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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, four-plexes 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 investment 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 housing market prices are 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.
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.
Is It Better To Use Real Estate Agents Or Go It Alone?
First a disclaimer- I am a a real estate agent so there is an inherent bias in that I would love to work with you and maybe I am trying to talk you into using my services. I want to try to dispel the idea by reminding you that I started as a real estate investor and did that for 10 years for ever getting my license. When I did get my license, I thought no one would ever want to pay a real estate agent, so I joined a discount brokerage firm. I thought everyone would be cheap like I am. (Investors are notoriously cheap! You should meet my father and grandfather – also investors – also cheap.)
It turns out, people don’t necessarily want cheap. They want VALUE. They want an ADVISOR. They want someone who understands them and their goals, and who understands the market, and can help match things up together for them.
Okay, that’s the end of the disclaimer, let’s get to my opinion.
Here’s the truth, if you want to do it alone, you’re going to have to find a way to get a deal (property). You need INVENTORY.
This is what realtors spend all their time on. Lots of time and money from realtors is spent on building relationships with property owners who may one day sell and list with an agent. You, as a potential investor, have to get to them first and make a compelling case about why they should sell directly to you without ever putting the house on the market and giving it broad exposure through the MLS.
In addition to competing with realtors for inventory, you’ll also be competing with other investors. Professional well-funded investors are out there sending postcards and text messages, building websites, using facebook ads, calling and door-knocking to try to get to home owners who they think might be tempted to sell their houses cheap (especially estate sale property (probate), divorcees, behind on payments (notice of default), etc.). This is a full-time occupation for them.
So you have to decide how and where you want to invest your time and money. Do you want to do it yourself and invest yoru own time and money, or do you want to work with an agent (or wholesaler) and leverage their time and money, to snap up a deal when they find one that you like?
This may depend on where you are in your career, family life, etc. When I was young and single I had more time for putting “We Buy Houses” signs around my neighborhood, and licking stamps (yes, we had to lick them back then!) to send mailings. Now, I’d rather work with someone else who is up-and-running with inventory they can present to me. I am happier writing checks and saving time.
If I were starting over, I would say “do both” and see which one works the best for you! If they all work… do all of them! Or at least all you’re comfortable with.
As an investor-friendly agent, I’m happy to talk through your options with you here.
Why Is The Seattle Real Estate Market So Challenging For New Investors?
In 2022 Bankrate rated Seattle the 3rd Worst Market for First Time Home Buyers.
It wasn’t “bad” because the market was bad. No… It was ranked as being “tough” to get into because prices are high and rent (though high) is not high enough to cover the monthly mortgage.
It would not be unusual to find a property you could buy and have your mortgage be $6K/month, and your rent be $3K/month. Those numbers are pretty hard to swallow as a new investor.
What can you do?
- Get a better deal when you buy (e.g. underpay for the property by finding a motivated seller) – Hard to do in a “Seller’s Market” when there are more buyers than sellers.
- Buy a cheaper property – like a condo, where the negative cashflow will be easier to cover, and rents will be relatively higher in proportion to your monthly cost.
- Buy a fixer upper and put a lot of your own labor into fixing it up and making it nice enough to rent out, while keeping your cash needs low.
- Buy in an “outlying” market like Tacoma, Covington, or Marysville where things are a little bit less expensive. (Also less likely to appreciate quickly).
For those who really want to invest sooner rather than later, and don’t think they can readily put together the cash for investing in Seattle, I would recommend looking at investing out of state. I track the highest appreciating markets around the country, and maybe we can find you a strong market where cashflow is a little more comfortable.
So, What Is It Like To Invest In Seattle Real Estate?
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 percent 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.
Buying Your First Property As A Real Estate Investment
The hardest thing about buying your first investment property in Seattle is usually getting together the money for the down payment. For a non-owner occupied property, most lenders will want to see 20-25% down. If you are buying a “median” price point house, that could be an $800K property, needing $200K minimum for a down payment, plus 2% of the property price for closing costs.
That’s a hefty chunk of change. Maybe you’ve been saving for a long time, or maybe you get huge bonuses at work that make this easy, but if not, tit could take you several years of saving to get ready to make this investment a reality.
I am going to share a few ways to make this cash requirement less burdensome, so you can think about whether that would better fit your needs.
1) Buy A Smaller Property
I know condos aren’t glamorous, but here in the Seattle housing market, MANY people start and stop with buying a condo and that is all they can afford. While it may seem onerous to have to pay the HOA dues, the truth is that as a landlord or homeowner, these are typically covering expenses that you’d have to pay anyway.
For example, the HOA usually covers such things as exterior maintenance and replacement of roof and siding, landscaping, property insurance, and sometimes utilities.
