Last week I sold the fifth rental property I bought. I purchased the house in 2012 for $88,000 and sold it for $199,950. There were many reasons why I sold the property, and while it may appear that this will take me further away from my goal to purchase 100 properties, I am not disappointed. This was one of my least desirable properties and I will be able to do a lot with the proceeds from the sale. I can reinvest in more rental properties and fund my fix and flip business, which has been doing awesome. I would love to be buying more rentals instead of selling them, but I cannot control what the local real estate market is doing.
What is the real estate market doing in Colorado?
The real estate market in Colorado has gone crazy. Median prices in my town (Greeley Colorado) have surpassed $260,000. The median price in 2010 and 2011 when I started buying rentals was $120,000. It has been great to see the values of my properties increase so much, but the price increase has made it tough to find good rentals in this area. The rents have increased the last couple of years, but they have not increased nearly as much as home prices. While prices have doubled, rents have only increased 30 or 40 percent. I like to invest for cash flow and hope for appreciation, but it is really hard to find cash flowing properties in Colorado.
I cannot predict what the future real estate market will do. It may keep increasing like it has been, but I do not want to count on prices increasing to make money. A lot of investors counted on prices to continue to increase before the housing crisis and they went bankrupt. They also over leveraged themselves and were not buying great deals, but I still not think it is a good idea to invest in rentals only for possible appreciation.
What kind of rental property can I buy in Colorado?
I can get a great deal on houses in Colorado still. I have 11 flips going, including one I just bought this morning. I have two more flips I am buying in the next month. I can get great deals for flips, but that does not mean I can get great deals on rentals. Here are some of the best deals I have seen in the last few months on potential rentals.
- 2 bed, 1 bath, ranch for $155,000. This home might rent for $1,100 or $1,200 a month.
- 3 bed, 2 bath, ranch for $175,000. This home would rent for $1,300 or $1,400 a month.
These are some of the best deals I have seen for potential rentals. The worst part is these homes need work. I would have to put $15,000 of repairs into the properties. I would have built-in equity, but I would not be making much money at all each month. Because of the increasing prices I would also have to put more money down and my cash on cash returns would be much less than my current rentals. I would have over $40,000 invested into each of these properties when putting 20 percent down.
You can check the numbers on rentals with my calculators below. I also added a new fix and flip calculator:
For me, the available properties in my area do not have good enough numbers to be rentals. These are not properties that happen to be for sale right now, but some of the best deals I have seen in the last few months. I used to be able to buy rentals for $100,000 to $130,000, rent them for $1,400 a month. With those properties I was able to get a great deal, and make money every month. Maybe I was spoiled with the opportunities that were here a few years ago, but I know I can still get great deals on rentals with cash flow. I may have to go outside of Colorado, but I know I can find great rentals.
How was I able to buy rentals in Colorado with the crazy market in 2015?
It was not just this year that the market has been crazy in Colorado. The market was going crazy in 2015 and I was able to buy multiple rentals that year. Looking back on the rental properties I bought, I was paying more and more money for houses. The houses I was buying were also in areas that were stretching my original criteria for buying rentals.
One of the rentals I bought was an up/down duplex that could be a college rental, which was way outside my original criteria for rentals. The house cash flows well (bought for $120,000 and rented for $1,300 a month), but I had to go outside the areas I usually to buy in to get it. This property has worked out well in the short-term. I am also going to sell this rental. I have it listed and under contract for $179,900. I put about $15,000 into repairs on this property since I have owned it. You can see the details on the house below.
This rental cash flowed well and has gone up in value (I also got a great deal on it), but it was one of the few properties I saw the entire year that cash flowed well. I have not seen anything close to that deal this year (2016). I bought a few other rentals that cash flowed well, but they were in areas I have not bought rentals in before as well. While I was able to buy rentals in 2015, they were not in the same areas as the rentals I had previously purchased. It is even harder to find those properties now.
