Questions that came up when I am trying to start investing in real estate

[Keng Fong]

1. Is it a good time to start investing in real estate because the interest rate is so high?

2. How to start investing in real estate when I live in a very expensive area？ (Seattle WA)

[Michael Haas]

Its definitely harder to purchase good, cashflow positive properties in today's market than it was in the low interest rate Covid market, but that doesn't mean buying today is good or bad. Others above have argued that prices have not fallen as significantly as many predicted - but its worth noting that most good markets were averaging 10% appreciation for years leading up to the rate-induced slowdown of 2022. So, a contrarian view - prices are "down" if you look at divergence from the long term average appreciation (which here in Seattle is 5.5%), not just if they drop in absolute terms YoY. Divergence from the average is just as important here than absolute prices - if your average appreciation is 5.5%, then years where you appreciate less than that are in some ways "down" markets and years where you appreciate more than that are in some ways "up" markets. For two years most markets have be relatively stagnant, which could be a sign that there is some "catch up" appreciation due in future years, or it could be that we're reverting to the average to pay back many years of above average property appreciation leading up to now. Lots of crystal ball predictions that you can make here, so I'll save you my guesses. A couple of high level thoughts though:

On HouseHacking:
As others have mentioned, HouseHacking is the #1 strategy to get started in the Seattle Market.  Lets say you do a Seattle 4plex HouseHack w/ 5% down conventional loan (new loan option as of last month!)

That $70,000 could purchase you a property up to $1,400,000 locally... and to get a 100% ROI on your investment all you need is 5% appreciation on the property (remember, I called out above that the AVERAGE appreciation rate in Seattle over the last 40 years has been 5.5%). Cashflow / rents will provide additional ROI but in our experience over a long hold time appreciation will always contribute more to your total ROI than cashflow. Interest rates will also be .25% - 1% lower on an owner occupied property than on a rental property.

Contrast that with buying out of state / non owner occupied properties. That $70,000 now has to go into a 20 - 25% down mortgage, allowing you to purchase a property for $280,000 - $350,000. Now, to see 100% ROI the property would have to appreciate 20 - 25% in value. Cashflow / rents will provide additional ROI but not enough to overshadow the more favorable loan terms and higher value of the househacked property.

This is an oversimplification but I'm sure you get the point! Happy to talk about the strategy more - we're up to 13 properties owned in WA now and wouldn't have been able to scale to that level quickly without househacking.

On Seattle - we like ADU and DADU properties with multiple units. For those:
1. Be aware that 80% or more of those ADU units have been built without permits. Not a deal breaker necessarily, but a risk to be aware of and mitigate.
2. Brush up on building code requirements: in basements you're looking for egress windows that are 5.7 sq feet or more openable (3ft by 3ft casement style windows work best), and ceiling heights 6ft 8 inches or greater (as little as 6 ft 4 inches is ok under ductwork and beams though)
3. I've had success with cashflow rentals around Seattle by getting off the beaten path- there are established investors bidding up the price (and therefore compressing the cap rate) on many small multi-families, but those same investors are not going after large 5-9 bedrooms SFHs that you can househack by the room or split up with an ADU / MIL. Establishing a short term rental / airbnb in part of the home is another great way to maximize rental income.
4. There are first time homebuyer assistance programs like WSHFC that you can get into a house for pretty much just the closing costs- could be just $6k - $25k up front cash to close on a $500k house. If that house has a unfinished basement you can finish and rent out, or even just extra rent-able bedrooms, your mortgage payment will likely be significantly less than you currently pay for rent, + you reap all the tax benefits and forced savings effects of home-ownership.

If you have good credit, good W-2 income, and just a little bit of savings buying a house hack is a financial no-brainer. We started with this strategy in 2013 and nearly ten years later we have 13 properties in King County / Seattle and about $10,000 / month of passive income profit - if you stick with it the results compound quickly!

Cheers and good luck! And seriously, message me anytime if you'd like to talk more about house-hacking, it's definitely changed my family's financial life and the lives of almost 100 of our clients for the better!