In this deal analysis, I talk about how I helped my clients decide to sell their duplex in Denver and buy their dream mountain home. This is a great success story that shows how knowing all of your options and the state of the market can help you make the right decision.
- Listen to the podcast “#306: Maximize Your Return – Why You Should Consult With Envision Advisors Before Listing Your Home” on the Denver Real Estate Investing Podcast
- Watch the YouTube video (at the bottom).
- Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast or video.
How do I make money in Denver’s real estate market?
People often ask how they can make money in a market like Denver, where cashflow is tight and it’s possible to make multiple six figures when exiting a property. It’s important to remember that Denver is a growing city. As cities grow and asset prices go up, a lot of people forget about the amount of money that can be made just from holding onto a property for five or six years and redeploying equity. As you build equity in your property, it’s vital to figure out which of your options best aligns with your goals.
Traditional real estate agents often tell clients to sell because that is what’s in the listing agent’s best interest. Our added value comes from looking at a client’s future goals and figuring out how to best capitalize on the asset.
Rental Property Overview
These clients bought a duplex near Sloan’s Lake around 2016 for $575K, which was $25K under list price. From the home, you can walk to Mile High Stadium and the newly opened Meow Wolf, in addition to living in a great neighborhood for young professionals. The property was zoned for three units, but the previous owner instead converted the single family home into a duplex with a 3 car garage. Each unit has 3 bedrooms and 3 bathrooms. Because it was built into a hill, both units are completely aboveground and have lots of natural light. The top unit had already been renovated, and my clients made upgrades to the flooring and kitchen in the bottom unit.
The property had been cash flowing well, but the owners were trying to decide whether or not they should take advantage of the market in order to buy their dream home in the mountains. I used our Return on Equity spreadsheet to show them what all of their options would look like.
Using a Spreadsheet to Weigh Your Real Estate Options
The first step for using the spreadsheet is to input all of the data.
Their monthly rental income was just under $5K a month, and their loan balance was just over $500K. For an older duplex, their deferred maintenance was pretty good—the home has central air and a working boiler.
Taking this information, we can run through four scenarios: keeping the home, a maximum cash out refinance, a safe cash out refinance, or selling it. From a high level, this involves looking at what they bought the property for, and how that compares to today’s market. Understanding how it’s performing now will give homeowners the most relevant, apples-to-apples comparison.
Safe Cash Out Refinance
Maximun Cash Out Refinance
It was easy for my clients to rule out both refinance options. The maximum cash out refinance would allow them to pull out as much as $300K, but the property would then be negative cashflowing. They weren’t comfortable with this, and we don’t usually advise our clients to take an option resulting in negative cashflow. The safe cash out refinance would keep the property at a healthy cashflow, but they would only be able to take out $50K. This wasn’t enough for them to take the next step, so that was ruled out, too.
Their decision came down to keeping the property or selling it. Looking at those two options side by side made it clear that selling was the right decision. By keeping it, they’d be getting a good—but not great—return on their equity from a real estate standpoint. If they sold the property, I estimated they would get about $533K. Because the home has such huge appreciation, selling would let them take advantage of it most efficiently.
Looking at the Return on Equity spreadsheet is a great exercise for property owners. Everyone has hypothetical conversations about what they should do with a property, but the spreadsheet puts all of the options right in front of them. It usually helps them steer their decision-making by taking away two choices right away and then drilling down to look at the remaining options.
Creating the Right Listing Strategy
My clients lived in the house for a while so they were able to exclude some money from capital gains. They wanted to do a 1031 on the property and roll over some of the money because it was half their personal property in addition to an investment property. In these situations, I like to go through every option with clients in detail so we can avoid any overlooked consequences. Planning is extremely important when selling properties, and it’s never too early to start.
I knew timing was key for the listing strategy. They were selling at the peak of the season when there was very limited inventory and prices were continuing to go up. As prices go up, it forces the seller to get creative on how to make the higher price point home appealing to different types of buyers. For this house, I had to sell the story of house hacking, how you can subsidize expenses while living in a prime area.
This duplex provides great house hacking opportunities to multiple buyers: a traditional investor, using Airbnb, and strictly house hacking without Airbnb. I did the extra legwork to get potential rent rates for all scenarios in order to make it simple. Not all agents are trained in these types of investing strategies, so I didn’t want to rely on them to tell a story they might not know. I made it easy for the selling agents to show their clients (the buyers) what this asset would be doing for them.
I took a lot of pictures and was at all of the showings, because the property was tenant occupied and we were coming out of high-COVID time. It was important to make sure the renters were being respected during a vulnerable period. I gave them gift cards and put them in Airbnbs to help them feel like they were safe. It also gave us time to get potential buyers through the door; there were over 45 showings for this house.
We listed the house for what we knew it would appraise at and used the market to our advantage. We generated a lot of offers and let them work against each other, ensuring an appraisal gap and certain inspection items. This allowed my clients to get the best offer price and focus on what they would net.
Going under Contract
We received seven offers, all of which were over $1M, and went under contract with an investor at $1.21M. This investor was doing a 1031 to get into the property, so I got a backup offer with a great local agent who’s had a lot of success with this strategy. The backup offer was a little under $1.15M, which was still solid. My clients understood that going under contract with an investor doing a 1031 was risky because it meant he would have to sell his property to get their house. Having the backup offer allowed them to shoot for the moon but weigh the risks, too.
Are backup offers a good strategy?
About 20% of real estate contracts fall out, so getting a backup offer can be beneficial to both buyers and sellers. For sellers, backup offers are great because they’re able to negotiate terms during the hot time while the property is listed. It’s helpful if you’re trying to get something over list because if a property falls out of contract and goes back on the market, it loses steam and likely won’t generate a lot of offers. While it’s extra work for the agent to negotiate two contracts, it gives more leverage to the seller during inspection and negotiation.
Buyers benefit from backup offers, as well. There’s no financial commitment while waiting and they are automatically under contract if the first contract falls through. Buyers generally have 24 hours to turn in their earnest money after that point. When I negotiate backup offers for my clients, I reserve their right to shop around, and if they find something they like better we’re able to terminate the backup offer without any penalty.
If you’re doing a 1031, it’s good to know you have something in your back pocket that’s worthwhile. In this case, it gave my clients peace of mind knowing that if their homerun offer didn’t work out, they still had something. While they weren’t able to get the highest offer to work out, they still made a lot of money and were able to buy their dream home in the mountains.
What’s the current state of the market in Denver?
While COVID is unfortunately making a comeback, it triggered the FED to do another reduction to bring down interest rates. Otherwise, things are back to their normal seasonal buying and selling trends. Usually, things cool off during the summer with people traveling, and we’re seeing a new flux of inventory right now. The market is still tight, but a lot of people seem to be gearing up to put their homes on the market, and we’re able to negotiate better terms on the buyer side.
There’s no one good time to buy and sell because each transaction depends on a lot of different factors. If you’re on the fence about shopping the market, now is a good time to look and find a way to fit real estate into your long term strategy. Reach out to me and I can help you run analyses and find properties that will help you meet your goals.