What rent would support a 200k home (on average)

Question

I'm currently evaluating properties in the suburbs of Seattle and am having trouble finding anything that cash flows.

The best situation i'm finding is a SFR for 180k that will rent for 1600. So far my search has been focused in Everett since that's the only place where market rents come close to covering the mortgage. is there a price break for more expensive homes in the greater Seattle / Everett area? I'm looking at either a SFR or 2-4 units and can afford up to 400k as I need owner occ financing.

Using the above numbers (180k loan that rents for 1600) and assuming a $1200 mortgage payment I get a monthly cash flow of -400 and using the 2% rule i'm coming up with a required monthly rent of 3600 to support a relatively cheap home in a B- / C neighborhood.

Am I misinterpreting the calcs or is the situation really that bleak for 1-4 unit properties in this area?

thanks!

Aaron Montague · Answer

I look for monthly rents to be at least 1% of purchase price. I rarely find places that will make much sense if that number isn't met. Honestly you'll find plenty of money making deals with this ratio. Your SFH above might make you some money at 180k, but I doubt it would be much. At 160k it'll probably make sense. SFHs tend to do a bit better on the ratios because you can pass almost all bills along to the tenants. So to your question, I'd want to see at least $2000 for a 200k house. I'd look at the numbers for one that rented for $1700. My expectation is that I might be able to purchase it for 170k.

Matt Devincenzo · Answer

You have to understand the 2% rule is only accurate/applicable at about the 25-75K range. 50K is about ideal and as you go closer to 25K you need to be higher than 2% and as you go closer to 75% you most likely will need to dip slightly below it. Looking for rental using the 2% as a guideline on a property that doesn't fit the "model" won't work. Think about it like this: 2 homes both about 1200 SF and both 3/2, one in a expensive market and one in a much cheaper market lets say 40K and 175K price for each. The cost of a new A/C unit for both will be similar. Maybe in the expensive market it will be 10-20% more because of higher labor costs but the materials and equipment will be the same price or nearly the same price. So as a percentage of gross rents the replacement will eat up more on the cheap home than the expensive. This is why you need to understand the true costs in your area in order to truly analyze what you are looking at. Another area that this can easily be seen in in property taxes. Two properties that are the same price but one is in a city that has taxes of 4K/yr and one is in an area that has taxes of only 1K/yr. That is a difference of almost 250/mo on your expenses. So if the one rents for 1100/mo and the other for 1300/mo you may be better off buying the 1100/mo rental since the true difference in CF compared to the other home is not -200/mo it is +50/mo.

Account Closed · Answer

No Jo, you are going to be pressed to find properties meeting even the 1% rule let allow the 2% rule in Everett or Lynwood straight off the MLS. Tacoma and other areas in Pierce county have some 1.5-2% listings on the MLS. In Everett, a technique I have utilized and have seen other use is purchasing poorly managed properties and raised rents along with the service offering from the property mgmt side. I have seen upwards of 1.25-1.5 rule being met in four plexes. Also, make sure to use some of the great analysis sheets found on this site

Zach Schwarzmiller · Answer

Owner occupancy is a great way to go. I and a couple friends do that in the area.

Kimo Baenen · Answer

Hey No Jo, A lot of people have hinted at a few things here that i'm mostly summarizing. First, remember that the 2% "rule" is not a hard and fast rule at all, it's a guideline. It's the cover to the book. Not all deals that meet the 2% are the best, and some that come in lower are great. Second, you're not going to find 2% between Seattle and Everett, or even Marysville, and forget about the east side. Does that mean there are no good deals here? no. It's just you're gonna have to dig deeper. Try the 1% rule, but remember to break down the numbers and work to get the best estimates you can on rent and costs. As someone else said above, with a SFR, you can pass all costs to the tenant. You can also do this in a 2-4 unit property if everything is separately metered, if not, you can charge a flat fee, but it's not really that honest to over-charge, so most probably end up under-charging. Also property taxes, etc. That's what will tell you if it will cash flow, not some magical 2% line. The last thing is something nobody else caught (that I saw). If you're looking for a SFR income property, you don't qualify for owner occupant financing. I know you can say you're occupying, and then rent it out, but I'm under the impression that the bank has been known to check in, and if you get caught doing that, your mortgage will come due as you just violated the terms of financing. Perhaps the best idea would be a 2-4 unit that you can occupy one unit and rent the others for a couple years, then do the same thing again. That way you won't be violating your legal contract that you sign to get financing (yes, I said it this way on purpose).

Jason Merchey · Answer

Thanks Elizabeth C. Hello from South Carolina. I think you are doing well at those percentages! Hopefully the HOAs don't cause you any trouble, which is a pile I stepped in with a condo I moved out of and started renting. Thanks for the tip on taxes; I am trying to get into a SFD up here in Summerville in 2014, and will watch that. Can I rely on my Realtor to tell me the truth, or do I need to look at the County Tax office website or what? Really, though, 3% of the market value per year in property taxes, huh? Wild. I guess that would make a lot of the Dorchester II School District houses harder to cash flow.... Short sales kind of frighten me. Also, I think banks are not as amenable as they were when you bought those townhouses. I will probably do straight buyer/seller transactions or foreclosures (though I hate those damned contracts the banks make you sign). I'm also wary of the whole cash thing: the fact that a large percentage of buyers here are using cash, thus making your "pre-approval letter" less valuable than it used to be. I have heard of Westcott, of course. I wonder though if it matters if the neighborhood is a high proportion non-owner-occupied? Does it matter if 30% of the 'hood is renters do you think?

Lane Kawaoka · Answer

In Seattle you would be have a hard time finding anything getting 2%. 1% is more realistic. I understand its a numbers game but there are so many intangibles that make a difference between a rental in Seattle as opposed to one in White Center. You might not be the investor who what's the extra worry/work associated with a higher yielding property. @No Jo I think your assumptions are spot on. Its a question on what your investment strategy is.

Elizabeth Colegrove · Answer

@Jason Merchey Definitely look all around. Not sure what price range you are looking for but we were able to buy 2 properties in the Wescott Plantation area for 1.27 and 1.20. These were 3 bedroom 2 bath townhouses 1350-1700 sqft . They were short sales. There were still deals this past summer but I haven't look in the area since. Also WATCH the taxes. While I was told the taxes were MORE expensive, I did not realize they would work out to be 3%, since primary is 1%. Since this is a hurricane area our taxes are also up there. On the house we paid 90,000 house our insurance is $900 and our taxes are $2350. So that a total of $3,250 or $270 a month for our escrow. Since we bought them as short sales, we have seen our taxes increase as the market is coming around!

Elizabeth Colegrove · Answer

@No Jo It depends on your thresh hold and your goals. We buy in areas with 8% cap rates and .75-1%. For us this is great because it is within 5-15 minutes of our houses and taxes and insurance are VERY low. The clientel is a high end, therefore I can manage it myself. There is also the real possibility of appreciation. My personal business plan is the Southwest Airlines Model.

Jason Merchey · Answer

Yah I think in my area it is more like .08 or .09. I'd be happy with .1. I was thinking of getting into one here in 2014, and I think I can get it to cash flow at $300 a month with my numbers.