High Value home but lower rental market

[Daniel Lambert]

I am new and have only just begun my research and looking for deals. My issue is that the average SFH is $650000+ and duplexes can be $700000+. If we typically want to shoot to have rent be 1% of the mortgage, how am I supposed to be able to rent something out for $6500 minimum (whether for a single family home, or split between units in a duplex)? My rental market averages $2500 for a basic but nice house, 2+ bedroom apartment or townhome. What are my options in this ridiculous market?

[Kirsten M.]

In some markets, the 1% rule just won't work. You might want to consider looking for deals elsewhere. I don't know anything about the Seattle market, but I assume it's very costly. Have you looked at surrounding cities/towns that people can commute to/from Seattle? If you're set on investing in Seattle, then try to find homes where you can put some sweat equity in. Maybe find a wholesale or buy the redemption rights of a home going into foreclosure. 

[Jason Nguyen]

It's the same in Northern Virginia, and people became more creative by renting rooms out instead of entire home. Usually, people would purchase a townhouse (because it's cheaper than single-family home) that has 3 bedrooms upstairs and a basement that can be turned into an in-law suite. I'm not sure how the Seattle market room rental looks like, but here people rent their master bedroom out for $1200/month, the 2 small bedrooms that share a bath for $800/month each and the whole basement in-law suite can be rented for $1800/month. 

That's $4600 in rental income. Depends on your mortgage payment, $4600 in rental income usually leave the landlord some cash flow while riding the market appreciation. Airbnb is also an option.

[Eliott Elias]

Can you airbnb to up the cash flow?

[Nathan Gesner]

Quote from @Daniel Lambert:

It's like buying an F350 pickup and then wondering why it doesn't get 35 miles per gallon. You can't have everything. Not every market has property that will meet the 1% goal and cash flow. Some markets will only work for appreciation. You need to stick to the numbers. If the market doesn't work, find another market.

[Emily Hazard]

Have you looked at properties up in Arlington? They have a brand new Amazon facility going in and tons of jobs are openings up. Drive around up there, and you will see that they are adding in infrastructure and tons of new development. The price point is lower, but rents will be going up with all the new development. 

[Henry Lazerow]

Just look in other markets. Chicago class A/B areas you can cashflow, it's not 1% but it cashflows. There likely are other A/B areas maybe within an hour or two of you that do the same. Most nice places are priced to live not invest so won't cashflow unless you put a lot down or pay cash. People like to own a home for many reasons outside financial reasons. 

[Michael K.]

@Daniel Lambert

The more units a property has the more it’s value will be derived from the income it produces. Single family homes and duplexes are generally bought by owner occupants, who are often just looking for a nice place to live. As a result they are competing against other people with the same goal. In these situations buyers typically don’t care to look at the rental numbers, because they have no intentions of ever renting it out.

[Dave Skow]

@Daniel Lambert- Seattle is and has  been priced high for years ......a  year  ago with rates  < 4% your  1%  target was  closer to working  ,,,with  rental  rates now being  7-8%  range - no way this will occur ......also a  duplex for  700K in  greater  seattle isnt  realistic   ...Maybe on the outsirts   (  auburn / Pacific / Monroe  etc .....)    if you can locate a  property that cash flows  or  close to cash flows  - consider it  but dont get  caught up in the  1% rule  ....make sure that you  are  pre approved  as  without  financing - you wont get too far 

[Sherief Elbassuoni]

@Daniel Lambert, investing in Seattle works out but with some creativity like Split level homes, rent by room, airbnb, ADU, DADU, ....

I am an investor my self here in the greater Seattle area. Feel free to reach out if you needed any help!

[Michael Haas]

Hey @Daniel Lambert - you're right, here in Seattle SFH's and Duplexes tend not to cashflow much without value add or other strategies besides just calculating the purchase price, Rentometer amount, and seeing if it pencils. Although not all of our properties here hit the 1% rule, 3 of them did on purchase, so its definitely possible. Rent appreciation is also strong here, so although only 3 of our portfolio hit 1% at purchase, many others have reached 1% through consistant rent growth and appreciation (one of the big benefits of our market). Here's two pieces of advice I wish I knew when I was starting out, depending on where you think you'd like to invest. Feel free to DM me to dive into this a lot more:

1. Outside of Seattle: More traditional strategies work here - think HouseHacking, multifamily rentals, etc. The trick is to find pockets where the rent to price ratio is most favorable - SouthPark, Riverton-Boulevard Park, Renton, Skyway, Kent, and Des Moines are a few to look out for. Downside to this strategy is, as you can see, you tend to have to focus on "less desirable" areas to find good cashflow. Which leads me to my favorite place to invest, which is....

