Colorado has had one of the highest appreciating markets in the country and it is predicted to keep going up. An incredibly hot real estate market is great for some, but it creates many questions for investors. I own 13 rental properties and I am closing on number 14 this week. My properties keep going up in value and have been great for my net worth. With prices increasing so much I wonder if the market can sustain high prices. Would it be smart to sell my properties and reinvest the money?
How much has the Colorado real estate market increased?
Five years ago the median house price in my area was around $120,000. In April of 2015 the median price was 225,000! Our market is not done either with the median price increasing $30,000 in the last four months! This graphic predicts Colorado will lead the nation in appreciation in the next year.
I am in Northern Colorado where prices have not increased as much as other parts of the state like Denver. Our economy has had a huge boost from oil and gas the last few years and many predicted our market would slow down with lower oil prices, but it has not. I can’t predict whether our market will keep increasing, stay the same or go down, but my gut tells me it will stay strong for the immediate future. The thought has crossed my mind to sell my proprieties and use the cash to buy more properties either in my area or in a different market.
How much have my rental houses increased in value?
I bought my first rental property in December of 2010, when the market was much lower. On every rental property I have bought I have gotten a great deal, made repairs and then rented the home. Not only have I made money through appreciation, but I increased the value of my properties when I first bought them by buying them below market. Here is a list of my rentals, the approximate amount I spent on repairs and what they are worth now.
Rental Property Price Paid Repairs Made Value in 2015 Value when bought
1 $97,000 $2,000 $205,000 $130,000
2 $94,000 $15,000 $200,000 $140,000
3 $92,000 $14,000 $190,000 $135,000
4 $109,000 $14,000 $205,000 $150,000
5 $88,000 $18,000 $170,000 $130,000
6 $115,000 $15,000 $185,000 $150,000
7 $113,000 $9,000 $205,000 $140,000
8 $97,500 $15,000 $175,000 $140,000
9 $133,000 $4,000 $175,000 $155,000
10 $100,000 $3,500 $145,000 $125,000
11 $109,000 $16,000 $170,000 $145,000
12 $133,000 $15,000 $190,000 $185,000
13 $120,000 $1,000 $145,000 $140,000
Total: $1,400,500 $141,500 $2,360,000 $1,865,000
If you subtract the purchase price and repair cost from what my houses are worth now I have gained $818,000. That is a lot of money to gain from buying properties over the last four and a half years. That number does not quite tell the whole story if I decided to cash out my rentals.
How much money would I make if I sold my rental properties?
If I sold all of my rentals I would not get to keep all of the sale price. I would have to pay selling costs and taxes on the profit I made. The nice part about rental properties is that you only have to pay capital gains tax on them if you own them long enough. However, I would also have to pay taxes on any depreciation I recapture when I sell the houses. You are able to depreciate the structure of the rental property, which saves a lot of money on taxes when you own it. When you sell the property for as much or more than you bought it for you have to repay those tax savings. It get very complicated trying to figure out what my tax costs will be if I sold these houses.
When I sell the houses I would pay another agent to represent the buyer, but I could list them myself. There would be other closing costs and I should market the properties as vacant to get the most money from them since they are single family homes. I would have to wait until my leases are up and then put the home up for sale after the tenants moved out and make any repairs at that time as well. To account for selling costs, vacancies and repairs I will assume it will take 6 percent of the selling price.
- 6 percent of the selling price equals $141,600
- Profit is $676,400
- 20 percent of profit for capital gains tax equals $135,280
- Estimated depreciation recapture equals $70,000
- Total profit I would make after taxes equal $471,120
After taxes and selling costs I would have a little more than half of what my initial profit was. However, I have refinanced properties and I put 20 percent down on every property I bought so the cash in my pocket would be different.
How much cash would I have after selling my rental properties?
I have refinanced four properties over the last four years, which has given me much more money to invest. Refinancing also increased the amount of money I owe on some of my properties. I also paid of my first rental property, which reduced how much I owe. Right now I owe the bank $1,184,000 on my 13 rental properties. If I subtract the amount I owe on my properties from what I bought them for I owe $216,500 less. I would actually get back about $687,000 in cash.
That is a lot of cash to get back from my rental properties, but that does not mean it is worth it to sell them all.
How much money do my rental properties make me now?
My rentals make me about $7,000 a month or at least they will once number 12 is rented (it is still being repaired). The $7,000 I make a month is $84,000 a year. I have spent about $420,000 buying my houses with repairs and down payments. That does not include any carrying costs or closing costs, but many times I will have the seller pay closing costs and I also make a commission as a real estate agent when I buy houses. I am going to assume the closing costs and commissions cancel themselves out. I also refinanced four of my properties, which gave me about $150,000 in cash. Overall I have spent about $270,000 of my own cash to buy my rentals. The $84,000 a year I make from cash flow is about a 31 percent return on the money I have put into my rentals.
31 percent is an awesome return on my investment, but I think I need to look at the cash I would have available to make a decision about selling, not the cash I already invested. $84,000 a year divided by the $687,000 in cash I have in the rentals would equal about a 12 percent return. I know I can make more than 12 percent buying new properties below market value, fixing them up and renting them. But is it worth all the hassle and is it wise to do that in our market?
How many houses could I buy with $687,000?
If I sold all my properties and bought new properties I could buy many more than 13. Historically it has cost me about $32,000 to buy a house, fix it up and rent it (assuming 20 percent down). That means I could buy 21 houses in theory with $687,000. The problem with that theory is houses are more expensive and it is much harder to find great deals than it was three years ago. I probably have to spend $40,000 a house now, which would mean I could buy 17 houses.
If I sold out, I would have a really hard time finding 17 houses that would be great deals and great rentals at the same time. I would also have a hard time finding properties that cash flow as well as mine in this market. There is the risk that the market would decline and I would be stuck with 17 houses that had much higher loan amounts than I have now.
What if I were to cash out my rental properties and buy in another market?
I have thought about buying a turn-key rental property for quite some time. In fact, I am going to buy one with my IRA as soon as I get around to setting up a self-directed IRA. I have also thought about investing in other areas of the country that I may be able to buy below market value, repair and then rent. Here are the issues with buying out-of-state for me.
- I must have time to research and visit an area, plus find a good agent, contractor and property manager.
- I will not have the advantage of being a Realtor in another state and I will not get paid a commission.
- I will not know the area as well and the farther away I am, the less I can keep track of my properties.
- My portfolio lender will not lend in most states so I would have to find new financing.
With all those negatives I have decided it is not worth it to buy out-of-state, unless I buy a turn-key that already has those processes in place.
Would it make sense to exchange my properties?
The last option I can think of would be to use a 1031 exchange to sell my properties and buy new proprieties tax-free. This would save me $200,000 in taxes, which would let me buy five more houses. Again I would run into the problem of finding enough great deals to replace my current houses and I would have to find them quickly with a 1031 exchange. If I were to sell out, I think using a 1031 exchange would be the best way to reinvest my money, but I still do not think it is worth all the hassle and risk.
I suppose I could sell out and use the money to buy a couple of exotic cars, but that would not be the wisest decision! My Diablo has increased in value since I bought it, but it doesn’t provide very good cash flow. I also would have a hard time reaching my goal to purchase 100 rental proprieties.
The reason I considered selling my rentals is because our market is going so crazy. However, if I sold my rentals and bought new properties in the same area I would have higher loans and more risk if our market declined. It is not worth it to me to sell my properties and buy in a different location, because of the work and risk involved in that venture. I could sell my houses and hold the cash, hoping the market declines and buy again. However, how long would I have to wait and what happens if the market never goes down? For now I will stick to the plan.