Buying my first home in Seattle - advice needed!

22 Replies | Seattle, Washington

Hi everyone!

I'm new to BiggerPockets, and am looking for some advice!

My husband and I are looking to buy our first home in Seattle, and in neighborhoods with good access to shops and restaurants. Our initial plan was to buy a house and live in it for 2-3 years, then rent it out, and move to a second home.

The challenge I'm running into is that the neighborhoods we like don't seem to offer good investment opportunities. I used the 1% rule and calculated GRM of a few properties we found on zillow, and the numbers just don't seem to work.

I'm not sure what the right next steps should be, but I've considered a few scenarios:

1. Buy a single-family home in a neighborhood we like; at least our $$ is building equity in our own home rather than going to rent. We then save up, and buy a rental property later on.

2. Buy a single-family home, and rent out the basement to help pay down mortgage.

3. Continue to rent, and buy an investment property elsewhere. I think the rent will likely be higher than the cash flow we can get from the investment property.

I'm new to RE, and appreciate any advice you may have.

Thanks so much for your help!

Hi Tiffany,

I'm in a similar situation in Seattle as well. I have been looking at duplex and triplex properties, but the math doesn't work. They are not even remotely close to cash flowing. I've recently contemplated just finding an SFR and doing light rehab. Eventually renting it after a year and repeating. I'm really hoping this market correction turns into a larger housing market correction.

@Tiffany Kung

What you see is pretty much the story in most parts of the country and especially true in big cities. 1% rule seems pretty difficult, let alone the 2% rule that is recommended by experts on this site. Time is difficult for cashflow. People here say that if you look very hard in current market then you might find some deal, but that seems quite difficult to do if you are new to RE. 

I remember reading somewhere (maybe one of the Rich Dad books) that RE is cyclical like farming. Maybe this is the harvest season, not the sowing season?  

A home is a different purchase than an investment property, and especially for a buy and hold strategy, buying in a high walk-score neighborhood in Seattle is very very very difficult. Depending on your capital it might be possible to find something with a legal MIL (mother in law) unit, but with the way rental laws are going on in Seattle, you need to be very careful.  

As I am sure you know the prices in Seattle are rising quickly especially for in-demand neighborhoods, it's time to really think about what you want.  If you want to live close to the City Life, and everything that is, you might have to put off investing for awhile, if you want to put investing ahead of that, a broker just sent me a decent looking triplex in the south end of seattle that could cash-flow fully rented, but will appreciate quickly at $325k. Using a fha to lock it up and living there until you can refinance, to 20% would put off home ownership, but put you further ahead of the curve.

@Patrick Britton and @Tiffany Plovie what do you guys think?

@Troy Fisher  Thanks for the shout out. :)

@Tiffany Kung  The 2% rule is pretty much useless for a market like Seattle. The people who come up with this sort of thing get this number thanks to the data collected from all over the United States. In a market like Seattle, it's simply too hot and does not make any sense, so throw it out the window.

Quite frankly, I think the very best way to get into real estate is something that Troy touched on. 

Find some kind of multifamily property, ideally a triplex or fourplex. Purchase it and live in one of the units allowing you to get an FHA loan and requiring a mere 3.5% down payment. While the total rent may not cover your entire mortgage payment, it will certainly help while building significant equity. Furthermore, as you reorganize the multifamily you can increase rents, pass on certain expenses to the renters and add additional sources of income, such as washer/dryer, parking, storage, etc. after a year of doing this, you will have the numbers that justify a significantly higher sales price. For instance, suppose you buy a $500,000 property providing net operating income of $25,000. Therefore, you're operating at a 5% cap rate. But suppose after a year of reducing expenses, adding additional income and increasing rents, your NOI is now $35,000. Well, given the prevailing cap rate of 5% your property is now actually worth mathematically $700,000. So what you do now is sell it for $600,000 (sometimes it doesn't pay to be greedy), and take your $100,000 and put it towards another property. Or if you want to keep the property, do some kind of home equity takeout and apply that to the purchase of something else.

With the FHA loan, so long as you occupy the property for at least one year you can do this up to 10 times (assuming you have no other financed properties).

And while this is a fantastic idea in theory, here are some of the drawbacks/catches/negatives: 

1.  you will have to live in one of the units. And let's face it, not everybody wants to live right next to their renters. 

