Profile picture for seattlejoel

buying investment property in Seattle

Ok, here is my situation.  I currently own two houses in Seattle, the one I live in and one that I own as an investment.  My rental income is about double the mortgage on my investment house and I currently have about $250k in equity in that house and another $100k that I have available to invest. 
I've done the math and I think that I can buy another fixer in Seattle and get it up and running with at least a small profit (I'm fairly handy and know when I'm getting over my head) but my question is, what is the best way to finance this?
Should I take out an investment mortgage?  Pull equity out of my other investment property? Or just wait a little while until I have enough cash to buy a house outright?
I'm banking on the thought that it can't be that bad for that long.  House prices are getting low enough in Seattle that the market is opening up a lot of first time buyers that could not have afforded to buy here a few years ago.  And I think that this will bottom out the market.  But even if it continues to tank I think that I can make at least a modest profit from rental income. 
Who should I even be talking to about this? 
  • December 16 2008 - Columbia City
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Answers (13)

What part of Seattle are you looking in? What price point?

Those should make a big impact on people's responses.

Also, home equity lines are a challenge to get these days above 80%
  • December 16 2008
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Profile picture for seattlejoel
I'm looking in south Seattle.  Area's where I know the neighborhoods and rental markets well.  I'm looking at the low end of the spectrum and I'm willing to take on projects that would scare off the average home buyer but that people that flip houses for a living would not be interested in because of the tight profit margins.  I'm thinking of it as a long term investment that I will at least break even in the short term.
  • December 16 2008
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You may consider apply for the mortgage.
The extra saving money you have in the future, you can pay extra on mortgage monthly payment,
Or you can buy the bank's CD if you want do another investment in the future.( the money in your pocket is your money )
  • December 16 2008
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You should be talking to a kick butt lender because the lending market is changing every single day.  You are right, though - there are some properties out there where the numbers actually pencil in!  I just found one in Ballard for well under $200k and there are a few more as well. The REO properties are popping up here and there and are in pretty good condition in some cases. 

Let me know if you need a lender - or just want to pick my brain! :)

  • December 16 2008
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Hey Joel, good questions. The market has never been better for investing now, as you have in the past. The question really should be "what is your plan??" Are you interested in amassing a portfolio of rentals, or simply purchasing now, rehabing over a shorter time frame and renting until the market will provide your desired profit from a sale? In all of these cases, timing really is everything, as the bottom will come and go in the Puget Sound area before the media gets wind of it. You should truly spend your time and energy becoming a student of the neighborhoods you are interested and comfortable with. I have a great tool for monitoring neighborhoods that I am happy to offer you. Would save you allot of time collecting data, just let me know!
  • December 17 2008
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Profile picture for Adam Hestad
Joe, remember that cash is king. Keep as much of it as possible on hand. Talk with some local banks about your position and see which banks might be willing to let you leverage your current assets and perhaps only put down 10% on a new rental. It's better to bleed a little bit of cash each month while you get that rental squared away than it is to tie up your cash.

Another thing you might want to consider is looking at small multi-family rentals such as duplexes and four-plexes. This spreads your risk and in the long run will probably produce a better cash flow for you than a single family home will. There are some great loan options out there for these types of properties including FHA loans with as little as 3.5% out of pocket. If you need a lender who can help you find a loan like this email (ahestad@rpaseattle.com) and I will point you in the right direction.
  • December 17 2008
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This is not legal or tax advice. Seek appropriate legal and tax counsel.

Most lenders will require that you put up a 25% down payment on non owner occupied real property assets. Personally, I am not a fan of using equity in a primary residence to acquire real property asset investments. That idea got many people into financial trouble. I am seeing many of those in foreclosure or short sale. Under most circumstances those in trouble thought of the cash from equity as cash. It is in fact leveraged and the income from the real property asset rental must be able to cover the annual debt service from all sources including the indebtedness secured by the subject real property asset and the indebtedness from the primary residence equity.

  • December 18 2008
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I would suggest you use unleveraged cash as the down payment to acquire more real property assets. Bank financing will be better than hard money lending. Hard money lending note rates can be 10%-20% with loan fees of 3%-5%. If you are looking for a lender, then choose wisely. They come in all shapes and flavors. You need one that understands more than the marketing fluff in the loan brochure. Choose one that understands margins, indexes, inverted yield curves, bond market pricing, and economics.

