Rental owner in Lynnwood WA
Lender · Bothell, WA · Member since 2016 · 13 posts · 8 votes
Rental owner in Lynnwood WA
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Lynnwood, WA · Member since 2016 · 10 posts · 5 votes
10yWell, Dallas, I'm bullish on Lynnwood and haven't had good luck managing out of area rentals that I can't keep an eye on. With that said, as a broker in the area, I'm telling my clients if they are planning to sell, now is a good time. Buying in the Seattle metro area right now is pretty risky and I'm predicting a correction sometime in the next year or so. If you do sell, you might consider a four-plex in somewhere like Everett. Just my biased thoughts.
36 Replies
- Lynnwood, WA · Member since 2016 · 10 posts · 5 votes10y
Well, Dallas, I'm bullish on Lynnwood and haven't had good luck managing out of area rentals that I can't keep an eye on. With that said, as a broker in the area, I'm telling my clients if they are planning to sell, now is a good time. Buying in the Seattle metro area right now is pretty risky and I'm predicting a correction sometime in the next year or so. If you do sell, you might consider a four-plex in somewhere like Everett. Just my biased thoughts.
- Lender · Bothell, WA · Member since 2016 · 13 posts · 8 votes10ySid Roberts, thank you for your input! I tell myself I'll treat it more like an investment, and spend less personal time doing repairs if it's remote. But your input is good, maybe I should consider a multi family unit in a year after the market corrects.
- Investor · Bothell, WA · Member since 2016 · 38 posts · 21 votes10yJust curious Dallas Jacobsen are you charging market rent right now or do you think you could raise it $100-$200 a month? Also, just curious what area you're looking into for $125k homes? My gut tells me Lynnwood will only become more desirable as the population and employment boom continue in this area and your possible appreciation over the next few years will outshine investments in $125k houses that are made to achieve the 1% rule. If you do decide to proceed, may I suggest a 1031 exchange? Although, there may be a better option for you. If you've lived there in the past 5 years you can likely avoid tax on the gain using your homeowner's exemption.
- Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes10yI vote for selling. That's what I did last year.
- Lender · Bothell, WA · Member since 2016 · 13 posts · 8 votes10yGreg Harriman I could raise the rent $100-150. That is a relatively good return on my original $250k investment, but I'm concerned about the $10-20k expenses in 5 years. I was thinking of Spokane, or some small city in Texas for the next investment. But the more I look into it, maybe a fourplex in the greater Seattle area is what I should get into with the cash from this sale. We lived in the house for 7 years, then out for 3-1/4, so get a percentage of $250k tax free capital gain. We won't end up with any capital gains.
- Lynnwood, WA · Member since 2016 · 10 posts · 5 votes10y
And @Greg Harriman and Link Light Rail will help Lynnwood too! That will be here in 6.5 years. I think investors might under value what that brings to the area.
- 10yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Dallas Jacobsen, I hate to be the bearer of bad news but I don't think you qualify for capital gains exclusion. In order to qualify for sec 121 (primary residence exclusion) you must have lived in the house for 2 out of the previous 5 year period. (Actually if you're married you would have been able to exempt 500K of gain). If you've been renting it out for 3 1/4 already you are past that 5 year look back window.
As @Greg Harriman said, the 1031 exchange is the way to go if you want to defer taxes on that gain. But you'll need to look at your purchases a little differently. In order to defer all tax in a 1031 exchange you have to do two things - First you have to purchase at least as much as you sell ( Your net sale, so around 350 minus commissions etc). Second you must use all of the proceeds from the sale in the next purchase or purchases. It sounds like you'd generate around 125K in net proceeds. So your reinvestment target to completely defer all tax in a 1031 would be to purchase at least 350K of real estate using 125K of cash.
You can buy less or take cash out of the 1031 but you pay tax on the difference. It also does not have to be one replacement. You could buy roughly 3 100K properties and still defer all tax that way.
The 1031 Investor5137 Reviews - Kent, WA · Member since 2016 · 9 posts · 1 vote10y
My wife and I just put our home under contract to sell in Kent and are taking the proceeds to throw in to investment properties. We have found the same thing as you with values in the market and through our search we are debating between doing something in Indiana or a local multifamily in a suburb.