2.  Another drawback is that it will require a fair bit of work, just like anything else. You will have to increase rents and decrease expenses somehow and very often this could mean doing some kind of renovation work to add separate metering for certain utilities. 

3.  As well, it may require the outlay of some cash for the purchase of income-producing assets, like a coin-operated washer and dryer. 

4. And last but not least, you will not be able to do it for every multifamily property you find. FHA guidelines clearly state that for triplexes and fourplexes, the total gross rental income of all units including the one you will live in must be greater than the total mortgage payment.

So let's say you have a fourplex that rents for $1000 a unit. This means it produces gross rental income of $4000 per month. You will have to find a property in which a total monthly mortgage payment is less than $4000. And when I mean total monthly mortgage payment, I mean principal plus interest plus taxes plus homeowners insurance plus mortgage insurance.

So when you find a property that looks appealing and you make an offer on it, make sure that your broker has a financing contingency, along with any other contingency. As well, it never hurts to have a lease review contingency.

Trust me, you do not want to be in a situation where you make an offer on a property, go through the whole process of paying for an inspection and an appraisal only to hear that the total rental income will not cover the total monthly mortgage payment and the FHA will not provide the loan. This is a costly mistake as you will have to pay for the inspection as well as the appraisal. Total cost could be anywhere between a low of $800 to as much as $1200 or higher.

Make sure that the real estate broker understands this and has connections to lenders who are also familiar with this type of purchase.

@Tiffany Kung

Welcome to the forums. A lot of similar advice has been given in this vein, so I will add some of my own as one with some experience in the Big City Blues.

Basically, your 'hott' urban MSAs (New York, SF, Seattle, Miami, LA, DC) will have notoriously terrible rent/value ratios. People blame a variety of causes for this: urban renewal, foreign investment, protectionist zoning laws, lack of available land, and others..

Additionally, these are the areas where laws almost unilaterally favor tenants over landlords. For years to come, I anticipate a huge populist push for rent controls and tenant protections. As we become a nation of more and more renters, the political appeal will be for rent protection, and this will be most vehement in areas where the rent is too damn high.

@Hersh M. mentioned that this may be the harvest season for real estate in cities, and I do believe that. Just for those who got into the big-bad-cities 30 years ago.

I recommend thinking forward to the next big harvest. The dreaded word: Millennials, will eventually have kids and go to live places where there money goes a bit farther. Be ready to rent to them when they arrive.

8/22/2015

Tiffany – thanks for the post

As you and others mention, thetextbook guidelines are hard to meet in King County ( especially Seattle area ) ….as the marketremainsstrong for sellers , I would recommendhaving all your “ ducks in a row “with regards tofunds in place / lender pre-approval( not pre-qualification “ ) etc….reason for this is thatif a property thatis attractive to offer on becomesavailable – there isvery likely to be otherslike you that have been waiting / watchingfor theopportunity to buy

Thanks and I hope this helps and if you already are prepared – great!...all the best

Originally posted by @Trevor Ewen :

Basically, your 'hott' urban MSAs (New York, SF, Seattle, Miami, LA, DC) will have notoriously terrible rent/value ratios. 

Rent/value ratios only reflects demand.  Ratios are higher in cities like SF because of high demand.  If you are trying to determine profitability you would want to compare rent growth.  SF has high rent growth.

Hello

Great to see this discussion on rent to value. On the surface , the properties in Seattle metroplex will not meet the 1% rule but dig dipper and you will find values. The value call is not for the newbie though. One can find 100 year old homes in Seattle that can be rehabbed and there is a possibility to have instant equity if one plans to live there or rehabbed enough to create positive rental cash flow ( though still not meet the 1% rule) or fix and flip. We are working on two such properties one in the desirable west Seattle area and the other in the central district. One we are building with a mil and the house buyer can live in one section and rent out the mil for $1500 very easily. The other is a duplex and we are pulling down the 1900 structure and adding two new units. Yes difficult to find but not impossible.

Thanks

Inder

@Dave Skowhit the nail on the head. Best to get your finances in order by seeing a competent lender. In Seattle, you are competing with genuine, actual cash buyers with POF and massive EM checks. You need every advantage you can get and without a pro-approval letter, your offer, no matter how high, can be totally worthless in the eyes of the seller.

@Ryan B.

