Dilemma: Own our own place or start investing

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Dilemma: Own our own place or start investing

Wesley Wong
Seattle, WA · Member since 2012 · 18 posts · 2 votes

My wife and I both work and have no kids. We live in Seattle, Washington, where the market is really hot right now. We started looking for our own place back in October, but have yet to land anything. We've put in some bids, but they've all been beat in bidding wars and prices continue to soar.

Our rental lease is coming to an end at the end of the month and we have to renew, along with a rent increase that we received a few days ago. Seeing our rent go to someone else's mortgage and being at the mercy of rent increases really makes us want to own our own place.

We also want to get our own place since we want to start investing in Real Estate. We've always thought that owning our own place would be a good step before we start investing. However, our situation seems to be pushing us to rethink this.

We would like to invest close to where we live as we're just starting out and believe it will be easier for us to be close by. This limits us to the area in and around Seattle, perhaps as far as Tacoma down south and Everett up North. This also means we are not likely to be able to buy both a home and an investment in parallel since prices seem to be quite high here and we'll most likely be going with traditional mortgages for both to start off. We will most likely need to buy one and then another in about a year.

Some other thoughts I had. There are rumblings that there will be a downturn in the next few years. This makes me think it's better to hold off on buying a home until then. Since there should be investment opportunities in any type of market, I'm not as worried about jumping into investing now.

Saying all this, I was hoping to get some thoughts and advice as to what we should do. One thing I'm trying to do right now is negotiate with our landlord about signing a 1 year lease but having a clause that allows us to give 3 months notice to break the lease without penalty. This would allow us to search for a home without a need for timing the purchase.

Some options that I see:

1. Sign the lease and continue home hunting. Only after we find a home do we start to consider investments.

2. Sign the lease and start investing immediately and put home hunting on hold until next year when we're ready to buy again.

3. Sign the lease and start investing immediately. Continue to invest and rent until the downturn. Buy a home during the downturn.

4. Something else?

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Jonathan J. Miller
Lender · Denver, CO · Member since 2015 · 275 posts · 35 votes
10y
Have you considered a duplex. Buy and rent? You will get the awesome Owner occ rates. Or maybe a four plea. How's Seattle? I was born at Fort Lewis and was there in Tacoma for a few before Colorado became my home.
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  • Ingrid J.
    Investor · Tromsø, Norway (Europe) · Member since 2015 · 431 posts · 194 votes
    10y

    @Wesley Wong A great question!

    The entirety of the decision depends on the deals you've considered. Having an overall strategy is great, but only it you find real opportunities to support it. No matter what you decide it may take longer than a month to find a deal.

    I also would caution against betting on a downturn in the market. As it's hard to time a correction can take years to come, and by then you will have actually lost money by sitting on the sidelines.

    2Reply
  • Jonathan J. Miller
    Lender · Denver, CO · Member since 2015 · 275 posts · 35 votes
    10y
    Have you considered a duplex. Buy and rent? You will get the awesome Owner occ rates. Or maybe a four plea. How's Seattle? I was born at Fort Lewis and was there in Tacoma for a few before Colorado became my home.
    3Reply
  • Wesley Wong
    OP
    Seattle, WA · Member since 2012 · 18 posts · 2 votes
    10y

    @Ingrid J. We have considered a duplex. However, there aren't many duplexes in the areas we want to live in and the ones that are available are close to $1M, which is too expensive for us right now. Tacoma prices are a little cheaper, but unfortunately, that is too far out for us to commute to work.

    0Reply
  • Vlad Vdov
    Reading, PA · Member since 2014 · 4 posts · 6 votes
    10y
    We were in a very similar situation as you 2 years ago. What we decided to do was not renew lease, we were paying $995 per month. Moved back in with parents, to save a few bucks. We planned on staying there for 1 year but turned out we were there for 2 years. Result: Bought a 2 unit property cash flowing between $3-4K annually. Bought a 1,700 sq ft SFH to rent out, cash flowing $2.5k annually. Did a flip w/ partners resulting in $11k profit for our team. In addition paid off $12k in school loans. Paid off all car loans. Plus Saved up $25k cash in the bank. This all happened in 2015. You have to think outside the box and create winning circumstances for yourself regardless of what people think ;) Use the resources available to you Good luck!
    3Reply
  • Adrian Chu
    Real Estate Broker · Seattle, WA · Member since 2014 · 1k+ posts · 427 votes
    10y

    What is your budget?  An affordable approach would be to buy a condo to start.  My first home was a condo.