Why don’t I continue to buy rentals with little or no cash flow since our market is so strong?
It has worked out well to stretch my criteria and buy rentals that didn’t have awesome cash flow or were in different areas. When I say different areas, I mean neighborhoods with lower priced homes. As a real estate agent I cannot say very much about what is or is not a good neighborhood legally. Those properties have done great with appreciation, but there is no guarantee that they will keep appreciating at the rate they have been. In fact, I feel 10 to 20 percent price increases every year are not sustainable. Prices may continue to increase in my area, but I don’t feel they will double again in four years, and I am not going to invest my money assuming prices will increase at record-setting paces.
If prices do go down or the market softens, the lower prices areas usually drop in value first. They also tend to drop in value faster and homes are harder to sell in those areas. While the market may make those homes seem like great deals now, they may not be good deals at all if the market does change. I don’t want to keep stretching my criteria and buying homes that I would have never though of buying a few years ago just because our market is doing great now.
How did I choose which rentals to sell?
I picked a couple of rentals to sell that were my worst performing properties. Rental property number five is the rental I just sold. My loan on the property was about $66,000 and I got about $125,000 in cash out of the property after selling costs. I chose this rental to sell because it was very hard to rent and a little hard to sell as well. It is a 4 bedroom, 2 bath ranch with a basement, but has no eating space. It took us a very long time to rent it and has been rented to the same tenants since I bought it for $1,250 a month. We may have been able to get new renters in the home, who would pay more rent, but again the house was really hard to rent the first time. Since the market is doing so well, I thought it was a great time to sell the house and put that money into other investments.
I am selling the other rental because it is a college rental and in an area that I usually do not invest in. I have thought about selling a couple of other rentals as well that are in areas that I normally do not invest in. I was also trying to complete a refinance on 7 of my rentals to take more cash out so I can invest in more rentals. However, Jordan Capital Finance who was working on the refinance recently told me they cannot do the refinance on the same terms we originally agreed to! I had already spent money on appraisals and Jordan told me the lender that was going to do the 30 year fixed loans, stopped lending money. My refinance is on hold for the moment, which would have given me about $250,000 in cash out. I think I will still refinance at least a couple of my rentals with my local portfolio lender or I may look into a different national lender.
Why I am not doing a 1031 exchange on this rental
I thought about completing a 1031 exchange on the property and investing the proceeds into new rentals in Florida. In the end I took the money and will pay taxes on it next year. I thought I would rather not rush into buying properties in a new market, and it is nice to have that cash on hand for the flips. I have 11 flips at the moment and it is really expensive to flip that many houses at once. I figured it takes about $50,000 to $70,000 in cash on each flip I have financed with a bank. I have less money invested on flips that are financed with private money lenders because they financed 100 percent of the purchase price. With the private money lenders I have to pay higher interest rates and more points than with the bank.
It takes a lot of money to flip, but I am making about $30,000 in profit on each flip I complete. So while I may be paying more money in taxes, I can make more money using that money to flip houses than the taxes I will pay. I would like to buy more rentals at some point, but I do not want to rush into buying in a new market yet. I have been super busy this summer reorganizing my flip business after the project manager I hired last year set me back a few months. I now have my team handling the project management on my flips, I found an awesome new contractor and things are looking very positive on the flipping side. My plan is to keep building the flipping business since I cannot buy rentals in my area and eventually find a new market to buy rentals in.
I would love to have 25 rentals at this point and be closer to my plan to purchase 100 rentals, however I am not going to stretch my buying criteria and take big risks to meet that goal. I have confidence I can still reach that goal, but I may be buying a lot more properties towards the end of the 10 year plan than the beginning based on our current market. I really like flipping and have taken a very active role in that business this year. I feel like I am about to turn a big corner getting that business set up to run smooth and consistently. I do not see myself selling many more rentals because most of them I am very happy with and if the market changes drastically for the worse in Colorado, maybe I can start buying here again.