First Duplex. My numbers aren't 2%. Owner-occupied - Seattle area

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First Duplex. My numbers aren't 2%. Owner-occupied - Seattle area

Matthew Richey
Kent, WA · Member since 2016 · 14 posts · 1 vote

I'm about to put my offer in for a my first real estate investment.

In Auburn, WA which is about 40 minutes outside of Seattle,WA

 Listing price was 330k and dropped $5,000 about every 6 days which is now $315k I'm about to make an offer at 250k comparables in the area have sold $235k to $265k

The tax appraisal is 281k

Total square footage is 4200 and its a duplex 2100 square feet is on the top floor and then in the basement has a family room and unfinished portion.

I would be living on one side  or possibly making the basement into a another unit for owner-occupied

Offer price $250k with 25k down at 3.6% interest rate

Current rent that's collected $1930

Operating expenses including 10% for repairs garbage, sewer, insurance property tax is $745

Mortgage $1007

Mortgage insurance $111

 that would be a .37% for the 2% rule

I was thinking I could possibly raise rent possibly $1100 and then if I was able to make that apartment get those numbers better.

No other offers on the property currently has bad curb appeal

 Any advice would be much appreciated as I'm wanting to jump into real estate but don't want to make a huge mistake.

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Alex Chin
Seattle, WA · Member since 2015 · 500 posts · 243 votes
10y

Hey @Matthew Richey. Without getting into any deep analysis, I would say the first thing you need to remember is that if you're going to be owner-occupying the property as a househack, your equation changes entirely. The goal is not to generate some kind of massive monthly cash-flow, you are looking to defray your living expenses while gaining valuable hands-on management experience and building equity in a property with a very low interest rate.

Don't start evaluating this property based on the 2% rule, 1% rule, or whatever. Instead, look at it from the perspective of: "Well, I need to live somewhere, and it may as well be "free" to me so that I don't have $1,000+ going into someone's pocket ever month." Treat extra cash as a bonus on this property. If you can finish the basement and get a studio apartment out it, so much the better (make sure that this is permitted first!). My instinct is to advise holding rents slightly under-market as your priority in this situation is to minimize vacancies so as to reduce your personal operating costs.

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  • Alex Chin
    Seattle, WA · Member since 2015 · 500 posts · 243 votes
    10y

    Hey @Matthew Richey. Without getting into any deep analysis, I would say the first thing you need to remember is that if you're going to be owner-occupying the property as a househack, your equation changes entirely. The goal is not to generate some kind of massive monthly cash-flow, you are looking to defray your living expenses while gaining valuable hands-on management experience and building equity in a property with a very low interest rate.

    Don't start evaluating this property based on the 2% rule, 1% rule, or whatever. Instead, look at it from the perspective of: "Well, I need to live somewhere, and it may as well be "free" to me so that I don't have $1,000+ going into someone's pocket ever month." Treat extra cash as a bonus on this property. If you can finish the basement and get a studio apartment out it, so much the better (make sure that this is permitted first!). My instinct is to advise holding rents slightly under-market as your priority in this situation is to minimize vacancies so as to reduce your personal operating costs.

    4Reply
  • David Moore
    Investor · Crystal, MN · Member since 2013 · 486 posts · 277 votes
    10y

    @Matthew Richey

    Interesting.  If I were the seller, I wouldn't consider your offer.  You are 65K below asking and not offering all cash.  You have to give them an incentive to want to sell to you at such a big discount.  I also checked the comps, and I'm not seeing the same range you are.  You have to not just price compare, but compare square feet on comps as well.  I hope you get it, though, but I think you will have to raise your price, especially with financing it.

    0Reply
  • Matthew Richey
    OP
    Kent, WA · Member since 2016 · 14 posts · 1 vote
    10y
    Originally posted by @Alex Chin:

    Hey @Matthew Richey. Without getting into any deep analysis, I would say the first thing you need to remember is that if you're going to be owner-occupying the property as a househack, your equation changes entirely. The goal is not to generate some kind of massive monthly cash-flow, you are looking to defray your living expenses while gaining valuable hands-on management experience and building equity in a property with a very low interest rate.