The returns in the Indianapolis market look promising for cashflow, but I am not as enthusiastic about potential appreciation. Where in Texas were you thinking? Any interesting finds as you've done your research?
- Investor · Bothell, WA · Member since 2016 · 38 posts · 21 votes10y
@Dallas Jacobsen It sounds like you've thought this through and are making the decision based on solid facts. Are you looking to list the property soon or wait for a bit? Since you're not forced into a 1031 exchange as a way to deferred income taxes, you can time the sell of your existing property to take advantage of the summer rush and time the buy of the new property when there's less demand and competition from other buyers. Best of luck to you!
- Investor · Bothell, WA · Member since 2016 · 38 posts · 21 votes10y
@Dallas Jacobsen Just one more thing, you may qualify for the Homeowners Exemption under Publication 523 of the IRS code (https://www.irs.gov/publications/p523/index.html) but you'll have to pay capital gains tax on the depreciation recapture that the IRS requires you to take as part of your annual tax filings.
So, let's say you've taken $15k in depreciation since converting the property to a rental. When you sell, it'll trigger a $15k capital gain which, depending on your tax bracket, will result in an additional $2,250 to $3,000 in federal income tax.
- Seattle, WA · Member since 2015 · 500 posts · 243 votes10y
Originally posted by @Sid Roberts:
And @Greg Harriman and Link Light Rail will help Lynnwood too! That will be here in 6.5 years. I think investors might under value what that brings to the area.
My thoughts align with yours. I don't think a lot of folks have quite realized yet just the powerful effect the addition of a Light Rail station will have on an area. A quick example would be my parent's house. It ended up being located near the Beacon Hill Light Rail station in Seattle and saw an immediate 10% jump in appreciation when the station was announced, and within a month of the station opening, another 25% bump.
Over all, as the Light Rail continues to expand, it will help transform Everett-Seattle-Tacoma into a single "super-metro" region, and any property located near a station will be an incredibly valuable asset.
- Lender · Bothell, WA · Member since 2016 · 13 posts · 8 votes10y
@Dave Foster I thought I barely missed the exclusion based on "2 out of the last 5 years", but I read IRS publication 523, and after that point, it switches to a prorated amount, it doesn't completely drop from $250K to $0. So I lived there 7 years, and rented for 3, so I get (7/(7+3))* $250K = 0.7*$250K = $175K of tax free gains. (I think I did the math right).
But as @Greg Harriman pointed out, I will have to pay on the depreciation. Interestingly, even if you didn't claim the 27.5 year straight line depreciation, you have to pay as though you did....
@Aaron Gowin I only started looking in Texas, so don't have any good input yet. At first I decided to avoid the capital expenditures associated with older buildings by buying a new home for $130K. (If you look, those do exist.) But again, I could get some instant cash flow, but would not benefit from any amount of leverage, and probably not much appreciation. I'd love to hear which way you guys decide to go! It's pretty neat having options like this to consider.
- Lender · Bothell, WA · Member since 2016 · 13 posts · 8 votes10y
@Sid Roberts Interesting to hear your perspective. Do you think the market in Lynnwood is going to continue to rise quickly, or level out? The recent growth has made the market look like a bubble, but here's a perspective that may indicate it's not... Look at a Lynnwood house value from 2005 (3 years before the peak), compared to today. That gain is only about 4% per year, because it took such a hit in 2008. Interested to hear what others in the area think.
- Real Estate Broker · Seattle, WA · Member since 2012 · 76 posts · 14 votes10y
Watching this form like a hawk!
- 10yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Dallas Jacobsen, Sorry but that's not a correct reading of pub 523, unless you're in the CIA (well and certain active military and Peace Corp but the CIA example is the most fun). Only for those individuals may there be a suspension of the 5 year look back to allow an additional 10 years.
There is no general automatic pro-ration after the 5 year period.
Because you have not lived in the property for 2 out of the previous 5 year period you will have to recapture all depreciation and pay all tax on the gain unless you use another tax deferral method. Talk to your accountant. This would be a nasty surprise for you.
