Gut check my reasons for NOT getting started with REI. [Seattle]

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Gut check my reasons for NOT getting started with REI. [Seattle]

Aengus McMillin
Seattle, WA · Member since 2017 · 4 posts · 1 vote

Hi, so I am a new BP member, and I have been listening to some of the podcasts, reading the educational materials, and checking out the forum for the last few days. I'm interested in REI, but I'm not sure there would be much benefit for somebody in my (admittedly quite fortunate) position.

I'm 23, I live in Seattle, and I work as a software developer for one of the big tech companies in the area. I make a fairly solid six figures in salary + stock and have been able to save/invest 50-60% of that for a few years now. Although I don't necessarily want to retire right away, I want to reach financial independence, hence the high savings rate, my portfolio is already at around 250k and I should be able to hit my target number within about 7 years. I have been thinking of real estate investing as a way to leverage my position and grow it faster, but my concern is that the effort required to get much in the way of wins in the Seattle market just wouldn't be worth it compared to simply letting my portfolio grow using Bogleheads style index fund investing.

The Seattle market has really high prices right now, so the 2% rule would be crazy to achieve, and even the 1% rule would be incredibly rare, i would likely be looking at closer to .5%. So cash flow likely would not be great in the short term. I have been thinking about appreciation as a route to profit, but concerns about a possible correction make that approach concerning. Alternatively I could try and find places out of the city/state, but I don't really drive, so the scope of places I could look at would be a bit smaller, and there would be additional effort dealing with renters out of area and it would guarantee that I would need to get a property manager.

Does it seem like there would be a good path forward for investing in Seattle, should I consider trying to partner with someone who can visit places in person and try and invest out of area, or should I likely just keep on my current path and stay the course on index funds?

Currently leaning towards staying out of REI for now, and possibly try to get into it after a correction, but wanted to get a gut check from people who know much more than I do.


Thanks!

Aengus 

1Reply
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Tyler Mullen
Investor · Kirkland, WA · Member since 2017 · 310 posts · 271 votes
9y

@Aengus McMillin

You have articulated your feeling about fear of overpaying, or buying something that doesn't cashflow now.  Perhaps take a longer view and consider all the aspects of property that would work in your favor.  Day 1 cashflow is not the whole story.

What are your risks if you DON'T buy?  Risk is uncertainty.  What will your rent be in 2020?  2025?  If you buy on a 30 yr fixed you could answer that question, which eliminates that risk.

Same holds for investment property.  You buy on a fixed payment but there are many ways you make money, and what you make can go up while you payment is fixed:

Yes the value could go down, just like the stock market could. That can't be the only consideration, I don't believe all the other REI taking place in Seattle is irrational. It could go down or... or it could keep going up, in my neighborhood the average annual return for ten years has been 15%.

Improve the property and the value goes up. (You cant put a new roof on a stock)

Inflation and or property improvement justifies increasing the rents over time.

Your rental income (and possibly w2 income) could be offset by depreciation.  Something you'd probably be interested in as a high wage Seattle tech employee.

Run the property better, get better tenents, cut expenses, NOI goes up.

Leverage.  You can invest $250k in stocks and make 3% dividend income, or use $250k to buy a $500k property, then you collect rent on the value of $500k, not just the $250k.

King County and certain cities therein have limited development for decades.  This is causing a flood of demand now due to the massive success of key businesses based here.

My advice is to do both.

You also said you lean towards passive investing, maybe you need to REI passively instead, that might make your perception of the risks change too.

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  • Tyler Mullen
    Investor · Kirkland, WA · Member since 2017 · 310 posts · 271 votes
    9y

    @Aengus McMillin

    Welcome to the BP Community!

    Have you considered purchasing a property to live in that also has a portion you could rent, a MIL unit, or ADU above a garage, a duplex?

    1Reply
  • Chris LumLee
    Investor · Honolulu, HI · Member since 2017 · 187 posts · 108 votes
    9y

    Hi!

    It depends what your investment strategy is. For example, if you want to buy and hold to rent out the properties, no matter because it'll produce cash flow.