If you are going to use equity from a primary residence which I am against, then you should maintain 25% equity position at a minimum.

“income is about double the mortgage”
The rental income needs to cover more than the mortgage. Property taxes, utilities, reserve for future capital improvements, repair and maintenance, property management. If you are not using a professional property manager, then you need to account for paying yourself the property management fee.

“up and running with at least a small profit”
Cash flow is much more important than profit. Ideally, real property asset rental transactions should be structured to have a tax loss and positive cash flow. Structuring the transaction can be complex at times.

Flipping vs holding
There is a big difference between the two that can have a significant impact on the assets cash flow. Flipped real property asset income is usually taxed at the earned income rate and does not qualify for capital gains treatment. Real property assets held for investment usually qualify for capita gains treatment upon disposition of the asset. Generally, the assets needs to be held for at least one year to qualify for capital gains treatment.

  • December 18 2008
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If you are not a professional contractor paying yourself for the work, then you need to account for the opportunity cost of your time. For example, if your normal job pays you $65 an hour after tax, then your opportunity of your time spent fixing your rental instead of working your normal job is $65. the calculation can have a significant economic impact.

The economic reports I am reading seem to suggest that the bottom won’t hit until the last quarter of 2009 or the first quarter of 2010. If you are holding on to the real property asset rentals for 5-7 years, then I would be less concerned about the timing of the bottom of the market. Timing is very difficult. The type of market is identified by looking at the two previous quarters similar to identifying a recession. Once we have identified the type it already happened.

Contrary to popular belief location is not the most important factor and timing is less important than some would lead you to believe. The location can be great and still produce lower than optimal return on capital. The location and be poor and produce higher than expected return on capital. Many economic factors will influence the location. Timing is a real estate market is difficult. Once the type of market has been identified it already happened. We know the bottom by looking back two previous quarters. We know the market is getting better by looking back two previous quarters. If you are acquiring real property assts on a steady basis and holding them for quite a while then timing is less important. Calculating the expected return on capital is important.

  • December 18 2008
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Adam brings up some good points. Generally, single family home rentals won’t produce a return on capital over a long hold period as high as multifamily property or investment grade commercial property. a primary residence is not an investment. Cash flows on single family homes rarely out perform multi family property. You can certainly buy the fixer multifamily and hold on to it.
  • December 18 2008
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Profile picture for Adam Hestad
Joe, I agree with Michael, don't leverage the home you are living in - it's your home, not an investment. But if the cash flow from your current rental is twice what it takes to cover your expenses and you have $100k in cash then I do think it's time to consider leveraging that asset. The banks won't allow you to over leverage in today's market. You will probably need to maintain a 1.25 debt coverage ratio in order for the bank to lend you money but it sounds like that is not a problem. I also agree with Mike that timing is not the most important issue here. Finding the right property (preferably multi-family) at the right price should drive your decision. You make money on the buy-side of the transaction.


  • December 18 2008
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Profile picture for seattlejoel
Thanks everyone for all of the advice.  I think that part of what got us into so much trouble was people thinking of the equity in their primary residence as a savings account, I am not willing to do this and I am only talking about rental/investment properties.

Part of my motivation is frankly personal.  I just enjoy working on houses and I don't mind the headaches that come along with owning rental property.  I've had at least one rental for more than 10 years.

I'm self employed and the slowing economy has given me more time on my hands that I would like to fill productively and I think that taking on another house might be a wise way to to that.

I'm seeing this as a long term investment, but I don't want to loose my shorts in the short term either.

I'm starting to look at different types of loans and I'm also going to start checking out multi family units.  Cash may be king, but there is something to be said for having four walls and a roof over your head.  Having a nice place to live is never going to go out of style and I think that I could provide that for a few more families.
  • January 01 2009
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Step one is to get per quitfied with a lender weather you would use your own cash or the bank you need to know what your lending power is. Step two, get educated with short sale, foreclosure auction and bank own properties determine your purchasing strategies.
  • January 03 2009
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