler Batchelder I am not convinced there is a good time to eat capital gains unless you can make that money back elsewhere (if you have a secret please share).  You may be paying a premium now but the long game surely has to be better than giving money to taxes. Check out Aurora for some better numbers without the long drive.

Matt M. · Answer

I'm just about to wrap up a closing with a client that did a 1031 here in Denver. I got him into an off market duplex with my cash buying program and he's other property is about to sell to complete the transaction. It can be done here, but you'll have to hustle.

Chris Freeburg · Answer

@Tyler Batchelder 6.7% appreciation last month and almost 20% since last year is definitely ridiculous! (And also what happened here in Denver in March. Full stats here)

We are experiencing the level of appreciation in one month that we would expect for an entire year. Why is this happening? It's supply and demand. We have roughly 2 weeks of inventory in Denver right now. That means if no new homes come on the market, at this rate of closing, they'll all be gone in 2 weeks! Low interest rates, millennial buyers, and quality of life in Colorado are driving the demand.

Will things cool off? Well, prices may not continue to soar at this rate forever. At some point, more listings will come on the market as vaccinations roll out, people feel more comfortable with strangers in their home. However, when that happens is anyone's guess. Still, no one expects the market to drop, so don't count on any bubble bursting. This is just not a repeat of '07-'08 housing crash market, but don't just take my word for it.

Look elsewhere? We're seeing these same trends in healthy markets all over the country. Dense cities like New York and San Francisco might be the exception, and if I lived there, I'd be buying.

Time to sit on cash? There's a reason for that saying about keeping your powder dry; you have to have capital to pull the trigger. I won't tell you what to do, but I'm not sitting on the sidelines. I'm actively looking for my next investment, but I think your post is pretty accurate and there's no way around it: good time to sell, tough time to buy.

Tyler Batchelder · Answer

@Theresa Harris, We are just north of Denver and finding that anything within an hour drive of the city is just plain over priced with most properties going for 10s of thousands over asking.

Theresa Harris · Answer

It is like that everywhere in Colorado-ie could you look a bit further outside of your city?  If the fees keep going up, is there a reason. I had a place where there were special assessments and fees kept going up.  I sold just in time as they then took out a massive load and last I looked the condo fees were double what they were 5 years ago (and they weren't cheap then).

Good time to sell, bad time to buy?

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