Multi-family First purchase (2-4units)- Seattle VS. Texas

39 Replies

Hello Everyone! I just discovered Bigger Pockets about a month ago and am totally obsessed. I am a new investor and looking to purchase my first multi family, ideally a fourplex but open to a duplex or triplex. I have made 5 different offers in the Seattle market (Issaquah/ Redmond area) on fourplexes.  I was beat on each of these by cash offers (even when offering over listed price). I'm very frustrated continuing to look with pricing so outrageous  (ideally looking for $650k-$850k range) here. My husband travels a lot to Frisco, TX and we could be spending a lot more time there and eventually moving in the next few years. My question, would you stay focused on Seattle where we live currently, know the market well and I also have my real estate license in WA but finding a deal under a mil, seams almost impossible and could take awhile or focus on a new market like (Mckinney/ Allen/ Frisco / Plano areas) learn the market and buy our first multi family there since it's so much more affordable. I really like the appreciation factor that the Seattle market offers but I feel like I may be waiting forever to find a deal where I know I could get something in TX but a lot more headaches come with that and managing an out of state property. I just want to get started. All thoughts welcomed!!

Thank you- Natalie

I live in Sammamish and manage about 800 units in the greater Seattle area, but for Texas I highly recommend reaching out to Steve Rozenberg.

I will definitely reach out to him. We live in Sammamish as well. Great to connect. I work for a multi family syndication firm so I’ve had my experience with multi family and investing in syndication but we want to buy one we own on our own as well. Seattle is getting crazy!

@Natalie Wells Welcome!

Enrique is a great resource, see if you can steal as much of his time as you can. ;) I live in Issaquah, so we're all close by. Are you open to other areas in WA besides Seattle? Prices and cashflow are much more lucrative in other areas, like Spokane, Yakima, Moses Lake, Tricities, etc.

Thanks.

@Natalie Wells I recommend staying focused in the Puget Sound region for many reasons. They are all debatable but here are my two main reasons for investing locally (we have 15 multi family buildings in Everett):

- large chunks of appreciation will make you far more wealthy than a few hundred extra dollars of cashflow every month

- I like investing in real estate because it is a physical asset I can force appreciation into with my own work and I can’t do that as well when I’m investing out of state

Thank you for your feedback and Advice. Those are some very good we teong 

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@PeteMathias wow your close too! Please excuse my below posts (my little one got a hold of my phone). I haven't looked at all into other areas of WA. I have put all focus on Seattle and the Eastside mainly since that's where we live and I know the market. But that is a great suggestion. I would be interested to look more into surrounding areas.

@GrantFosheim I really appreciate those two main reasons and you actually hit on the very factors I have been going back and forth on, which is building long term wealth and having control over the asset as well as finding/ pushing that appreciation. Very helpful advice! Working in multi-family syndication I have seen first hand the amazing benefits and wealth that can be created specifically for the Seattle market. So although I haven't found my own personal multi-family deal yet, it's hard to walk away from this market (although I have been considering it with being frustrated) having seen what can be created here! But it is a bit frustrating when you just want a deal and you keep loosing it to other investors. Haven't look much in Everett though :)

@Natalie Wells - Agree with much of what @Grant Fosheim stated. The Greater Seattle area still has some great market fundamentals going for it.  At the end of the day, the reality is that you probably are not going to get rich off of your first deal, but a first deal bought and managed well can set you up for future success! It is much easier to manage right closer to home and there are areas outside of the Seattle city core that are still good areas to invest in. 

I started investing locally in seattle. I got over investing in primary markets (Seattle, CA, Hawaii) and started investing in secondary markets like Birmingham, Atlanta, Indianapolis, Kansas City, Memphis, Little Rock, Jacksonville, Ohio, or other tertiary markets.

This requires you to get outside of you comfort zone - which most adults don’t like to do.

Sophisticated investors focus on the numbers… which require the Rent-to-Value Ratio of more than 1% is needed to be able to cashflow after expenses. You find the Rent-to-Value Ratio by taking the monthly rent dividing by the purchase price. For example a $100,000 home that rents for 1,000 a month would have a Rent-to-Value Ratio of 1%. 

PS I quit my 100k job doing this

My 2 cents as somebody who has lived in Seattle for a long time, owns my own non RE business and has had many adventures in the business world, has read WAY too much about business/economics in general over decades, and has lots of paper knowledge about RE, but is admittedly lacking in a ton of real world experience in that sphere... Also I'm a math/fundamentals always wins in the end kinda guy...

Seattle is close to the peak, if not past it already. Every time a bull market comes along people start thinking it will never end. Forget fundamentals, this thing is going to the moon! Every. Single. Time.