    0Reply
  • Aengus McMillin
    OP
    Seattle, WA · Member since 2017 · 4 posts · 1 vote
    9y

    Thanks Tyler! I have looked a little bit into duplexes, although it seems that those are similarly overpriced based on how many units could be rented out (e.g. I saw a 4 plex, but it is 1.2M and the estimated rent was ~1.5k per unit). But yeah buying a place for myself that would also bring in some money might be a good way to go, I will see what the market looks like for properties with accessory units.

    0Reply
  • Aengus McMillin
    OP
    Seattle, WA · Member since 2017 · 4 posts · 1 vote
    9y

    Hi Chris, I think I'm a little bit confused about your point. My concern is that I'm worried that if I did a buy and hold I wouldn't be able to find good properties that would be able to cash flow. If the rent is only slightly higher than the mortgage, I would likely end up cash flow negative after fees and expenses.

    0Reply
  • Ray Lai
    Investor / Vendor · San Diego, CA · Member since 2016 · 1k+ posts · 949 votes
    9y

    @Aengus McMillin

    You have 2 realistic options if you want to househack while cashflowing in Seattle

    1) Go to an outlying region and deal with a commute to find lower prices 

    2) Hustle your *** off to find off-market deals.

    Or combine both in an outlying area to increase your chance of success. Being new to real the biz, finding deals against pros in a hot market like Seattle is challenging.

    0Reply
  • Jonathan R.
    Investor · Wichita, KS · Member since 2017 · 584 posts · 813 votes
    9y

    One thing I would like to clarify is that you do own your primary residence right now? If not, certainly own your own home. My younger sister also lives in Seattle and works for Amazon and she saw her rent go from $1000 to $1600 to $2300 in three years (the owner wanted more but she negotiated) before she pulled the trigger this past year and bought a townhome in the area for $405k (her payment is now $1800). Her property has increased pretty well since closing. She had to sell off some stock to make the deal happen which was painful because Amazon's stock has been exploding, but at the moment so is real estate. Basically I am suggesting to own the property you live in if you don't already so you don't get priced out of the city or throw good money at bad. Aside from that, I'll leave it up to you as to whether you want to go out of area and use a property manager, house hack etc. Keep watching podcasts and stay involved and the decision will be clearer. I do like owning stock in the company I work for, though risky, it is fun because you can see what is going on with the inner workings of your company. I certainly recommend owning real estate and a lot of it. Best of luck in your decision.

    1Reply
  • Evan SalvadorPro Member
    Investor · Roseville, CA · Member since 2015 · 35 posts · 20 votes
    9y
    Have you considered the tax benefits of owning rental properties? Especially if your income is all W2 income. If you're making well over six figures, you're just paying more and more in taxes with solely W2 income. Owning rental real estate gives a few ways to "write off" various expenses and don't forget about depreciation. Many times you can show a loss on paper but still would have made positive Cashflow. Obviously, consult your tax professional with the details but it's taking a look at. Can't really write off much with investing in an index fund. But it's definitely a solid strategy to grow over time and have far more liquidity than real estate. Why not do both?
    1Reply
  • Account Closed
    Investor · Scottsdale, AZ · Member since 2016 · 1k+ posts · 885 votes
    9y

    @Aengus McMillin Decide which kind of investor you want to be (SFR, Commercial, Land, Tax Liens, HML, Multi-Family, Notes, Fix & Flip, Buy & Hold, "Subject To", apartments, duplexes, assisted living, REOs, Foreclosures, Short Sales), etc.. Decide how much money you have access to, & the zip codes, city or state you want to focus on. That will determine the next step. Outline where you want to be in five years. Put it all in writing. Start working your plan. There are plenty of people around to help you each step of the way. Drop me a line if I can help.

    0Reply
  • Hunter Motto
    Investor · Seattle, WA · Member since 2017 · 9 posts · 4 votes
    9y

    @Aengus McMillin I live in Seattle and have watched the market, viewed condos, viewed houses in the outer neighborhoods and crunched the numbers over and over and it doesn't look great in the city purchases. 

    For a low time commitment house hacking or partnering up with someone else who is spending the time on the ground is probably your best bet. There are still some deals on houses along the light rail path that need a little love (not too much, flipping is usually a big commitment) but could be house hacked. There's a duplex in South Park for $370k but 1) that commute will stink and 2) appreciation in all of the greater Seattle Metro area is incredible, so something like that could make sense. 

    If you don't feel comfortable or like the looks of independent investing in Seattle, don't do it! Find an alternative strategy.

