Real Estate Investing in Seattle, WA – What To Know Before You Get Started Investing
Real estate investing in Seattle is no joke. Properties are expensive. Cap rates are low. This is not a poor man’s game. But if you have a house that you’re thinking about renting out, it can be a good way to hold on to a property as it continues to appreciate. If you are just entering the market, be sure to take a look at the current cap rates and rental growth projects (contact our office for help with that) and you can learn how to profitably invest in a market that banks on appreciation and not cashflow.
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Real Estate Investing in Seattle: Early Dreams
I first read this book, How I Turned $1,000 into 3 Million in Real Estate in My Spare Time by William Nickerson, in high school. I guess, looking back, you could say it changed my life.
If you haven’t read it you should, if you can find a copy. This one’s from 1979. Amazon has an updated copy here, now he’s up to five million. 🙂
The author grew his portfolio in California in a seemingly-perpetually rising market. But if you take his ideas, and add a zero or two behind all the numbers, you’ll get an idea of what he did and how it could work for you today.
His strategy: Buy a couple houses, roll them into a couple duplexes, fourplexes and so on, up the line. Kind of like you learned to do when you were 8 and playing monopoly on the coffee table in your living room.
Another tip that I want to pass on is that he recommends creating a balance sheet every year. This is a list of your assets and your liabilities. So if you buy a house and it’s worth $100,000 and you have a mortgage worth $80,000 – you would put that on your balance sheet and you could see that your net worth improved by $20,000. He did this every year and found the tracking encouraging and a good method of creating accountability for himself.
Nowadays, there are plenty of real estate investing resources out there. Maybe you’ve been inspired by Rich Dad Poor Dad or Bigger Pockets.
Whatever the case may be, if you’re looking to get started in real estate investing in Seattle, or you have some investments already, you are welcome to reach out to me and discuss your situation. I am both a real estate agent and an investor, so there may be areas in which I can help you. But at the very least, I understand where you’re coming from.
A Confession: I Did NOT Get Started Real Estate Investing in Seattle
I got started in commercial real estate investing after buying over a dozen rental properties in North Carolina after attending college at UNC-Chapel Hill (Go Tarheels!).
I was buying houses from distressed seller situations on terms, all cash, subject to, lease-options, and renting them out or flipping. It was a great model that worked THEN AND THERE, but here in Seattle, the real estate market is quite different.
Fortunately, I was able to branch out into the commercial space by partnering with other investors I met over the years. We syndicated deals in Colorado and Texas, where my partners were located. “Real estate syndication” means we raised money from private investors for the down payment and then used banks or owner financing for the rest of the purchase price. This allowed us to acquire relatively large properties with relatively little money out of pocket.
We hired an attorney to help us with our private placement memorandums – documents are required by government regulatory agencies when you are raising money from a big group of people. They want to make sure investors are being honest about disclosing risks and projecting realistic returns.
In this way, with partners and private money, we bought retail space – for tenants such as restaurants, furniture stores, Army recruiting centers, cell phone stores and laundromats. We also did raw-land development deals (much riskier) and apartment buildings. I was fortunate to be a part of these types of deals early in my career as they gave me a great perspective of what’s involved and how much FURTHER you can go as an investor when you work with a TEAM.
When You Try To Do Everything Yourself, You Can’t Grow As Fast As When You Invest With A Team
I want to emphasize that point. When I was younger, I was a do-it-yourselfer. Big Time. Everything was DIY. When I managed my own rentals I would clean them myself (there were a few puke-worthy moments), show them on the weekends, manage them when they went vacant, change the locks with a screw driver that cut my hand and lockset neither my tenant nor I could get to work right. I even bought a truck instead of a car so I could haul junk out of my houses and take it to the dump. I was the typical cheapskate investor and I wanted to cut costs and save money everywhere I could. What this really meant was that I didn’t grow as fast or as well as I could have in the early phases of my development career.
When I was an economics major, we learned about the idea of “highest and best use.” You want to do what your best at, what you enjoy and what makes you the most money. For me, a phi beta kappa and cum laude college grad and real estate novice, learning to change doorknobs late at night at a rental was probably not the best use of my time. It would have been better for me to be making money in other ways and paying an expert to change the doorknob. But I didn’t, because I was cheap and eager to learn. I think many of us go through this phase as we seek to acquire capital in the early phases of our real estate investment trajectory. Now I know better.
When I was older, and had the chance to work with these more experienced investors, I found that they were willing to spend money on quality help, invest in themselves and their project and surround themselves with a team that they paid for, but who allowed them to get the results they wanted.
Investing in real estate is a great tool to build wealth, save on taxes and diversify your investment portfolio, but the game is played differently in every market.
So, What Is It Like To Invest In Real Estate In Seattle, WA?
Here in Seattle, usually property sells at a very low cap rate. That means if you’re hoping to get positive cashflow from your property, you may have to put 40-50% as a down payment in order for the net operating income (NOI) to cover your monthly mortgage payment.
For some people, that prices them out of the market right there because if the duplex in Ballard you were looking at costs a million bucks, and you’re not sitting on half a million to use as a down payment, you can’t make a move.
Depending on your other assets and income, the bank may allow you to dive in on a negative cashflow loan, but you’ll need to bring at least 25% down to the table, and have the money to cover the negative and then some.
If you want to minimize negative cashflow, you may want to look farther out of the downtown Seattle core and explore “edge” markets like Everett or Marysville to the North, Bremerton to the West, or Tacoma, Olympia and Lacey to the south. Most of the new multi-family investors I’m seeing these days are looking South in Tacoma around the military base.
The downside of these edge areas is that they don’t tend to appreciate as well. You have to decide what trade off you want… do you want to have low cash flow and go for an appreciation play or do you want to go to the outskirts and forgo the dramatic appreciation rates and instead look for something with a closer to break even cash flow?
The answers to those questions may depend on your personal situation as well as the condition of the market.
Real Estate Investing In Seattle: Next Steps
If this article hasn’t scared you off, then maybe you have what it takes to start investing in real estate in Seattle, WA. It’s not for everybody, but if you’re ready to make a move and you have the cash (or partners) to work with, I’d be happy to help you get started looking.
Since I don’t know what the real estate market will be doing at the time you read this article, why don’t you give me a call and I or someone from my office can give you a report with the latest data available showing current property appreciation rates, cap rates, and rental growth rates.
Remember, when rents are increasing, you can see a major increase in income property values (even if houses are not appreciating.) Housing prices are driven by comparable sales, but income property value is driven by income. At a four-cap, increasing the Net Operating Income by $1000/year can increase the value of the property by $25,000. So, if you had a fourplex, and were able to increase the rents $100/month, you’d increase the value of the property by $120,000 if properties were trading at a four cap. That is very powerful.
So, if you’re thinking about real estate investing in Seattle, there are definitely ways to make it work. There are also a lot of ways to do it wrong, so reach out to our office – call, email, fill out the form on our website, and let us know what you’re looking for, and we’d be happy to help.