Yet it always does, because math says IT MUST. And math is correct, not the irrationally exuberant types. Look at the fundamentals that drive RE prices. Boring things like average purchase price to average income in an area ratios being one of the most stable and time tested. 5-6x income = average sale price is long term sustainable. Below that you should be buying! And above that it is overpriced, if not in an outright bubble. Seattle area was at 9ish before it cooled off in this last year... If the bubble isn't already in bursting mode, the reality is there is not much upside. 

Even if it goes back to running up for another year or two, in 3 or 4 years that just means it will have to fall that much more (or go flat for longer) to get in line with sustainable math. Don't think fundies apply to world class cities? That's an argument people make... But they do. The above has held true for NYC, LA, London, you name it. They always fall into that range during corrections, before running back up again eventually. That's just one benchmark, but we're borked on all of them.

In short, buying now IS NOT buying in 2012. It is buying in 2007, or MAYBE 2004/2005 if you're lucky. There is simply no upside left in THIS cycle. Personally I think Seattle has long term, as in 30-50 years from now, upside. But in the short to mid term, there's not going to be muc/any appreciation, more likely it will drop. We're overdue for a recession at the national level, all fundamentals say Seattle (and many other trendy markets) are waaay overpriced, and you run negative cash flow. Where's the upside?

Again 2019 is not 2012. Which is why I plan to look into the Spokane market, where the RE values are not as over inflated compared to what fundamentals say is solid, RE positively cash flows, and there seems to be a lot more upside potential as that city is turning and seems to be on a good trajectory long term. Buying in Seattle area in 2019 is like buying into a record high stock market... All that means is most of the gains have already happened!

So I would look elsewhere. Whether that is Spokane, or even somewhere just slightly better math wise and in the Seattle area, like Everett, Tacoma, etc. If you buy now you'll be fine in 30 years. I'm almost positive about that. But it probably won't do as well at this part of the cycle as investing somewhere with more upside left in it.

Also, because it drives me nuts when people say this... The people above saying "Appreciation! Forget cash flow! Who wants a few hundred a month in your pocket when you can gain $50K a year!" You should read more... Multiple massive studies have been done that showed that overall returns in RE in "boring" cash flow markets, like the midwest or south, have averaged IDENTICAL returns to "hip" places over multiple decades. 

Why? Because the hip places have huge run ups... And busts. The cash flow markets just chug along at a little above inflation rate. You also cannot double down on buying more properties as fast most of the time, as you're limited by the negative cash flow you can sustain. You're in the toilet during down markets as you lose your paper equity and cannot tap into the value, vs being able to continue to buy during market lows in cash flow markets. Hence, at the end of the day, the returns end up being within a fraction of a percent of each other. This is a fact, as proved by multiple studies, not to mention the opinion most big time experienced RE guys have. Google the studies, it's interesting stuff.

The thing is, your "risk adjusted" returns in cash flow markets are really better... Smaller/no booms and busts, AKA more stable. You put money in your pocket every month, hence almost never have to sell at the bottom of a market. If you have a job to support negative cash flow, losing it can tank you, not so with positive cash flow properties. In other words it's safer and more predictable, but you make the same returns. I know which one of those options appeals to me. The only caveat to this is if you're going to time the markets, and buy into trendy cities when there is a clear depression in prices, like the last recession. Seattle may be a good play in 2021 or something during the middle of our next recession, but not so much when it's still basically at its all time peak. In cash flow markets it ALMOST doesn't even matter where in the cycle it is. 

Note: I'm not saying anybody can perfectly time the market... But I do feel it gets to be a little obvious at the extremes, like the lows of the recession, or the highs we're seeing now. You can't predict the exact movements or timing, but I would say 100% for sure we're CLOSE to the top in trendy cities, if not at/past it. We're surely not at the beginning of a massive run up anyway!

Okay, that was about $100.02, not 2 cents... But I hope some of that makes sense. Seriously though, google the studies on return rates, and also benchmarks used for RE. You will see what I say above is true, and buying at an obvious peak is probably not going to be that awesome. Yes, you'll make money over 30 years, but not as much as buying at an obvious low, or buying in a stable cash flow market.

@Natalie Wells 2 radically different markets. Obviously you can capture more units in Dallas, but that market has insane levels of supply. Seattle is so strong with Tech job growth I'd stay local if you can find specialty upside in catering to wealthy tech. Both options could work, since you are local to WA, and it's around low 7 figures, I'd stay in Seattle. As you take on more units in Dallas, you'll eventually have to move there, or figure out how to capture more ROI in an area that's subject to so much heavy supply.