    0Reply
  • Tyler Mullen
    Investor · Kirkland, WA · Member since 2017 · 310 posts · 271 votes
    9y

    @Aengus McMillin

    You have articulated your feeling about fear of overpaying, or buying something that doesn't cashflow now.  Perhaps take a longer view and consider all the aspects of property that would work in your favor.  Day 1 cashflow is not the whole story.

    What are your risks if you DON'T buy?  Risk is uncertainty.  What will your rent be in 2020?  2025?  If you buy on a 30 yr fixed you could answer that question, which eliminates that risk.

    Same holds for investment property.  You buy on a fixed payment but there are many ways you make money, and what you make can go up while you payment is fixed:

    Yes the value could go down, just like the stock market could. That can't be the only consideration, I don't believe all the other REI taking place in Seattle is irrational. It could go down or... or it could keep going up, in my neighborhood the average annual return for ten years has been 15%.

    Improve the property and the value goes up. (You cant put a new roof on a stock)

    Inflation and or property improvement justifies increasing the rents over time.

    Your rental income (and possibly w2 income) could be offset by depreciation.  Something you'd probably be interested in as a high wage Seattle tech employee.

    Run the property better, get better tenents, cut expenses, NOI goes up.

    Leverage.  You can invest $250k in stocks and make 3% dividend income, or use $250k to buy a $500k property, then you collect rent on the value of $500k, not just the $250k.

    King County and certain cities therein have limited development for decades.  This is causing a flood of demand now due to the massive success of key businesses based here.

    My advice is to do both.

    You also said you lean towards passive investing, maybe you need to REI passively instead, that might make your perception of the risks change too.

    2Reply
  • Aengus McMillin
    OP
    Seattle, WA · Member since 2017 · 4 posts · 1 vote
    9y

    Thanks for the advice everyone, it is greatly appreciated!

    @Jonathan R.

    I actually don't own my primary residence yet, I moved into a new apartment last year before I had much capital for a down payment, and I ended up renewing a few months ago because it is a nice place and I still wasn't sure I was ready for real estate. I am seriously considering trying to get myself a townhouse or condo next year when my lease expires though. And yeah, getting priced out is definitely a concern.

    @Evan Salvador

    Very good point, I have considered the tax benefits of owning my own home, but haven't done tons of research into exactly how the numbers would work out for deductions from rental property. Will put it on my todo list to investigate, thanks!

    @Hunter Motto
    Yeah definitely going to consider house hacking. My commute is about a 3 minute walk right now, so very hesitant to move way out of the city, but definitely will see if there are good places to house hack and/or buy cheap and renovate that would be on good transit lines to my work. 

    @Tyler Mullen

    Thanks for the advice! I definitely think the risk of not buying is the biggest reason I am looking into this now, I think balancing the risk of buying (potential for a crash or for negative cash flow) with the risk of not buying (missing out on major market wins, being tied to rapidly rising rents) is going to be the big thing for me. I think I will crunch some more numbers and keep looking into properties that are available, try to develop a profile of the type of place I would want to buy and what the value would be of that. Currently thinking at least in the Seattle area I will focus on trying to find a home to purchase next year, but i will keep my eye out on surrounding areas to get a feel for what the markets are doing. 

    0Reply
  • Joseph Duren
    Federal Way, WA · Member since 2017 · 8 posts · 0 votes
    9y
    Here come some unorganized thoughts on what I think can help you, assuming that you're buying and holding. Off of what you wrote, that's what it seems that u want to do. If you're worried about a market correction, you should find "off market" deals that are at a deep discount. To further lessen your burden, you should team with someone that is willing to live in your property and manage it. PM me for ideas on how to do this. The property should be residential or commercial multifamily. Since you now have a partner, get property somewhere that will always have a huge demand but that is also cheap (around JBLM). Also, consider this: the market conditions will always give room for an excuse, and I truly believe that the best time to start is now. Cliche... i know. I was just thinking your same thoughts a day ago and then a solution came to my mind... PM for details. Joe Duren
    0Reply
  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    9y
    Unless you are buying with cashflow then i would sit out. If you are looking to flip consider you are playing with fire and will get hosed when the music stops. Flipping is based on the greater fools theory. Plus now good luck finding a reliable CONtractor. It's a sellers market and contractors dream.
    1Reply
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