2. Inside Seattle: Everyone on BP loves to hate on Seattle (because of its strict landlord tenant laws) but you can absolutely crush it here with the right strategies. We're talking multiple $100,000's of equity created on the deal, occasional 1% rule or close to it, millions in net worth appreciation, the whole shebang. I'm glad everyone loves to hate investing here (more for me), but if you'd like to explore it here's my advice: don't be lazy. Take advantage of favorable zoning code, specifically ADU's and DADU's, and do value add projects.

If you're househacking (by far the best way to start and grow a portfolio) I would look for single family homes with basement ADU's and more than 4 total bedrooms - the average family size in Seattle is quite small, so the small houses often have more competition and higher prices per square foot than the larger houses, and the larger houses rent for quite a bit more. Buy on a 4,000sqft or larger corner lot or with lot with a back alley to leave yourself the option of building a 1,000sqft DADU now or in the future - if prices keep going up in Seattle your future self will thank you! We shot a video on what we look for to find Seattle properties with great DADu potential here: https://www.youtube.com/watch?v=rS403F0Y7RQ&t=12s

Happy to talk more about the strategy and tactics, especially in Seattle as investing here is a bit more complicated than investing in the suburbs. Feel free to reach out if you'd like to chat on the phone or grab a coffee. Cheers!

[Account Closed]

That's a market problem, not an industry problem. 

My firm is acquiring properties in two midwestern markets where we do see 1% or more of the purchase price in monthly rents. This is why we don't invest where we are located in Denver, CO. 

We help clients invest out of state by modeling properties and connecting the client with property management companies, lenders, and realtors with whom we've partnered with in the out of state markets. 

I'd be happy to chat about this.

thx

[James Dainard]

Hey Daniel,

Seattle is a tough market to make work using metrics designed for higher cash flowing areas.

Holding rentals for cashflow int he PNW requires more money down to get to the leverage position you need in order for the numbers to work out. The reason for this is that the local demand is so high that there are other buyers in this market that are willing to tie up significant amounts of capital to live in a convenient asset.

With that in mind you have to be looking for the opportunity zones when trying to invest in this market. You have to be willing to go after the properties that other people aren't willing to take on.

Once you find something with a delta (renovation scope) that you can take advantage of you want to see what other upsides you might be able to get out of that deal. Did it get upzoned? Are you able to split the one structure into two units?

One of the opportunities we're seeing right now is holding upzoned lots as rentals. The builders in the PNW got hit hard with interest rates and a lot of them are getting rid of projects they don't want to take to completion. You can pick these up already knowing that a builder bought it once, get some of the plans/permnit sets the builder already put together in some cases, and hold it as a rental until either you can develop it, you can get the permits to completion for it, or another builder decides they want to build on it when cost of money goes back down.

I know that's a lot of info so here's the TL:DR

In a market like the PNW where the demand is so high that asset prices are inflated due to buyers investing in quality of life you want to find niche deals that have multiple margins built it. There are plenty of deals on market right now, make sure you're underwriting for what the best deal is for you given the current market conditions.

[Drew Sygit]

You might want to follow the "Deep Dive" series we're doing on our BiggerPockets blog about Metro Detroit cities, City of Detroit Neighborhoods and comparing Metro Detroit to other hotspots investors usually consider:

https://www.biggerpockets.com/...
(links also available @ our website)

[Anthony L Amos Jr]

Quote from @Daniel Lambert:

I am new and have only just begun my research and looking for deals. My issue is that the average SFH is $650000+ and duplexes can be $700000+. If we typically want to shoot to have rent be 1% of the mortgage, how am I supposed to be able to rent something out for $6500 minimum (whether for a single family home, or split between units in a duplex)? My rental market averages $2500 for a basic but nice house, 2+ bedroom apartment or townhome. What are my options in this ridiculous market?

 A lot of investors from your area are investing in Ohio for this reason. 

[Patrick Drury]

@Daniel Lambert
A lot of investors from California are investing in Columbus, OH. For them, the local market doesn't make sense in terms of the returns, the barrier of entry is quite high, and it's not very landlord friendly. So if you can find a place that would check those boxes of better returns than where you live, has a lower barrier of entry, and is landlord friendly, it's worth investing out of state. As for where, in particular, look for a market with lots of job opportunities and population growth.