Over the last few months I have talked about the possibility of selling some of my Colorado rentals. Prices have been increasing in Colorado and it is tougher and tougher for me to find good deals that have cash flow in the area. I bought five rentals in 2015, but have not bought any properties to hold since September of 2015. I am still flipping here and have 11 flips going at the moment, but the flips are easier to find since I don’t care about cash flow on them. I have started the process of selling a few of my rentals and put one of them on the market last week, which is now under contract.
Why can’t I make money on my rentals in Colorado anymore?
Prices in Colorado have skyrocketed the last four years. I am in Greeley Colorado and our median price has doubled from around $120,000 in 2011 to over $250,000 in 2016. I wrote an article about median prices on my local real estate team’s website here. While prices have doubled, the rents have not. I bought my first rental property for under $100,000 in 2010, and rented it for $1,050 a month shortly after buying it. That home is now worth over $200,000 and rents for about $1,400 a month. As you can see, the rents have not kept up with the increase in prices.
There has been record low inventory in Colorado for years. That is one reason why prices have jumped up so high, so quickly. While rents have not kept up with home values, there are also fewer deals in the area because there are less homes for sale. I have pretty strict criteria on the rentals I buy, and it has been really tough to find any good deals in areas where I buy rentals. I talked about how my rentals have over one million dollars in equity on this podcast, and one reason why I have gained so much equity is because I get great deals on houses.
If I look at some of the best deals I have seen in the last few months I would get these returns based on my cash flow calculator.
- Purchase price: $160,000
- Rent: $1,400
- Payment (PITI): $750
- Property management: $112
- Maintenance: $70
- Vacancies: $70
Cash flow: $390
The cash flow on this property is not bad on the surface, but this home is not in good shape and need some work. What I really like to look at is the cash on cash return.
- Down payment: $30,000
- Closing costs: $3,600
- Repairs needed: $15,000
- Carrying costs: $2,000
- Commission: -$4,500
- Total cash needed: $46,100
Cash on cash return: 10 percent
While my cash flow is not horrible on this property, I am not making very much based on the money I have to invest. I have always made at least 15 percent cash on cash return on my rentals, and in many cases 20 percent or more. When I buy more expensive rentals, it takes so much more cash and I can buy much fewer properties. My returns are also much lower when the cash flow is the same or lower on a $160,000 house than it was on a $100,000 house a few years ago. Keep in mind, the house I listed the numbers on above, would be an awesome deal, not something that is readily available.
Will the real estate market in Colorado continue to be as hot?
I have talked with many investors about my plan to sell some properties and buy more in another state. Many think I am crazy, because prices have gone up so high in Colorado. They think I am killing the golden goose, because they feel prices will continue to increase. I am not so sure prices will continue on the pace they are currently at. Colorado has never seen prices increase this much, this fast. One of the reasons prices are going up so much, is there wasn’t any building for 8 years during the housing crisis. When the economy recovered, and foreclosures decreased, there weren’t any houses to buy. They have started to build more and more the last few years, but the median price was still well below what they could build for. Now, the median price is approaching what they can build houses for. My thoughts are they will build more houses to meet demand which will cause prices to stop increasing so much.
My county actually lead the nation in foreclosures in 2006, mostly due to overbuilding in the area from 2001 to 2004. I do not think they are overbuilding at the moment, but that could certainly happen considering how fast prices are increasing and how much demand there is at the moment.
Am I selling all my rental properties?
Over the last year, I bought some houses that were stretches for my rental property criteria. It was harder to find great cash flow in the areas I had been buying in before. I am planning to sell a few rentals that are in areas which are prone to decrease in value faster than others and I am keeping the rest. Right now, the plan is to sell three, refinance 7 others, and start buying more rentals in Florida.
What rental property am I selling?
The first house I am selling is one I bought in 2012. The house is rental property number 5 and has been a decent rental. I have had the same tenants in the home since I first rented it, but have had some problems with the property.
- The home has a weird floor plan with no place for a dining room table. It was really hard to rent and rented for less than I thought it would.
- The tenants have been there for years, but have been a pain. They constantly paid late, but would catch up with all late fees when we threatened eviction. These are the tenants who bought a new Toyota Sequoia when they were behind on rent.
- In the last two months, the tenants got way behind on rent and we had to evict them.
I decided to sell this house because I only owed $66,000 on the loan, the home was hard to rent and values have increased greatly in this area. The home was also going to be vacant, which is a great time to sell. My houses are single family rentals and I make much money selling homes that are vacant to owner occupied buyers, than I would to investors. We put the house up for sale last week for $199,900, and we had 20 showings right away. I was expecting multiple offers, but we only received one, which was accepted after a little negotiating.
I bought this house for a little over $88,000 and put about $18,000 of work into the home when I first bought it. The house needed another couple thousand in work after the tenants moved out (mostly exterior paint). I will have about $7,000 in costs to sell the home, which will leave me a gain of about $80,000. I will be getting over $120,000 in cash out of the property after selling it.
Should I do a 1031 exchange on the property?
I am selling this house and I may do a 1031 exchange into new rental properties in Florida. I am considering not doing an exchange for the following reasons:
- When I complete a 1031 exchange I only have 45 days to identify new properties.
- I have to put all the cash I get from the sale into purchasing new homes.
- I have to buy houses for at least as much as I sold my rental for.
The houses I am looking at in Florida are in the $80,000 to $120,000 price range. I would have to buy at least two houses to meet the 1031 exchange guidelines. To maximize my investment, I would want to buy at least three homes or even four in Florida with the $120,000 plus cash I will be reinvesting. Is it worth it to buy that many homes that fast?
- If I buy four houses in 45 days, I may not be buying great deals, but whatever is available.
- The lender I have found in the area may not want to loan me money on four houses that fast.
- Buying four houses in an area I do not live in will not be easy and I am taking a pretty big risk.
I think I may choose not to do a 1031 exchange and pay taxes on the money (15 percent long-term capital gains tax on the gain), and take my time buying properties. Another option is to buy two houses down there. One with a low down payment and the other with a large down payment. Then refinance the large down payment at a later date to get my cash out and buy more rentals without pressure to buy right away.
This is a good problem to have, but I want to make sure I am not pressuring myself into mediocre deals. In the next few weeks I will have to decide if I want to save taxes with a 1031 exchange, or take my time buying new properties and pay the taxes on the money I make from the sale. I also plan to sell two more rentals this year. We are fixing up one of them right now that is vacant and will be ready to sell in the next week or two.