    Don't start evaluating this property based on the 2% rule, 1% rule, or whatever. Instead, look at it from the perspective of: "Well, I need to live somewhere, and it may as well be "free" to me so that I don't have $1,000+ going into someone's pocket ever month." Treat extra cash as a bonus on this property. If you can finish the basement and get a studio apartment out it, so much the better (make sure that this is permitted first!). My instinct is to advise holding rents slightly under-market as your priority in this situation is to minimize vacancies so as to reduce your personal operating costs.

     Thank you for your help! That's such a great point. 

    I hope to work something out! :) I would love to get more units someday.

    0Reply
  • Matthew Richey
    OP
    Kent, WA · Member since 2016 · 14 posts · 1 vote
    10y
    Originally posted by @David Moore:

    @Matthew Richey

    Interesting.  If I were the seller, I wouldn't consider your offer.  You are 65K below asking and not offering all cash.  You have to give them an incentive to want to sell to you at such a big discount.  I also checked the comps, and I'm not seeing the same range you are.  You have to not just price compare, but compare square feet on comps as well.  I hope you get it, though, but I think you will have to raise your price, especially with financing it.

     About 1200sf is unfinished so 3000sf is finished. Here are the compares http://www.matrix.nwmls.com/Matrix/Public/EmailCMA...

    Any suggestions or ideas on how to make my offer better? Besides all Cash 

    Thank you for your help. I'm 22 and I'm learning as much as I can!

    0Reply
  • David Moore
    Investor · Crystal, MN · Member since 2013 · 486 posts · 277 votes
    10y

    @Matthew Richey

    I took a good, hard second look at the area, the home, the comps, and I have to stand corrected.  I'm with you...I think you are in the right range.  Hats off to you for having 25K.  But for whatever reason, this seller has big ideas for the price he wants.  The spread between list and sale on your comps is much more narrow than the spread you are shooting for.

    I love your idea of adding a unit, but watch out for zoning.  Make sure the city permits a triplex at this site.  It probably is, but good to check on.

    The psychology of sellers is hard to predict.  I've seen sellers in my market just hold on forever until someone gave them their asking price.  But this guy seems to be in a hurry.  If your financing is solid, with pre-approvals in place, that may buy you some price reduction.  But the comps belie that the spread between asking and sale price is much narrower than a 25% spread you are going for.  Hey, I hope you get it.  

    Concerning the 2% rule, what determines the 2% is your gross rents divided by the purchase price of the house.  So if each unit rents for $1100.0,  assuming you rent both, than this property at $260K is a .08%.  

    You are 22, you have 25K, and you have the guts to invest in real estate, so you are ahead of the pack.  One thing to consider.  In 2006, the owner purchased it for just 52K.  He has a big capital gain coming.  Find out if he owns multiple properties in the area.  You can do this by looking up tax records, then cross reference his name to see if he owns any others.

    Knowledge is power in negotiations.  If this is his only rental, you know something about him.  If he owns many, he may prefer an all cash offer because he intends to roll proceeds via 1031 exchange to another property.  I bet its the former...the impatience is there.  There are a lot of variables here still to consider, but you are off to a good start.  Please post what happens.

    2Reply
  • Matthew Richey
    OP
    Kent, WA · Member since 2016 · 14 posts · 1 vote
    10y
    Originally posted by @David Moore:

    @Matthew Richey

    I took a good, hard second look at the area, the home, the comps, and I have to stand corrected.  I'm with you...I think you are in the right range.  Hats off to you for having 25K.  But for whatever reason, this seller has big ideas for the price he wants.  The spread between list and sale on your comps is much more narrow than the spread you are shooting for.

    I love your idea of adding a unit, but watch out for zoning.  Make sure the city permits a triplex at this site.  It probably is, but good to check on.

    The psychology of sellers is hard to predict.  I've seen sellers in my market just hold on forever until someone gave them their asking price.  But this guy seems to be in a hurry.  If your financing is solid, with pre-approvals in place, that may buy you some price reduction.  But the comps belie that the spread between asking and sale price is much narrower than a 25% spread you are going for.  Hey, I hope you get it.  

    Concerning the 2% rule, what determines the 2% is your gross rents divided by the purchase price of the house.  So if each unit rents for $1100.0,  assuming you rent both, than this property at $260K is a .08%.  

