Should I buy and turn current primary into rental?

[Michelle Belle]

Hello, I’m a long time lurker on this board, so first post here. A little about me: I’m a working mom with an exec job that pays very well. Have retirement assets over $850k (401k, Roth, HSA invested). Also have $350k cash. No debt other than mortgages on appreciating properties. Got serious about finances a few years ago so now save $70k per year toward retirement and another $30k cash. My partner is also in a good financial position but I’m not taking his assets into account here for simplicity.

So help me check my thinking here, please. I’m also a small time RE investor in the Denver area (one LTR with 8% cap rate, one STR that cash flows nicely). I am looking to quit my day job in 10 years after I’ve saved enough and invested enough so trying to think through my next real estate move through that lens...

I had planned to buy a different primary residence this year for a few reasons:
1. Current primary also makes a great rental. I’ve rented it before when I brought another home to live in and did a lucrative slow flip. So Denver house I am in has 32% cap rate.
2. Current home is becoming too small for our family.
3. Because of cash flow potential of my current primary residence, I will cover the new mortgage on a new home. Planning to buy in the $800k-$1M range but put down enough for conventional lending.
4. Would like to move to FL in 10 years, so idea is that we would take the equity/appreciation from new home for a sizeaboe down payment on retirement home.

HOWEVER, the Denver market is now drunk. We found a property with killer panoramic view and almost got it for $931k (asking was $850k with 15 bidders) but were knocked out of first by a cash buyer who bid way over us at the last minute. The good places go for crazy high...not sure if this is the new post-COVID norm, with folks moving in from CA/NY (this is in fact happening per local news) so extra high prices will be here to stay? Local experts are predicting 6-10% appreciation this year, but it doesn’t seem sustainable.

Do I hop in now before things go higher and get extra aggressive? Wait it out since this insanity can’t sustain itself? I have been disciplined on doing my diligence to make sure I don’t overpay for a property and am working with a trusted, long time realtor. Would appreciate any other insight or ideas. Thanks!

 

[twaddle]

Congrats on your finances and on delurking.

You know the market better than most here. You know the supply is artificially constrained by pandemic dynamics, so it's a sellers market.

Cap-rate sounds great, though. Or sell into the same frenzy, which lets you participate in the current frenzy and maybe you get a fantastic deal on cap gains taxes if you've been there long enough.

 

[OldShooter]

Don't forget to factor in the tax shelter benefit you have when selling a primary residence, possibly timing your sale for just before the shelter goes away. Another shelter is if the residence ends up in your estate and your heirs get the basis step-up.

 

[Finance Dave]

I wonder about the option of selling ALL your properties while pricing is high, rent for 1-2 years, then buy. Of course the risk is that things keep going up....but you describe things as CRAZY now...can they get crazier?

Will you keep the rentals when you move to Florida? If so, what about the option of buying rentals in Florida near where you will be moving? Is the market any better there?

 

[Ready]

I only buy when nobody else is buying. I have no interest in being a buyer in a hot market where 15 people are competing against me for a single property. That never ends well.

 

[harley]

I wonder about the option of selling ALL your properties while pricing is high, rent for 1-2 years, then buy. Of course the risk is that things keep going up....but you describe things as CRAZY now...can they get crazier?

Yes.