There are a lot of great opportunities here in Texas. Thanks @Enrique Jevons I own properties both in Dallas area and Houston. As well as own a property management company. I would suggest before you buy to take some time to focus on the goal and reason you are wanting to buy and what think this through to the end goal. Make sure that this strategy aligns with the goal. Frisco is great but there are some reasons I would give you to think more before buying there. You also want to make sure you align yourself with people that are like minded that operate to get you to your goals not just theirs. The challenge with out of state investing is it really needs to be run a non-emotional asset and business with policies procedures and structure. Make sure you think these things thru before just buying

 @Vaughn K. . - I don’t think anyone here is saying to “forget cashflow.” You always want a buy and hold property to cashflow, once stabilized, so that you can ride the ups and downs of the market. But real estate is not just numbers on a spreadsheet. There are a lot of factors that drive returns and both are good markets for different reasons. But the reality is that the OP would be forfeiting a number of advantages by investing in TX, especially when there are markets within an hour or two drive that will likely allow her to still make a solid first investment.

@Steve Rozenberg

I am new and beginning to start investing in real estate. I have attended a couple wholesale conferences that make this seem very easy. I have a 401k/403k that I'm rolling over into a startup solo401k to begin my investment career. My question , in the dfw area, where should I concentrate to get the biggest return. Oak cliff and south Dallas seem to be booming right now. I want to JV a project( and not use all of my savings) but am skeptical about who to invest with. What are your suggestions, please. I'm a nurse for 20 years and just recently got burned out by it but have this career to fall back into , if this investment plan doesn't pan out. I was very successful as a nurse, it's just emotionally tolling. Thanks Val.

@Natalie Wells This is the question most of us have in expensive markets. I am in Tacoma so I picked up places in Yelm, Lacey etc about 30 minutes from the expensive areas. So from Seattle you may want to go out a ways. 45 minutes or so in almost any inland direction. This may be easier to manage than going for Texas unless you only use property managers. I am still at the point where I like to manage the units myself. 

Good luck

If you're considering the Texas/DFW market primarily for cashflow, make sure you factor in the high property taxes (close to 3%) and high insurance premiums. The insurance premium on my Arlington SFR is roughly the same as my primary residence in Sammamish eventhough the value is only 1/5th.

Wow @ArunN that's good to know. I didn't know the property taxes were that high in Texas. Just starting to learn about that market. Helpful info, thank you!

@DionMcNeeley great suggestion. My mom lives in Graham so I know that area a bit. I haven't done much looking out that direction but I definitely will now. My focus hasn't actually been Seattle but more eastside, Issaquah/ Fall City/ Redmond area. Which is a bit less expensive then Seattle. But got out bid on 2 different fourplexes, one because of an all cash offer (I'm doing traditional financing) which was a screaming deal at $650k and the other was just over a mil but seller went with a local company that wanted it for their artist and she wanted to stick with building the Issaquah community. I'm attempting to send out letters to all the triplex to 4plex owners in Issaquah and will see how that goes. Problem is there is not a lot of inventory on the market for this especially on the Eastside. Definitely, will look more into the areas you suggested. Other part of it, is ideally I want to owner occupy it for a year or so which has kept me looking on the Eastside since we are in Sammamish. So many factors and choices!

@VaughnK thank you so much for all your knowledge and advice. You dropped some serious gold nuggets of knowledge and make some great points. There is obviously a lot of factors that go into this, but I definitely agree with you that Seattle is towards the top and probably going to start coming down or already is starting based off what I have seen this last year. The other part of it was, ideally, I was hoping to buy a 4plex and house hack it for a bit living in one unit at least for the next year or so to get good financing as owner occupied. This also depends obviously on the price if that's even an option. Just one scenario we are considering, we don't have to live in it. I'm definitely going to check out some other areas as your suggesting just in WA. I honestly had not even thought of that as an option.

@BrianJuris some great points. Ideally, we would like to get a couple multi -family properties here and then eventually if we do have to move to TX then invest there as I already have pretty great contacts here as far as partners, property managers, contractors, etc. So our business could be hopefully running pretty smoothly at that point at least as far as biz structure and logistics . But it's being patient through the process of trying to find a deal lol! I'm mainly focused on eastside- Issaquah/ Redmond, even Snohomish area. A little cheaper then Seattle, not much though, but not a lot of inventory :(

@AaronNelson great points and thank you for your thoughts. I love that you said "your not going to get rich off your first deal". I think it's a very important point especially for new first time investors. It's about getting that first deal and going with it and the long term opportunity! Thank you for that reminder. I see you're an agent too, if you see any multi-family deals in Maple Valley, please send them my way!!

@Natalie Wells if you must choose between the two markets then the DFW area is a better choice. That being said, you will not find many of the multi-family units in the places you mentioned (Frisco, Plano, etc.). There may be some out there but you’ll have to pay too high a price.

So my two cents... DFW, but different areas in DFW. I live in the area so feel free to reach out for different options.

@Natalie Wells I loved the reply from your kid. ;-) In all seriousness, have you look at Kitsap County yet? With the newly launched fast ferry from Kingston AND the Bainbridge ferry, I'd say it's definitely worth a minute of research. Poulsbo and Kingston are both very cute AND affordable. 

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