    You are 22, you have 25K, and you have the guts to invest in real estate, so you are ahead of the pack.  One thing to consider.  In 2006, the owner purchased it for just 52K.  He has a big capital gain coming.  Find out if he owns multiple properties in the area.  You can do this by looking up tax records, then cross reference his name to see if he owns any others.

    Knowledge is power in negotiations.  If this is his only rental, you know something about him.  If he owns many, he may prefer an all cash offer because he intends to roll proceeds via 1031 exchange to another property.  I bet its the former...the impatience is there.  There are a lot of variables here still to consider, but you are off to a good start.  Please post what happens.

     I put the offer in. I decided to change my down payment to 15k so I have some more money to work upgrading the place right off the bat.

    I tried doing a cross reference but not quite sure how to do that on the tax website.

    From his Facebook I found out he recently retired as a mortgage broker.

     So the best way to get that 2% rule the work is to find something dirt cheap and remodel it.

    I'm pre-approved for 230k but since it's a duplex I'm able to go higher

    I'm learning so much! I can see real estate investing going a long way with me

    Thank you!

    0Reply
  • Matthew Richey
    OP
    Kent, WA · Member since 2016 · 14 posts · 1 vote
    10y
    Originally posted by @David Moore:

    @Matthew Richey

    I took a good, hard second look at the area, the home, the comps, and I have to stand corrected.  I'm with you...I think you are in the right range.  Hats off to you for having 25K.  But for whatever reason, this seller has big ideas for the price he wants.  The spread between list and sale on your comps is much more narrow than the spread you are shooting for.

    I love your idea of adding a unit, but watch out for zoning.  Make sure the city permits a triplex at this site.  It probably is, but good to check on.

    The psychology of sellers is hard to predict.  I've seen sellers in my market just hold on forever until someone gave them their asking price.  But this guy seems to be in a hurry.  If your financing is solid, with pre-approvals in place, that may buy you some price reduction.  But the comps belie that the spread between asking and sale price is much narrower than a 25% spread you are going for.  Hey, I hope you get it.  

    Concerning the 2% rule, what determines the 2% is your gross rents divided by the purchase price of the house.  So if each unit rents for $1100.0,  assuming you rent both, than this property at $260K is a .08%.  

    You are 22, you have 25K, and you have the guts to invest in real estate, so you are ahead of the pack.  One thing to consider.  In 2006, the owner purchased it for just 52K.  He has a big capital gain coming.  Find out if he owns multiple properties in the area.  You can do this by looking up tax records, then cross reference his name to see if he owns any others.

    Knowledge is power in negotiations.  If this is his only rental, you know something about him.  If he owns many, he may prefer an all cash offer because he intends to roll proceeds via 1031 exchange to another property.  I bet its the former...the impatience is there.  There are a lot of variables here still to consider, but you are off to a good start.  Please post what happens.

    Thank you I love learning all of this! Looks like besides this he hasn't bought anything since his personal home in 2003. 

    I put the offer in this evening so we'll see where that goes. I decide to drop my down payment 15k so I could have more cash to put into the place right away/ larger emergency fund.

    As for the third unit: Is that something that are normally just call the building department for the zoning? After I inspect the place I'll get a better feel if this is even feasible.

    I'll keep you updated!

    0Reply
  • David Moore
    Investor · Crystal, MN · Member since 2013 · 486 posts · 277 votes
    10y

    @Matthew Richey

    Yes, just call city hall, building or planning department.  Ask what is needed, if anything, to add a 3rd unit to an existing duplex.  

    0Reply
  • Pete Perez
    Engineer/Real Estate Investor · Renton, WA · Member since 2015 · 368 posts · 120 votes
    10y

    @Matthew Richey

    I am looking to do the same thing very soon in that area as well. Maybe closer to Tacoma. I am following this post, please keep us updated. Good luck.

    0Reply
  • Matthew Richey
    OP
    Kent, WA · Member since 2016 · 14 posts · 1 vote
    10y
    Originally posted by @Pete Perez:

    @Matthew Richey

    I am looking to do the same thing very soon in that area as well. Maybe closer to Tacoma. I am following this post, please keep us updated. Good luck.