Unless you're an CIA sleeper???
The 1031 Investor5137 Reviews - Investor · Snohomish, WA · Member since 2014 · 115 posts · 68 votes10y
Welcome to BP! There's no shortage of opinions here and some of them are excellent. :-)
I'm squarely on the "Team Hold" side, at least in Snohomish county. Property values here soared 11.4% in the past year, so that means that your now-$350k property is appreciating at about $3,300/month. http://www.bizjournals.com/seattle/news/2016/06/06... Can you net this kind of profit with any of your other options?
One thing that you need to get clear on is the basis for this huge appreciation rate, so that you can try to guess how long it will last. I've been flipping RE around here since the late 70's and I've seen the local market rise and fall many times. I paid $12,500 for my first house and $25,000 for the second one. I just missed a pair of side-by-side houses one block from Juanita beach near Kirkland for $25,500 for the pair that are worth an easy $600,000 today, if not more. So, a median SFR value in SnoCo of $389k blows me away.
In today's market case, I do not believe that we're on a price bubble nor that there is a "correction" coming for the foreseeable future. This isn't the stock market nor are most current buyers active speculators. A bubble is like an ocean wave that rushes in, then quickly recedes.
The other basis for price appreciation is more like a rising tide that doesn't go back out, and I believe that this is where we are here. In our case, the rising tide is a huge increase in housing demand because of the growth, and immigration of, national tech companies. But, our housing supply isn't keeping up, so Seattle rents are exploding and forcing out ordinary tenants, who then can then only migrate North and South, to Snohomish and Pierce counties.
Our Puget sound RE prices are a small fraction of California's and they've discovered that opening a branch office, conducting everything online, gives them a way to hire good workers and let them enjoy a high quality of life for less than half the housing costs of CA. So, they can pay less wages and still keep the team happy.
Until our market values catch up with San Francisco's, which is still a long way off, we're going to keep seeing this double-digit appreciation. If this changes, it will be because of national/world economy issues that cause the tech companies to start pulling back. But, they'll be the last industries to falter on the stock market.
(FWIW, I just saw a news report that Tacoma has nearly run out of fixer houses and rents are skyrocketing, already forcing people out. I don't know where these folks will go, except to Olympia.
The last low-hanging Seattle-centric REI fruit left is Snohomish county, so we'll be growing even faster for years to come. On top of that, we'll be growing by 10,000 new residents per year for the next 20 years, and this is based upon 2007 state projections, before the Seattle core explosion had even started, so the projection is probably very low. And, we're only building about half the 5,000 new residences per year that it will take just to keep up ordinary population increase.
And, yes, light rail will be creating a megalopolis that runs from Tacoma to Everett. Personally, I think that we ain't seen nothin', yet. If you want an in-depth vision into the future, read the Puget Sound Regional Council's exhaustive "Vision 2040" document. The long term trends are clear, even if short term timing is variable, depending muchly on what local government officials do, beside taking payoffs from special interests in the construction industry and voting accordingly.
If you want to keep track of the economic trends that impact local RE values, there's no better nor more pessimistic news outlet than Seattle Bubble, which is constantly scanning for signs of price devaluation and parses the factors down to the DNA level. I subscribe to the free SB newsletter, but their detail depth is usually so great that I get bored beyond the fact that they aren't yet screaming "Sell!" If selling time comes, you'll read it there, first.
All in all, it sounds like you've got some decent equity now, with another $40,000 a year in appreciation happening. If you want to keep investing, rather than selling, have you thought about refinancing to pull out as much cash equity as you can and still maintain positive cashflow? Maybe use that as the down payment for a duplex. You've already demonstrated that it's a cashflow property, so you might find some good commercial financing. Maybe do this every time the appreciation hits $200k and never sell your cash cow.
Before you apply, what can you do to boost this cashflow? Raising rents certainly helps. But, does Lynnwood permit occupied RV's on residential lots? Unincorporated SnoCo does, but not all the cities. The management for RV pads can be very challenging, especially getting in quality tenants, but the going rental rates start at about $500/month bonus cashflow from a sideyard with access to the basic utilities on a "plug-in" basis. I've heard rumors that there's a new local RE management company coming that will be specializing in turnkey "Sideyard cashflow" professional property management. Or, is there a garage that you can rent out?