    Depending on the area, there are many condos for under $200k.  Some are in the low $100s.  

    Live there for a year and buy a new place, and rent the condo out.  

    OR

    Live there for 2 years and sell it to take advantage of tax-free capital gains.  

    2Reply
  • Kyle Parks
    Realtor · Hendersonville, NC · Member since 2015 · 51 posts · 24 votes
    10y

    @Wesley Wong if you consider a condo be sure to check on rental caps. You wouldn't want to get into it with the intent to rent it out and then find out that the HOA won't allow you to rent the unit.

    Have you looked to see if your renewal lease has a favorable exit clause. For instance you will help procure the new renter and only be charged half a month rent as a penalty for breaking your lease. if it doesn't try to renegotiate the lease. This will give you time and you can budget the fee into your new home. 

    3Reply
  • Wesley Wong
    OP
    Seattle, WA · Member since 2012 · 18 posts · 2 votes
    10y

    @Vlad Vdov Thanks for your take on this and sharing your story. Great job on having an amazing year last year. Hopefully it continues into 2016!

    @Adrian Chu Thanks for the ideas. To clarify, when I talk about buying a home, I meant we're thinking of buying a condo as houses in Seattle are really expensive in the areas we want to be in. Our budget right now is around $300K ($350K if we really have to push upwards) for a 1+ bedroom. However, we both work close to Lake Union and want to stay in areas that would allow us to commute by bus. That means South Lake Union, Belltown, Queen Anne, Fremont, and Ballard. All of these are really hot right now. However, you bring up an interesting point. It would be awesome if we could buy now and stay for 10 years to reduce the hassle of moving our home. But there's also the option of buying for the short term and either renting or selling for appreciation. The only problem is that our checklist for a home is much more strict, in terms of wants, than a possible checklist for an investment geared mainly towards a financial profit. I guess that's something we might have to compromise on if push comes to shove. This is sort of what I alluded to when I mentioned that buying for an investment can happen at any time since there are always opportunities, but buying a home is more restrictive.

    @Kyle Parks Thanks for the warning on rental caps. That is definitely something we've been keeping an eye out for. One of our worries about this is that even if there are no rental caps now, there may be one in the future. Hopefully the HOA is willing to grandfather in existing owners though. In terms of a favourable exit clause, our landlord is using the default lease agreement provided by the Washington Landlord Association. I don't see any mention of exit clauses, but we will try to negotiate one in there. I like your ideas about helping find the next renter and/or paying a penalty, rather than having to pay for the entire lease. By the way, do you know if these exit clauses are normal?

    0Reply
  • Kyle Parks
    Realtor · Hendersonville, NC · Member since 2015 · 51 posts · 24 votes
    10y

    @Wesley Wong the exit clauses are case by case. The duplex that I rent has this exact clause but others don't. Some landlords want to control the timing of vacancies in their rentals so they are strict. Others haven't even thought about it. Like everything, rental leases are negotiable contracts but the more desirable the place the more likely the landlord will get their terms. You might probe your landlord to find out what is most important to them then give them what they want so you can get what you want.

    Have you checked to see if your landlord wants to sell your current place to you? If they own it free and clear you could do seller financing then use your loan to buy a rental.

    Another option is the foreclosure auction. My brokerage (Caliber Real Estate) specializes in buying at the foreclosure auction using hard money and in your case refinancing after acquisition. This is a big week at the King County auction. Let me know if you want more info on this and we can talk about the details. 