Although some HOA”s have a lot of overhead, you can avoid this bey finding a financially responsible HOA or condo development to invest in, and avoiding properties with extraneous amenities like outdoor pools or tennis courts that may not be actively enjoyed by your tenants.
As an example, I sold a $300K condo to some clients during a hot market. The property was being occupied by the ex-husband of the real estate agent (and his girlfriend). The pictures were not top quality, the apartment smelled like pot, and it was a smaller condo complex that wasn’t as “fancy” as other buildings nearby.
When my clients bought it, they were able to repaint it white and bright, get some new gray LVP floors (very popular at this time) and totally re-vamp the look of the interior. A year later condos in this area are selling for $400K. So they have already built a lot of equity in a short period of time.
2) Live In Your Rental and Buy With An Owner-Occupant Loan
Another option, rather than just buy something small, is to buy something you can live in.
If you owner occupy the property for a year or so before putting tenants in, you can then move out and rent it out after you’ve been in there.
This allows you to get owner-occupied loans to buy the property which typically have better interest rates and lower down payment requirements – you could even get 3.5% down with an FHA loan, and combine that with our Washington State First Time Home Buyers Grant which covers 4% of the purchase price and goes toward down payment. I had one client who combined these strategies who was able to purchase her first home with no money down. We negotiating for the seller to pay $5K toward her closing costs and a relative covered the remaining $5K balance of closing costs, so it was truly a no money down deal for her. WOW!
So if you are nimble and willing to move, you could look at buying your first home as an investment with a slight delay in placing the tenants.
You could also buy a multi-unit property and live in one of the apartments while renting out the rest. This works for up to four units (four-plex, quad-plex).
The kids call it “house hacking” and I have a separate article on this topic, if you’re interested.
How Can Investment Properties Make Me Financially Free?
When it comes to using real estate to make you wealthy, there are 4 different profit areas to consider:
- Debt Paydown
- Tax Write-Offs
Of these four, Appreciation is usually far-and-away the biggest wealth driver. In the Seattle market, this is especially true, and is the primary reason most people invest here.
Cashflow can be good in some properties, but not around here. Most high-cashflow properties are in low-appreciation areas like the mid-west where cashflow is the primary reward for buying property. Maybe if you live out in middle of no-where with low property values you can cashflow. Or maybe if you buy a house especially cheap or do a fix-and-hold where you have a lot of equity… but for the most part rental properties, houses and apartments in Seattle trade at very low cap rates (2-4 cap). Some say they’re higher, but they’re usually using pro-forma (read: made-up) numbers. I think realistically a property needs to be a 6-cap to break even and an 8-cap to have good cashflow. I’ve seen 10-12 cap properties in a) War Zones, b) Declining Population Cities, Mobile Home Parks – frequently if it looks *that* good on paper, you’re missing something.
Debt Pay-down is nice and helps you build up your equity automatically as you reduce your mortgage balance.
Some people get tax write-offs. Unless you are a full-time investor or an active full-time real estate professional, these are limited to Passive Income Write-Off’s of $25K/year. For most people, this will not create enough savings to be a determining factor. We’ve also seen that tax laws can change every few years and if you buy a property that only works due to tax write-offs, you’re in jeopardy of becoming insolvent if the tax laws change.
Investing For Appreciation is The Best Way To Build Wealth
Would you rather have a house that cost $100K and makes $200/month in positive cashflow, or would you rather have a property that LOSES $200/month but makes $100K/year in appreciation?
That’s not just a hypothetical, but a solid, open questions you should be asking yourself before investing in the Seattle housing market.
We have many investors who have chosen to play this game. As long as appreciation is positive, and cashflow doesn’t get too bad, you can make a lot more with the high appreciation property in the low cashflow market. And that’s what people do. But you have to be prepared to weather the storm if Seattle has some bad years or there is an interruption in rent from the tenant due to vacancy, eviction, etc.
In general, what I recommend is that if you want to get really rich in real estate invest for appreciation while you are young and in your prime earning years. Plant that orchard and let the trees mature.
Down the road, you can expect to be sitting on significant equity positions. At that time, – when you have enough equity built to “retire on rentals” you can switch over the equity (by refinancing, or selling in a 1031 exchange) and reposition your portfolio (e.g. buy different houses/apartments) that have better cashflow so you can essentially start reaping a different crop – the cashflow crop.
Another strategy one of my retired real estate friends uses (he’s in his 30’s…) is to refinance his properties every few years. He can refinance, pull out cash, and live off of that, while he let’s his tenants pay back the new mortgage. He’s using his equity as a piggy bank for his lifestyle.
This works well as long as the market keeps going up, but if interest rates go too much, or values do not increase, he will have to PAUSE this strategy, because he won’t have the equity growth that allows him to pull as much money out of the homes.
Entering The Real Estate Market As An Investor: 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.