Turn my home to a rental or sell?

Question

Hello! I have lived in my condo for 5 years and have decided to buy a bigger home for my growing family. My current condo is in a great location in Denver, CO and I'm wondering if I should keep it as a rental or sell.

I would like to have an investment property but the yearly cash flow for this place would only be $3,540. Is it worth keeping?

Chris London · Answer

Ann, There are 3+ wonderful ways rental properties make you money compared with other investments. 1) You have the cash flow which I personally believe people put too much focus on. 2) You have the principal paydown by the tenant's rent. 3) You have appreciation (typically) that is your paper wealth. +) tax benefits Of course, asking this group if you should keep your condo as an investment I suppose is like asking your bartender if you should order another drink :)

Kirk R. · Answer

You've probably taken great care of your property & could get a tax free retail sale? How will u feel when 1st tenant dents a drywall corner moving in? Seems like something that is not too nice almost makes a better rental. like carpet that is at its 70% useful life. A little dated counter tops. renters seem more willing to accept these things vs retail sales want everything updated & perfect.

Mike McCarthy · Answer

@Ann MacMillan does the cash flow include repairs, capex expenses, and potential vacancies? Most investors would be happy with a few hundred dollars per month cash flow, considering you’re also paying down the mortgage and gaining some appreciation too (hopefully).

Joel Atzenhoffer · Answer

@Ann MacMillan Hi Ann, thank you for sharing and asking for feedback in regards to your situation. If you would like some more information that may help you in the decision-making process I could put you in contact with my colleague in our Denver office she is great and can answer any questions you may have about renting out your property.

Jamaal Gibbs · Answer

@Ann MacMillan if you don’t have to sell it you should absolutely keep it. That $3,500/year cash flow can be a great start to building a portfolio or having an extra $300/month free cash in your pocket. Plus with debt pay down, appreciation in the Denver Metro, and other tax benefits, those factors may outweigh selling for a short term gain.

Chris Lopez · Answer

@Ann MacMillan It's a "great problem" to have. In these situations, there is no clear cut answer as it really depends on the property performance, opportunity costs, and your personal goals and financial situations. Personally, I follow two main rules of thumbs: What is the current cap rate of the property? If it's below a 4% cap, sell it. You calculate this by "repurchasing" the property at TODAY's value, not at what you bought it for.What is your current return on equity? (value - loan amount = equity) If ROE is less than 15%, I'll either sell or pull out cash. I can earn more than 15% on new rental properties easily. I sold a condo I bought in 2011. I bought it for low, but with zero money down, it cash flowed and had great equity. It was time for me to reposition the equity. I generally do NOT agree with the "never sell a property" mantra. The most successful investors I know are constantly selling properties to trade up. From everything I've seen, it's the best way for accumulating wealth. In 2019 the condo was a 3.5% cap rate at today's numbers and was returning a 6.9% return on equity. BOTH are abysmal numbers. It was generating around $2,000 yr in cash flow and would have been paid off in 7 years. Here's the summary tab from a spreadsheet I built to analyze these situations: Since it was such a poor performing rental, doing a HELOC or cash-out refi did not make sense! YOu can see that selling it and re-leveraging up is making me way more money, even after all the transaction costs. It's option #3: Sell it. Not only am I making more cash flow, but I'm also getting a bigger tax benefit, appreciation and principal reduction since it's a more expensive property. From a high level, this makes sense based on these two wealth building principals: Higher and better leverage. The new property is at 75% LTV. The condo was at a 20% LTVI'm buying a better rental. I sold a 3.5 cap and bought a 6.0 cap Therefore I'm making MORE money today and in the future. Eventually, I'll stop trading up, but that'll be years down the road after I've built my retirement rental portfolio. IF you want to use the spreadsheet, let me know.

Jingru Sui · Answer

That cash flow is not too bad. Have you consider doing short term rental? Does your condo allow it?

Brian Ploszay · Answer

There are risks in becoming a first time landlord. Let's assume the tenant pays and is stable. I'd personally keep it because I like that location a lot. It is long term good real estate.

Craig Curelop · Answer

@Ann MacMillan - I have talked to many investors about this rent vs. sell debate. Every experienced investors (10+ years) has said they regret every property they ever sold. If your condo is in a GREAT location in Denver. Do you think that is going to appreciate over the next 10-20 years? I sure as heck do! And the appreciation is what really makes you rich. The fact that you also get ~$300 a month is a bonus! If you have owned that condo for 5 years, I bet that you have some equity in that property. I'd recommend taking out a HELOC and invest more that way.

Steve K. · Answer

@Ann MacMillan if you do want to sell, it’s still a very strong sellers market throughout Denver metro so it should be easy to sell. Whether or not that will be the case in the future is an unknown. Personally I think the market fundamentals are strong here, the population will continue growing and that increasing demand with limited supply will continue driving prices up, but nobody actually knows.