    2Reply
  • Kyle McCorkel
    Rental Property Investor · Hummelstown, PA · Member since 2015 · 638 posts · 653 votes
    10y
    You can do an FHA loan on your primary residence and only put 2.5% down. Make sure you consider that option.
    2Reply
  • Wesley Wong
    OP
    Seattle, WA · Member since 2012 · 18 posts · 2 votes
    10y

    @Kyle Parks Thanks for the clarification on the lease. I will definitely be probing my landlord to see if we can work something out. I've never really thought about the seller financing option. I think financing is probably one of the areas I know least about and is something I need to start exploring. A traditional mortgage is really the only thing I'm fully aware of. I will need to talk to my wife about your offer about foreclosure auctions. We know nothing about that. I'll PM you if we find that we're interested.

    @Kyle McCorkel My financing knowledge is fairly weak. I'm unfamiliar with this type of loan. I will definitely have to start reading up on it. Thanks for bringing it to my attention.

    0Reply
  • Dave Skow
    Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes
    10y

    1/7/2016 Wesley - thanks for the post and creating some good thinking ..... if you are desiring to purchase a primary home ....its likely to not get any less expensive in the future ....so if you are waiting for prices to come down - this might be a long wait .....if you buy a condo and want to use a FHA loan to minimize the down payment - be aware that the condo complex will need to be FHA approved ( not many are any longer ) ...that being said there are some conventional loan programs that allow as little as 3% down . make sure that you have your pre approval and financing all lined up in case a property becomes available .

    Regarding buying an investment property before buying a home -  decent idea  except that this might eat up  most of the capital you have to work with

    I like the idea of  possibly increasing your  budget a bit and looking for a multi family home that  you can both live in and rent ...in the area you describe these  will be  higher priced than condos  though ....

    I am located in the area you describe  wanting to buy so if you have any loan / mortgage  questions - feel free to  call or email

    all the best

    3Reply
  • Wesley Wong
    OP
    Seattle, WA · Member since 2012 · 18 posts · 2 votes
    10y

    @Dave Skow Thanks for the tips about the FHA loan and making sure to check with the condo complex. We've been keeping our eyes out for a multi family home with a higher budget, but we haven't seen any that would make sense for us yet. Luckily, we are pre-approved by our bank for condos in our price range. Great to know that if we have any questions about loans/mortgages, we have another point of contact.

    0Reply
  • Dave Skow
    Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes
    10y

    :)  thanks ...feel free to bounce any loan related questions off me anytime

    1Reply
  • Troy Fisher
    Specialist · Kirkland, WA · Member since 2013 · 1k+ posts · 817 votes
    10y
    Originally posted by @Dave Skow:

    1/7/2016  Wesley - thanks for the post and  creating some good thinking ..... if you are desiring to  purchase a  primary home ....its  likely to not  get any less expensive in the  future ....so if you are waiting for  prices to come down - this might be a long wait .....

    Seattle Prices are years away and tragedy from coming down.  It might become a little less competitive to purchase as interest rates rise, but the fundamentals are too strong in the area for anything nasty to happen.  North Bend, Marysville, Burien are all still viable investment areas, but your decision comes from the plan that you develop with your wife.

    1Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y

    I can't speak specifically to your market, but for me personally and as an investment I'd rather (and did successfully, multiple times) buy a small SFR in the 'burbs over a condo closer to the city. More control over your investment, no HOAs eating your cash flow (I always buy SFRs w/out HOAs), and more stable long-term renters (once their kids are in the school district, they won't move and they'll pay rent like clockwork). Whatever you do, don't let your fear of "missing out" get you into a bad deal ... keep trying until you find a good deal that you can put some sweat equity into and comfortably afford to hold through a downturn, and yes it may take a downturn until you find one. As for your rental, I'd seriously negotiate with the landlord to go month-to-month ... if you are a good, paying tenant, I can't imagine they will kick you out for not renewing for a full year. Only risk is that the landlord can raise rents mid-year, but if that's the case they would've anyhow at year end. Good luck!

    2Reply
  • Edgar CausinPro Member
    Investor · Seattle, WA · Member since 2015 · 6 posts · 3 votes
    10y

    Hi Wesley, 

    A few years ago my now wife and I were in the same situation. Would could afford something in the city but it would not have been the best house on the block by a long shot. We live in the Greenlake neighborhood where the prices have skyrocketed and wanted to say here. We made a choice to invest in a duplex in Edmonds and keep renting in the area we love. Since we could use part of the rent to qualify for the loan we actually we able to buy the duplex on just my wife's income. Now, two years later, rents on one side alone of the duplex are more than the rent we pay in Greenlake and the duplex has gone up in value almost 10% / year. We are extremely happy with our choice and have since purchased another rental house and still rent our primary residence. 

