Hi! Brand new to this, is my plan workable?

Question

Hi all.  My wife and I think we are going to buy a first rental property and wanted to check in with all of you experts, particularly because our plan might be a little different than most.

Us: 55 and 51 years old, one teenage kid.

Goals: retire early and save some on taxes.

Wants: To move out of Seattle in the next 5-10 years.  Relocate in the Bay Area near family, possibly second home in Bend.

Financial background:  We are financially stable.  No debt, solid retirement and other savings, own 2 million plus home outright.  Income is high and stable.

Risk tolerance:  low.  We don't like financial risk.

Plan: we want to buy a 3 bedroom single family home in a stable, moderately-priced neighborhood like Issaquah Highlands.  Something in the 1-1.3 million range.  We have the cash and do not plan to use financing.  We want a place that is in built around or after 2000 that could stand cosmetic interior upgrades.  We would rent this house out for 4 or 5 years until our kid leaves for college.  Rent would cover expenses and make a bit of money on top of that.

We would move into this rental house and sell our primary residence in Seattle once our kid is out of the house.  I would then upgrade the Issaquah rental house (aka our new primary).  I'm good at this sort of work and have had great success "slow motion flipping" primary residences.  We would also look for a second home in California or Oregon at that point.

We'd stay in the former rental house at least long enough to not be taxed on $500k of gains.  And probably long enough to avoid high 5 or 6 figure state income taxes in CA or OR.  We'd spend increasing time in CA or OR.  When ready to retire we'd sell the newly improved Issaquah house.  Retirement likely between 2030-2032 for the 51 year old (if I can make her stop working - she like her job).

I realize that is plan is not leveraging much of anything, but we aren't risk takers and very thankfully feel like we have plenty without pushing it.

I'd really appreciate advice on potential pitfalls, tax issues with rentals I'm not considering, etc.  It is important to my wife particularly that if we but a rental house it be good enough (and in a good enough neighborhood) that she'll feel content living in it for a while.

Thanks very much!

Kevin Sobilo · Answer

Account Closed, I understand your thinking but have one question.

Why would you want to buy a house and rent it for 4-5 years before moving in? First off prices are high and interest rates have gone up both of which may be more favorable in a few years. More importantly, if your intent is not to acquire and hold rentals you will either need to hire a PM or manage the property yourself. If you self manage with 1 rental you will never become very proficient at it.

Also, there is more risk with one rental than having many. With 1 rental everything is either going fine (and you barely notice) or its going TERRIBLY and its the only thing you can think about. With even a few rentals when there are issues at one the others care carrying things and the overall situation never seems terrible or overwhelming.

If you instead made your purchase in ~4 years then this just becomes a straight forward live-in flip and that is very low risk because the worst case is that you keep living in it.

Brent Huling · Answer

Not sure you can make these numbers work in Issaquah Highlands.  I live here.  I have a friend who bought a few houses in a new development (Forest Ridge) for around $500k.  They are all over $1M now 6 years later, but are just cracker jack junk houses.  They squeak and rattle in the wind.  He rented one out for 5 years until his kids were out of high school and moved in.  Smart.  Rent covered the mortgage, house appreciated.  In my view, every house in the Highlands is highly overpriced.  Hard to find anything under $1.5M.  Yes, you can rent a 4 bedroom house for $4k per month, get depreciation, write-offs, etc.  But I just don't think these houses are going to appreciate for the next few years.

I have a house in Bend and Palm Desert area too.  I mean with tech and Issaquah, it is possible the appreciation will continue, but it is hard to imagine. I personally would not buy a house for the prices right now in the area. These houses are soooo overpriced right now.  I think fundamentally you have a great idea, just not sure the Highlands is the best place to execute.  Further east in Snoqualmie or North Bend might work better.  New house in a new development would have the best chances of better appreciation, or a long term flip.

Nathan Harden · Answer

Hi Hank,

In my opinion, this does not sound like a huge risk because everything will be paid outright, no debt is great for your situation since you don't want to take huge financial risks. When it comes to renting out your house, I would only recommend that you rent out the property for 3 years once you move out. The reason that this is, is because if you have lived in that house for 2/5 years and used it as your primary residence at that time, you will not need to pay capital gains tax on the sale when that time comes.