I might add that, if you see upcoming capital expenses for your property in the next 4 or 5 years, most savvy buyers will see it coming, too. Or, at least the property inspectors who they hire will see it. So, you can count on a lower offer. If you're going to hang onto the property, why not just bite the bullet and have the work done when you can no longer afford it? Maybe pick the winter season when contractors aren't so busy.
I hope that this helps you to make a better informed decision.
Good luck!
Chris
- Lender · Dallas, TX · Member since 2015 · 283 posts · 128 votes10y
Wow - Dallas
You have started an extensive thread in just a short time. My two cents is that you might consider a refi and cashing some equity out. The cash out is not taxable and with rates as low as they are, there might be some great opportunities.
Best of luck
- Lynnwood, WA · Member since 2016 · 10 posts · 5 votes10y
@Dallas Jacobsen I would agree with Chris that the long term outlook is good. One of my complaints about some of the opinions in and around RE investing is the over focus on flipping and quick money. On the other hand, I have been careful to build equity but haven't used that equity as well as some. For instance, I have 70% equity position in a couple of rentals and own one property free and clear. But the point it that slow growth is safe position and better in the long run; with that said, I can assure you there will be a correction and it usually comes when people don't think it will happen. Whether that is a bubble or whether it is as extreme as before, I don't know. But not to fear! if you think long term. I just wish I would have bought when prices were low.
So about Lynnwood, I'm bullish. The location is unbelievably convenient and city government is doing some good things to build a city center. I look for it to be a Bellevue type of city in 20 years with a few buildings that are 300 feet tall (already zoned for it in what they call the city center). You can get to any freeway fast and Light Rail is just a few years away. If ST3 doesn't pass, (ST3 is the ballot measure to take Light Link to Everett) then Lynnwood will be the destination gateway to Seattle.
One solid investment strategy is to buy owner occupied with low down, live in the new house for a couple of years, keep it and do it again. If you did that every 3 years for 30 years, you would own 10 properties, income average into the market and own a few free and clear. Just some thoughts...
- Lender · Bothell, WA · Member since 2016 · 13 posts · 8 votes10y
@Dave Foster, I'm hoping my reading of Pub 523 is right, and no I'm not in the CIA, or anything. See Section 5.b. It's about 2/3 of the way down this page
https://www.irs.gov/publications/p523/ar02.html#en...
My calculations above were not quite right, you calculate the exclusion limit a couple different ways. In my case:
- The number of days (or months, it you prefer) your home was your residence during the 5-year period leading up to the sale.
- Divide by 730 days (or 24 months); calculate to 3 decimal places. If the result is less than 1, enter the result. If the result is greater than 1, enter “1
- Multiply by $250,000
- If you are married and filing jointly, repeat the entire calculation for your spouse, again using $250,000 as your spouse's reduced exclusion limit. Then add your spouse's reduced exclusion limit to your own.
- If you are married and filing jointly, this is your exclusion limit
For me this is approximately:
- 22 months
- 22/24 = 0.917
- 0.917*250,000 = $229,250
- Do this same math again, add them together, I get $458,500 of exclusion limit. So capital gains of $458,500 would be tax free for me.
Do you agree, or am I missing something?
- 10yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Dallas Jacobsen Ah, I see what you're thinking. Your math may be fine. But what you have calculated is your potential gain exclusion if you meet the eligibility test or if you you qualify for a partial exclusion. You do not meet the eligibility steps 1-5. And you do not meet the exceptions listed under eligibility step 6 and eligibility step - review. You've got to meet those tests or exceptions before you can calculate anything.
See the list of available exceptions. If one fits then you have a fighting chance. But understand that these are rigorously tested. So, saying you had to move for job related reasons when your commute dropped by 5 minutes will not fly. Saying the allergens are less at your new house probably wont work either. And an unforeseen reason will only fly as far as a grumpy field auditor will allow it.