    There is nothing wrong with buying where it makes sense (cash flow) and renting where it makes sense for you (price, location, amenities etc) as long as your money is working for you somewhere. If you have to break the lease later on the fees/cost should be minimal as in Seattle the landlord/owner needs to make a good faith effort to re rent the space and as you know the market is crazy so that should be a problem. (they cannot legally collect rent for the same space in any month from two different parties).

    I just wanted to chime in so you know you are not the only one in that situation. 

    Good luck with your decision.

    Eddie

    2Reply
  • Wesley Wong
    OP
    Seattle, WA · Member since 2012 · 18 posts · 2 votes
    10y

    @Troy Fisher Thanks for your input. It is hard to imagine the areas we're looking in Seattle will plummet especially it looks like there is strong job growth in these areas, which is also bringing in population growth. What do you think about reports that Seattle vacancy rates are going up, move-in incentives are increasing, rent increases are slowing down, and new supply coming into the market in 2016? Do you think any of this will potentially cause this unimaginable plummet? Or perhaps it won't be enough to put a significant dent into a hot market? Here is an example of a report I'm talking about: http://www.bizjournals.com/seattle/blog/2015/11/ba...

    @David Faulkner Definitely agree with all your points, and we would definitely consider everything if we were buying an investment. The problem is that even though we know a primary residence should also be thought of as an investment, it pains us to think about having to commute into the Seattle core every day and back out. This emotion has kept us looking close to the Seattle core rather than the suburbs, for better or for worse. Thank you for stating out loud that we shouldn't be in a rush just because we feel like we're "missing out". Sometimes you forget and let your emotions take over. It's always good to get a kick in the rear end. We will definitely be negotiating with our landlord. In fact, I've already kicked off my reply and waiting for an answer. We're hoping we've been good enough tenants to warrant negotiation.

    @Edgar Causin Great to hear about your experience and that it is working out for you. This gives me hope that our notion of owning before investing isn't necessarily the only route. You are absolutely right with your insight that it doesn't matter too much if you're owning or renting while investing, as long as the numbers make sense. Of course, we would one day want to own our own place, but it doesn't have to be today.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Wesley Wong  on the West coast in the urban areas  SEA PDX SFO LA SD etc I always champion owning your own home first then go shopping.

    My home purchase's in the SF Bay Area over the years go without saying... SEA is the next SFO

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    1Reply
  • Arthur Schulte
    Designer & Educator · Redmond, WA · Member since 2015 · 12 posts · 6 votes
    10y

    @Wesley Wong 

    Seattle is a tough market to cash flow but like you I'm also keeping my eyes open for duplexes. However as Adrian mentioned, I'm becoming more open to making a condo/townhome my first investment. Assuming you do your due diligence, I think they can be a great entry point within a hot market. 

    Keep your eyes open in Lynnwood, Bothell, and Mountlake Terrace. 

    Cheers

    1Reply
  • Christy Yogerst
    Investor · Vancouver, WA · Member since 2015 · 2 posts · 2 votes
    10y
    hi Wesley. I totally understand your situation. Im a new investor and I live in Portland. the multi family are very inaccessible and expensive here as well. if it helps I'll tell you what I did. I got started by buying a short sale condo that needed some fixing in an area that was desirable. I lived there for a year while I finished fixing it up. this condo did have regulations as to the number of rentals it allowed. I knew two other owners were selling their units so the 3rd month I lived there I applied for a space. 8 months later I was able to rent and immediately did so, and I rented a less expensive apartment in town. I sacrificed my comfort to turn my condo(which I got for a great price) into a rental I'm currently waiting on an offer for a single family house in vancouver. again in a good area, where the price of my mortgage is less then the average rent costs. I intend to repeat until I'm satusfied with my number of properties. hope this idea helps!
    1Reply
  • Wesley Wong
    OP
    Seattle, WA · Member since 2012 · 18 posts · 2 votes
    10y

    @Jay Hinrichs Interesting thought about SEA being the next SFO. I definitely see some parallels with all the large tech companies setting up shop here and expanding. However, I think SEA will be less crazy than SFO since the city allows high rises. SFO has a lot of restrictions that "artificially" increase the prices.