     I have seen a lot of available for sale in Tacoma, Puyallup area. 

    Update:

    They declined my offer with no counter-offer. Requested their comps.

    0Reply
  • Curt McClements
    Puyallup, WA · Member since 2014 · 71 posts · 17 votes
    10y

    I am about to close on the purchase of my second duplex in the South Hill Puyallup area. I've been watching the $300-400k duplex market very closely for the last 6 months or so and the majority of the sales have been closing very close to asking price. The one I'm buying was listed at $420k and we settled on $410k. Good luck in your ventures @Matthew Richey!

    0Reply
  • Matthew Richey
    OP
    Kent, WA · Member since 2016 · 14 posts · 1 vote
    10y
    Originally posted by @Curt McClements:

    I am about to close on the purchase of my second duplex in the South Hill Puyallup area. I've been watching the $300-400k duplex market very closely for the last 6 months or so and the majority of the sales have been closing very close to asking price. The one I'm buying was listed at $420k and we settled on $410k. Good luck in your ventures @Matthew Richey!

     What's your monthly rent? and cash flow!? 

    Great seeing somebody local

    0Reply
  • Curt McClements
    Puyallup, WA · Member since 2014 · 71 posts · 17 votes
    10y

    @Matthew Richey

    The monthly rent is $2850 total. Cash flow is about $1,000 per month (I put 25% down). I purchased the other one last year for $315k. It is a little older and needs occasional repairs. The cash flow is also about $1,000 per month.

    0Reply
  • Lynda Lopez
    Property Manager · Seattle, WA · Member since 2015 · 4 posts · 1 vote
    10y

    Thanks for sharing your experiences @Matthew Richey and @Curt McClements. My fiance and I are getting our pre-approval and will be looking for a multiplex (ideally 4 plex) in the Tacoma area this year. Our plan is to live in one of the four units, and hopefully break even (if not cash flow) while living for free to build up for the next property. It's helpful to see a fellow newbie in the game. It's helpful to hear your analysis @Alex Chin about how to evaluate the numbers differently when you're living in one of the units.

    Keep us updated Matthew! I look forward to posting about what we find when we get further into the process :)

    0Reply
  • Matthew Richey
    OP
    Kent, WA · Member since 2016 · 14 posts · 1 vote
    10y

    it's awesome to see more local people!!!

    The listing agent wanted me to put my highest offer in but I can't go too much higher because the cops aren't very high. I think there might be a problem with the appraisal if they even accepted it.

     We we asked for comps but the listing agent says  " it is what itis" 

    Any advice would be much appreciated

    0Reply
  • David Moore
    Investor · Crystal, MN · Member since 2013 · 486 posts · 277 votes
    10y

    @Curt McClements

    Do you mind sharing your numbers?  $1000.00 cash flow on rents of $2850 is pretty impressive.  I would think mortgage costs and taxes, insurance, and water bills plus repairs would eat into that quite a bit.  

    0Reply
  • Alex Chin
    Seattle, WA · Member since 2015 · 500 posts · 243 votes
    10y
    Originally posted by @David Moore:

    @Curt McClements

    Do you mind sharing your numbers?  $1000.00 cash flow on rents of $2850 is pretty impressive.  I would think mortgage costs and taxes, insurance, and water bills plus repairs would eat into that quite a bit.  

    My instinct says that this is $1,000 "cash-flow" after debt service (PITI). I don't think vacancy, repairs, maintenance, etc. has factored into the equations yet.

    Priniciple, Insurance, Taxes, and Interest on a $307,500 loan should come out to a few shades under $2,000/month, I think that he is counting the rest as cash flow.

    0Reply
  • Curt McClements
    Puyallup, WA · Member since 2014 · 71 posts · 17 votes
    10y

    @Alex Chin

    You're right! I am not figuring in vacancy or repairs. PITI is $1620 / month on my first duplex. Rental income is $2615. I'm expecting similar numbers for the new one. I did put a large amount down, and that's why the numbers are good. Both duplexes are newer and so far, repairs have been minimal.