Sorry, but claiming double top secret CIA status still may be your best bet - or 1031. Let the auditor know when they ask that you can tell them but then you've got to kill them!
The 1031 Investor5137 Reviews - Lender · Bothell, WA · Member since 2016 · 13 posts · 8 votes10y
@Chris Newman It's a privilege to hear from someone who's been in the business for so long!
I'm not so impressed with the Light Rail. I rode it from Seatac to Seattle once, and I think it averaged 30 mph, and it wound through neighborhoods worse than a city bus. If I had to commute from Everett to Seattle and could choose between a twisting jerking train like that, or an express bus, I'd chose the bus. At least the bus can go 60 mph at times. But maybe they'll do better with the northern portion of the track....
If I hold this property, it will cash flow (pay it's own mortgage only, nothing for maintenance) for another 12 years, at which point it will be debt free, and I'll get $2500 / month (assuming rents keep rising). But I'd wonder if a fourplex in the area would get to debt free status faster.
@Account Closed I refinanced to a 15 year mortgage (no cash out) this year already. I guess I could get a equity loan when I need the cash for maintenance. Thanks for bringing that up.
- Investor · Bothell, WA · Member since 2016 · 38 posts · 21 votes10yDallas Jacobsen I didn't mention this before, but I'm a CPA and I threw publication 523 on the table knowing you'd dig in and make sense of the calculation that's necessary to justify the exclusion of the gain if you decide to sell. Just keep in mind, if you don't sell in the next 12-18 months that exclusion will disappear. I'm not recommending you sell just to buy back again but the transaction costs of doing so will likely be less than the tax savings you will indirectly realize via the exclusion. If you were to sell in 2 years you'd have a taxable gain based on the net proceeds minus your cost basis plus capital gains on the recaptured deprecation. However, if you sell now you basically get the first part of that equation as tax free, however, you'll want to know your transaction costs and do a cost-benefit analysis. If you're not emotionally attached to the house, I'd sell the house now and find an investment that aligns with your goals. It appears you could sell and buy something in cash and have a little less stress. If you go that route, you'll have much better cash flow but not as much of an increase in your net worth b/c of lower appreciation. I'm a big fan of parts of Lynnwood. I would think if the home is worth $350k you should be able to get $2,000 to $2,200 a month and that will only increase over the next few years. However, selling now to get a (mostly) tax-free gain is a huge win. Then you can buy and have a new basis in a new property. It's not an easy decision but I'd be interested to hear what you decide! Good luck!
- Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes10y
Originally posted by @Dave Foster:
@Dallas Jacobsen, I hate to be the bearer of bad news but I don't think you qualify for capital gains exclusion. In order to qualify for sec 121 (primary residence exclusion) you must have lived in the house for 2 out of the previous 5 year period. (Actually if you're married you would have been able to exempt 500K of gain). If you've been renting it out for 3 1/4 already you are past that 5 year look back window.
As @Greg Harriman said, the 1031 exchange is the way to go if you want to defer taxes on that gain. But you'll need to look at your purchases a little differently. In order to defer all tax in a 1031 exchange you have to do two things - First you have to purchase at least as much as you sell ( Your net sale, so around 350 minus commissions etc). Second you must use all of the proceeds from the sale in the next purchase or purchases. It sounds like you'd generate around 125K in net proceeds. So your reinvestment target to completely defer all tax in a 1031 would be to purchase at least 350K of real estate using 125K of cash.
You can buy less or take cash out of the 1031 but you pay tax on the difference. It also does not have to be one replacement. You could buy roughly 3 100K properties and still defer all tax that way.
One option that is not mentioned, if you decide to sell, is to move back in for the six months (or however long) it would take so that you can once again claim the Section 121 exclusion. You can have it listed on the MLS while you are waiting that time, and set your settlement date far enough in the future so that you meet the hold time requirement (24 months out of last 60 IIRC).
- Lender · Bothell, WA · Member since 2016 · 13 posts · 8 votes10yDave Foster You are right, unfortunately! Now I'll have to look at 1031 exchange option. Thanks for your patience in explaining this to me!
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