    @Arthur Schulte Definitely agree about the fact that it's hard to find cash flowing properties. Good thing with investments though is that you can invest further out from where you want to live, or invest in areas where you wouldn't want to live but know others would. Thanks for pointing me to the other cities. Have you been able to find anything out there? I was checking around Tacoma and there seems to be a lot of multi-family properties out there that aren't moving fast.

    0Reply
  • Wesley Wong
    OP
    Seattle, WA · Member since 2012 · 18 posts · 2 votes
    10y

    @Christy Yogerst Good to hear we're not the only ones struggling to make all of this work. Great job on sacrificing the short term for the long term! This is a route that we've considered and isn't out of the question. How was your experience with the short sale? I've heard that it can take anywhere from 3-6 months or more to finalize the deal. Best of luck on your journey!

    0Reply
  • Christy Yogerst
    Investor · Vancouver, WA · Member since 2015 · 2 posts · 2 votes
    10y

    thanks.

    yes the short sale was a bit of a pain, but I was in no hurry. I stayed in my rented apartment while I began the process with the bank. it took 8 months to close and there was withholding of documentation by the owners in an attempt to sabotage my financing, and pull my earnest money. however, I was pre approved and had a good down so my loan agent contacted me about the issue. I can't stress enough the need to have a loan agent that you know, preferably is local, and you can talk to if problems during a short sale arise.  I had to request my real estate agent call their agent and threaten to pull the deal and if they went after my earnest money the possibility of reporting fraud. then magically the required documentation showed up the next day and the sale closed in a week. I think it's important to remember when dealing with short sales that the people are in a desperate place. be aware, and empathetic, but don't let them take advantage of you. I stayed in my rented apartment for another month until I had fixed all the essential appliances, painted and put down new flooring. it was a mild inconvenience for the extra 60,000 in instant equity i had one year later. I did mostly cosmetic fixes, either myself or through the use of professionals. 

    if I were you I would see if your current rental allows subleasing, if so, sign a year lease and take your time and find a good deal in a great location that will make a great rental but give yourself a time frame, like 5 months. and you will get a little extra landlord training from the sublease. if not then try for a month to month lease although I know that much more expensive. at least in Portland with interest rates so low, its cheaper to pay a mortgage then to pay rent, so to me anyway owning a home that will become a future rental feels like a better option even in the short term.

    I've lived in Lynnwood and the market there and in the surrounding areas seems still accessible, I've also thought about buying a rental in near Kent, close to the train station.

    my thoughts, good luck! 

    1Reply
  • David Muir
    Everett, WA · Member since 2015 · 9 posts · 1 vote
    10y

    Best advice i have got to date, is don't buy anything you wouldn't live in.

    0Reply
  • Phil Bottfeld
    Certified Public Accountant (CPA) · COOPER CITY, FL · Member since 2015 · 126 posts · 36 votes
    10y
    Originally posted by @David Muir:

    Best advice i have got to date, is don't buy anything you wouldn't live in.

     I'm sorry but I have to disagree with this. Just because something does not meet your standards does not mean it won't meet the standards of others. For example, if you can only live with stainless steel appliances and white shaker cabinets, be prepared to be disappointed when you try to rent a property and cash flow with a decent yield. I am not saying it can't happen, but I personally do not want to live in one of my condos because they are not suitable for my family's needs, but they work great for my tenants. My tenants take great care of the unit. 

    Feeling safe is totally different, personally for me, I don't feel comfortable in renting to Class C- or lower properties because of the general environment and it does not attract the kind of tenant I want.

    Whether you decide to buy your own place or rent to others, run the numbers, be comfortable with whatever choice you make. But don't be blind to only the opportunities that you'd only consider living, you might miss a great investment.

    - Phil

    1Reply
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