    0Reply
  • Glen Erickson
    Lacey, WA · Member since 2015 · 49 posts · 4 votes
    10y

    @Matthew Richey 

    One of the things you should do is pay "rent" on the your side also. if you put the amount you pay yourself into a separate account it will add up quickly and you will find that you can purchase a second property quickly. In two years if you pay 1000.00 in rent you will have 24k to buy other properties. It will also give you a great emergency fund. 

    You may want to look at starting a self funded retirement with it also and use it to invest in some properties. You could put some of the rent you pay into it and build it up fairly quickly. I am sure there are several people that could help give you advice with that.

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y

    @Matthew Richey, "bad curb appeal" means that your best Offer can justifiably be even LESS than the lower comps! After all, two can play the "it is what it is" game! Cheers...

    0Reply
  • Matthew Richey
    OP
    Kent, WA · Member since 2016 · 14 posts · 1 vote
    10y
    Originally posted by @Brent Coombs:

    @Matthew Richey, "bad curb appeal" means that your best Offer can justifiably be even LESS than the lower comps! After all, two can play the "it is what it is" game! Cheers...

     Very true. I also haven't seen any photos of the inside and no inspection till I have a accepted offer. Luckily the market isn't too hard on it so I'm hoping I'll be able to make something happen. About to go do another drive-by to get a feel for the area again. 

    Any advice on how to convince that would be awesome. 

    Thanks everyone I'm learning a lot and I'm excited for future Investments

    0Reply
  • Matthew Richey
    OP
    Kent, WA · Member since 2016 · 14 posts · 1 vote
    10y
    Originally posted by @Glen Erickson:

    @Matthew Richey 

    One of the things you should do is pay "rent" on the your side also. if you put the amount you pay yourself into a separate account it will add up quickly and you will find that you can purchase a second property quickly. In two years if you pay 1000.00 in rent you will have 24k to buy other properties. It will also give you a great emergency fund. 

    You may want to look at starting a self funded retirement with it also and use it to invest in some properties. You could put some of the rent you pay into it and build it up fairly quickly. I am sure there are several people that could help give you advice with that.

     I was kind of thinking the same thing if I can make this work. Right now I'm pitting 5% of all my day job and come and do a 401k that's getting match from my employer.

    I really love the idea of having multiple multi families in making that work as a full-time job.

    Thanks

    Matt

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y

    @Matthew Richey, because you "love the idea of having multiple multi families in making that work as a full-time job", NOW is the time you need to come to grips with only offering prices that suit YOU! ie. having scant regard to any higher price that the Lister/Seller may be asking! All the best...

    0Reply
  • Glen Erickson
    Lacey, WA · Member since 2015 · 49 posts · 4 votes
    10y

    @Matthew Richey 

    Is it/can it be a self directed 401k? If so you can invest it in your properties and if you have a property under the 401k all profits go to the 401k and do not count towards your contribution. That is my understanding anyways. I would talk to an expert on that.

    I can't remember where to find it off the top of my head but there is a few things out there that talk about how much you need to make in passive income per month to be able to stop working. The basics is take all your bills per month and add other expenses and that is what you need to make in passive income before you can stop working. The usual suggestion is include the cost of a vacation once or twice a year so add 1 or 2k to the total you get.

    0Reply
  • Matthew Richey
    OP
    Kent, WA · Member since 2016 · 14 posts · 1 vote
    10y
    Originally posted by @Glen Erickson:

    @Matthew Richey 

    Is it/can it be a self directed 401k? If so you can invest it in your properties and if you have a property under the 401k all profits go to the 401k and do not count towards your contribution. That is my understanding anyways. I would talk to an expert on that.

    I can't remember where to find it off the top of my head but there is a few things out there that talk about how much you need to make in passive income per month to be able to stop working. The basics is take all your bills per month and add other expenses and that is what you need to make in passive income before you can stop working. The usual suggestion is include the cost of a vacation once or twice a year so add 1 or 2k to the total you get.

     It's a company 401(k)

    Thank you I gathering all the information I can.

    Update: I did another drive-by, talked with quite a few neighbors and decided to offer $281k they countered with $300k and I countered back at $290 They decide not to accept offer so hopefully they'll change their mind.

    Thanks everybody

    -Matt

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