Hi Ryan,

Thanks for sharing your experience! I'm considering that too, and hoping that some light rehab isn't too difficult for a new investor to manage, and can add some value to the home.

Which neighborhoods are you looking into?

@Hersh M. @Trevor Ewen

Hi Hersh, Trevor,

It makes a lot of sense that the 1% rule doesn't apply to cities like Seattle. Is it reasonable to expect higher appreciation in the hot urban cities, and therefore be ok with purchasing properties even if the rent/value ratio is not great?

@Troy Fisher @Patrick Britton

Hi Troy, Patrick,

I'm willing to consider multi-family properties, but I'm certainly concerned about the drawbacks that Patrick has clearly outlined. But more importantly, I just haven't been able to find them in the neighborhoods I've been looking into.

Troy: Do you have any recommendations on neighborhoods I should be researching for multifamily properties?

@Dave Skow

Hi Dave,

Thanks for the advice! I plan to contact a few lenders and maybe a CPA to have my funding available, so that I'll be able to respond to attractive opportunities quickly.

@Tiffany Kung - I'm not investing in Seattle, it's not in my wheelhouse, and I don't like where the city council is going with all their crazy ideas.  But @Patrick Britton sent me a couple multifamily to look at in the Seattle Area, and I gave him my thoughts on it.  There were a couple which would work for appreciation play house hacking situations.

@Troy Fisher yeah, city of Seattle has been throwing around, and implementing some very investor-unfriendly ideas and by-laws.  something to consider.  that in combination with the price and return on investment can make multi-families in SEA worth a second and third thought.  

@Tiffany Kung to give you a heads up on the documents you'll need, here's a short list: past 2 years' tax returns, past 2 years W2s, 2 most recent bank statements, asset statements showing proof of funds (IRA, stock trading account, savings accounts, etc.), and you'll need to provide SSN to pull credit. If you're self-employed, i'll let @Dave Skow give you the extended list :) 

@Patrick Britton

Keeping an eye on the political realities in urban areas can often make the choice for a would-be investor. This is why even high-value areas of Texas are still loved by investors, they have more landlord-friendly environments.

@Bob Bowling & @Tiffany Kung

I definitely agree that there is high demand in these areas. I live in New York, and have seen rents double since I moved here 5 years ago. Regardless, I think this window is a short game for growth before there is very little room left to move. 

When you are buying in at a much lower basis, demographic shifts are more likely to move to you. With historically high rents and tenants paying a historically high percent of their income on rents, I don't see the big city growth going on into perpetuity.

This article from Robert Shiller may also give a window into my bearish perspective on these larger MSAs eternal growth prospectus.

8/24/2015

@Patrick - thanks

@ Tiffany -  thanks for the reply and good idea ! :)   here is a data  list that's similar to what Patrick provided that you can use to  compile the data needed for loan pre approval purposes :

  • 2 most recent bank account statements (ALL PAGES. Any large deposits that are not payroll related that appear need to be explained and paper trailed)
  • 2013 2014 W2s
  • 2 most recent paystubs
  • 2014and 2013 tax returns
  • Copies of driver licenses
  • Completed signed loan forms

I hope this helps and feel free to ask any other questions ...all the best

You might want to read the book Buy and Hold Forever to get a perspective on where to buy, it's a pretty good book and is about the opposite of what we did.

I'm hoping to invest in Seattle in the future.  Hopefully during a down cycle rather than the height of the market, but it will still be tough to cash flow there, so have to consider appreciation as well.

Depending on where you bought and what the basement option looks like, you might be able to make more with vacation rental rather than a traditional tenant.

I like the suggestion from Trevor Ewan, be ready to rent to the millennials as they grow up and have kids. I'd say that's a pretty spot on prediction for the years to come.

Hey Tiffany, I personally think buying a non conforming duplex (your option 2) in the best way to go for the first house. You can live in one unit and rent out the other. You can probably get one for $600-$700 in North Beacon Hill, Central, and North Seattle area. Option 3 may work for you too. There are still areas that are not too expensive and the rental income is good. We just close our town home in south Delridge two weeks ago. Our monthly payment is $1087 and we rent it out for $1875 a month. The rent is very strong there. We rented out the place the first week after closing. Personally, I think the whole west Seattle area will increase dramatically in the next few years, if there is no big changes to the macro economy. Hope this helps. Thanks and have a great day!