Account Closed · Answer

Totally agree Nathan.  My Seattle neighborhood is full of high pay tech workers who seem fairly unaffected by economic slowdowns.  House prices in my neighborhood are still increasing year over year.  And agree about cash flow - it has to be almost an afterthought to make buying a rental house here make sense.

Thanks for chipping in - more confirmation that for me the biggest concern should be appreciation, and of course that starts with finding a good deal.

Account Closed · Answer

Thanks Brent.  I like Klahanie too, big lots, good value, easy to imagine getting value out of upgrades.

Agree too that it's hard to compute how much RE has appreciated in the Seattle area.  Definitely should have acted 5-10 years ago!

Hank

Account Closed · Answer

Thanks for all the useful information.  I think better when I can get a variety of perspectives and am not siloed in my own little idea castle (mixed metaphor alert :)

Brent your post is really interesting to me.  Appreciation is really what we are looking for, not rental income per se.  We'd like to have more of our total portfolio in real estate, but don't want to upsize to a bigger house in Magnolia.  There's only three of, and two in five years probably.  We have friends who've moved to waterfront houses etc to get more real estate equity, but staying inside the city of Seattle isn't even in our mid-term plans.  A base in Washington is important though, at least while my wife is still working.

I think I need to learn more about where on the Eastside is going to be a relative bargain and probably have relatively higher appreciation (or at least hold value).  So helpful you live in Issaquah Highlands and don't think much of the build quality.  We really like Issaquah Highlands because of the killer neighborhood amenities, schools, really low crime, small lots with less maintenance and  lower prices, really quick out to the mountains. Your killer Korean restaurant is almost worth moving for!  It feels like you could find a quality tenant there, and once the light rail reaches Issaquah the desirability only rise.

I grew up in Del Mar California and watched thousands of units of housing developments get built in the 80's and 90's.  Same complaints about quality, and yet somewhat shoddy tract homes continued to appreciate at high rates to this day.  But it is really hard to imagine.  And I just can't buy in an inflated market (really - it's almost physiological how I just can't buy an investment asset at a premium or in a seller's market - I can barely DCA in my retirement account).  Maybe waiting a year is my best shot?  If higher interest rates suppress the ability of buyers to drive up prices, and if in a year there's more inventory because sellers can't wait forever, maybe there's a dip to swoop at ....

Farther out 1-90 is a good idea too.  Snoqualmie Ridge is pretty darned nice - I can see why families want to live there.  Not sure I could sell my wife on it - she wants to be closer in if she needs to commute to downtown.

Anywhere else on the Eastside to think about?  I know price is an issue, but we don't want to spend primary house money on a rental house/stepping stone.

Anyway I need to research about what appreciate and why.  Thanks for the heads up!

Nathan Harden · Answer

Living in WA state is getting crazy expensive whether it's renting or owning. As for buying and holding in this area, you won't make much cash flow, if any at all. The big thing going to be appreciation, especially as more tech companies continue to grow in King County, the more expensive areas will hold their value because of all the money that these areas and neighborhoods are bringing in from the higher paying job markets.

Brent Huling · Answer

And I get the base in WA for no income tax.  I spend as much time in OR and CA as I do up here, but no way would I become a resident!  It would be cheaper to rent an apartment here and call it my home base than live in those states sadly.

Brent Huling · Answer

If you are looking for only appreciation, these houses will appreciate over time for sure unless the tech industry blows up, which won't happen.  Klahanie area might be a good buy for an older house that you can fix up and create more value with.  Great neighborhoods, but older houses.  Easy to fix up.  I have a few agents that live here in the Highlands and sell houses only in this area, so they would be experts to talk to.  They would know the market better than anyone.  It is nice to walk everywhere including the restaurants and shops and be 30 minutes away from the mountains.

RE will always appreciate here, but man, it is soooo over priced right now.  It needs a correction for sure.  I can't fathom how these 10-20 year old 2,000 sq. ft. homes are selling for 1.5M when they were built for under $500k originally.  Probably a personal thing as I should have been buying these things up long ago!

Happy to help if you want more intel.

Hi! Brand new to this, is my plan workable?

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