Realistic plan for suburbs of Denver?

Question

Hey all! My wife and I have been patiently waiting to buy in this crazy Denver market for a while now. We want to buy a primary residence in the Ken Caryl/Littleton area in early spring 2023 with the intent living in it for 3-5 years (most likely closer to 5) and then renting it out completely when we move back to the east coast.

I believe most lenders are okay with this so long as you live in your primary residence for at least 1-2 years correct? Our intent would be to put 3% down on a 30 year ARM to take advantage of a lower interest rate for the first five years of the mortgage and then potentially refinance to a conventional fixed rate at the end of 5 years if it was favorable to do so. I also believe we won’t have to deal with PMI if we go with one particular lender which helps as well.

Does this seem all realistic? It seems like the market in Ken Caryl and Littleton is pretty hot and will be for the next few years. I wouldn’t think we would have any trouble finding tenants once we decide to rent the house out. Thoughts? Thank you!!

James Carlson · Answer

@Alex Beaulieu

Congrats on your impending big choice to buy in the Denver area. I've got clients looking right now in the Ranch Plains area of Ken Caryl. Beautiful homes. Great community.

You will sign documents at closing where you say that you intend to live in the property. Sounds like that's exactly what you will be doing, so you're fine on that front. If you live in it for a year, no one will stop you from moving out and making it a rental. However, some lenders will balk at you trying to get a second primary residence loan within one year. They may think you were either lying on the previous mortgage or lying about the current one. Two years is a solid amount of time and no lender will blink an eye.

The other thing -- and maybe the biggest thing -- about living in it for 2 years is that it gives you the flexibility to then sell within 5 years and avoid paying 15% capital gains tax on the proceeds. So I would plan on living there for 2 years and then -- if you want to sell at some point in the near future after that -- you do so before the 5 year mark of when you bought it.

Finding tenants down there shouldn't be a problem. But be aware that you're not likely to cash flow. Most homes in Ken Caryl are in the upper $700k, early $800k range. Even putting 20% down, you're looking at a $4,000 mortgage. Rents for a 5br in that area are probably between $3500-$4,000. So you're really just buying and holding in hopes of appreciation.

I wish you the best in your search. Cheers!

Alex Beaulieu · Answer

Thanks @Dave Skow! One lender in particular is offering 0-10% down for their ARMs. I wasn’t sure if that was common or not but either way I’m open to fixed rates as well! We’ll probably be going through the pre-approval process 2 months out (January 2023) from when we want to start actively looking in March.

Shiela R. · Answer

Thanks @Alex Beaulieu.  I try :) Good question! I am waiting on the sidelines, with residential investing.  I mean, I have a couple buy and holds that I'm not selling. But for acquiring new residential properties, I haven't seen anything that is a good enough deal. Now, if something falls into my lap, I'll take a look and move forward if it makes sense.  Like this https://www.biggerpockets.com/...

I am investing in a couple syndicates that have 7-20 commercial properties each.  This is the first time my husband and I have invested in syndicates. Which says a lot bc I've been asked to invest by numerous parties and even researched about 25 over the past several years.  Most are not conservative and experienced enough for my taste.

Shiela R. · Answer

Okay @Alex Beaulieu.  Thanks for being open.  To answer your question...I study market cycles as well as historical trends.  Lately, I've been reading and watching youtube videos of and by Ray Dalio.  He has made a pretty sound argument that history repeats itself and it's more layered than we know. I agree, the bull market we've experienced is different than that of the early 2000s. I've also lived in Colorado most of my life and started investing right at the height of things in 1999.

So, I'm jaded. And conservative. Why? I saw - first hand, people losing their shirts because they were over leveraged. Both my husband and I were laid off at the same time and that was not in our "plan".  I always tell beginners that the market doesn't care what you think but you can learn the market by watching, with an open mind, what is what.

Alex Beaulieu · Answer

Wow thanks @James Carlson this is great! Yeah we would definitely be staying for a minimum 3 years so no issues with the second primary residence loan. And yes, we’ve understood that the Denver market is tough to cash flow and we’d definitely be leaning more on the appreciation side of things.

I’m sure we’ll probably be approved for $800K+ but we’re hoping to find a 3/4 bedroom house somewhat updated in the 550-650K range. It just seems crazy to me that some homes in that price range aren’t even fully updated.  Great tip on the capital gains taxes within 5 years as well!

Dave Skow · Answer

Thanks ! ams

Fyi - arm rates will

Likely be close to fixed rates …. Make sure to examine costs and mortgage ins costs as  well

Alex Beaulieu · Answer

Thanks @Matt M. I agree! I think they can definitely be useful. Any chance you can DM me your lender? I’d be curious to compare! We’re  still a few months out from going to lenders but couldn’t hurt to compile a few to compare and check out. The market does look like it’s softening a bit but I’ll be curious to see how it is early next year when we start actively looking.

Dave Skow · Answer

@Alex Beaulieu  1) get  pre approved for the  scenario you are  considering to make sure all looks oK and so you have  time to  fix any  issues  if there are any  2)  a 3% down ARM  is not  likely to be a  program that  exists ....you will liekly  be using a  30 yr fixed rate  if putting  3% down  3) changing a  property to a rental after owning it  for some time is  fine to  do ( make sure to  try to  refinance  this property   BEFORE  changing it to a  rental

Matt M. · Answer

Don't be afraid of an ARM. I've used them a bunch. My lender has a 10 year that hasn't been beat. ARMs get a bad rap from the 1-3 year arms that hit in 2008. There's a duplex just south of me on the market at $650k, so you can find them if you know where/how to look. On market is showings some deals finally.

Alex Beaulieu · Answer

Great feedback @Joe Garretson! Only reason I was considering a 5 year ARM is because it’d offer us a guaranteed 5 years of a lower market rate right now (I’m seeing around 3.8%). If we don’t end up selling before the 5 year mark we’d evaluate refinancing into a fixed rate. I know rates are still historically low but I’m also going off a hunch that I think the Federal Reserve will need to cut rates again. If not next year then at least in the next few years. I know mortgage rates aren’t completely tied to the Federal funds rate but cutting rates again would impact them.

I completely agree with your assessment of Denver’s market. That’s why my wife and I want to finally get off the sidelines even if it’s not our forever home.

Ken Caryl/Littleton area because that’s where my wife works. I work remotely so I can go wherever but being in that area would help her out a lot. We also like the community down there. We definitely could consider a townhouse or something that might cash flow better so that’s not off the table. I think we’re just looking forward to having a bigger space and a backyard (especially for our dog).

House hacking a duplex would be great but I haven’t seen many duplexes in the market and the ones I have seen were a minimum $800K+. I’d have to run the numbers through that scenario but that sort of mortgage would be hard for us if we couldn’t fill the other side of the duplex. I’m definitely interested in this option if we could make it work though!

Realistic plan for suburbs of Denver?

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