Old Seattle House - Worth it?

Question

In Seattle Washington.

This 100 year old house is 2,600 square feet and the seller wants $750k which is priced high for the market. I went into the house yesterday and there will be lots of deferred maintenance as the owners have taken a very hands off approach to landlording. They're getting $2,750 a month in rent right now which is much lower than market. With $20k for a light rehab I could get $4k/month. This is still not enough for the deal to work. I know that.

These sellers have priced it too high and I think it will sit and not sell. I think that with patience I may be able to get them to $650k. Then when I take out my pencil it gets more interesting. The area is zoned such that I could finish the basement and make it a legal duplex. I did this in a house very close by for $200k and the numbers worked out well.

So, if I can get it for $650k put in $200k and then get rent of $5,000 / month for the top unit and $2,800 / month for the bottom does this deal work?

Having a duplex in this area means I know the area rents well and my rent expectations are in line. I'm getting $4,500 for a 1,500 sq ft 3br / 1bath upper unit around the corner.

Thoughts?

Melissa Melia · Answer

If the numbers are right now, and you have a long time horizon, would you kick yourself later if you passed on it?  You know the neighborhood market and are developing a successful equation, it's ok to have a niche too, if you do it well.  If your greatest concern is a potential downturn, you've already performed the wisest hedge - buying properties in high-demand locations.

...and if/when things go south, you have a few levers besides price to keep your properties performing:

• Providing quality finishes to set you units apart (which you may be doing already, based on your remodel comment).  In the last downturn, the stuff that sat vacant was outdated, not clean, under-maintained.
• Allowing pets is a great way increase the renter pool without lowering price.
• Charge less to move in.  With market rents, coming up with first/last/security deposit can approach $10k in some neighborhoods, which can be a difficult check to write even for professionals. Maybe having high screening standards but a lower security deposit and not collecting last month's rent up front is enough insurance for you.
• Up your marketing game.  Use a photo editing software (I like Snapseed and take pics on my iPhone 6) to show the property in the best light.  Renting is emotional, don't hesitate to put a filter on it! ;)

Good luck! Are you going to the meetup on the 29th? If so, see you there...

Brian Fouts · Answer

Sounds like a Mercer Island home!

For me, I usually stay away from the high priced rentals and projects.  I would venture a guess that a slight cooling of the market or change in real estate (natural market cycle) would effect the higher priced homes first.  There is probably a smaller pool of tenants at that rate and vacancy would be rough.

But it depends on your risk tolerance as well.  Sounds like you may have already done something similar, so it wouldn't be like you are stepping into unknown waters.

I prefer to take that kind of buying power and get 2-3 rentals in Tacoma over 1 rental in Seattle or Bellevue.  If the 25 or so properties our Fund has in this area, I don't think even one of them is in Seattle or Bellevue.  My best cash flowing  and cash on cash return property was 1 bed, 1 bath, owner financed in Tacoma.  $90k.  Wish I could find more of those!

Alex Chin · Answer

@Troy Fisher - I actually saw that article and I think even with the addition of about 250 new units, it won't ease the housing demand that the UW has. Having graduated from the UW less than 5 years ago, and with many friends who still attend, I can attest personally to the thousands who would like to live nearer to campus, but can't afford the rent that their own place (read 1 or 2 bedroom) would entail. It can be a lot cheaper if you rent a house with friends, but there's a good chunk of the student body that doesn't want to live in the proverbial party house. 1,000 new housing units MIGHT start to make a dent in demand.

@Allen Clark - @Melissa Melia chiming in here reminded me that she is a property manager that focuses on high-end rentals. If you and your partner are looking to reduce your personal time investment, Melissa might be able to help you manage that down.

Troy Fisher · Answer

@Allen Clark, Some pretty smart people just gave you a lot of interesting thoughts.  You can see the different investing personalities that are around.  Melissa is Laser targeted on her Niche, and she is, as I like to say, "Killing it!"  Brian has finger in a ton of different pies and is looking for the right margins to determine whether it's a deal.  And Alex is a smart cookie looking for the right deals in the area.But, I think most of the Seattle Investors might agree, that there isn't a lot of a downturn in our market.  It has become a very "San Francisco" Market, If you want to look at market history do some research on the bay area.   I think when we do "correct" it will be more like, hitting the top really quickly and then sliding back a good 5%.

Alex Chin · Answer

@Allen Clark - Both Troy and Brian have weighed in with their thoughts, my opinion is that you might want to take this opportunity to diversify your rental portfolio a bit. Concentrating only on high end rentals means that you are more vulnerable to a market downturn. I seem to recall your desire to continue to buy within a short distance of downtown Seattle, have you considered taking a look at student-oriented housing by Seattle Central College/Seattle Univeristy/University of Washington? Potentially highly lucrative and almost immune to market downturns.

Guy Arama · Answer

Hi Allen

I think I know which property you are looking at. (Not too far from mercer)

We are now in the process of turning a duplex into a fourplex and it seems that you must have a 7ft height for this to be permitted (I.e turning an unfinished basement to a legal unite)

This one (if it's the one I have looked at is 6.3 ish...)

And you are right, even in this crazy market we are in it is IMHO over priced at this point

All the best!

Guy

Allen Clark · Answer

Yes, thanks all for the points to consider. On my house in Lower Queen Anne I have put money into it and brought it up to date (new flooring, new furnace, new tankless water heater, new windows, new counters, etc.). The location is premium so I know it will rent well and it will just be a matter of price. My other house across from Seattle U is also a very good location and will rent. I keep the places updated and well maintained as I just do not have the temperament to let them run down.

However, having a demanding full time job and three kids take up time. So, I have to remember to go slowly and not add too much. I like my full time job and the money it provides.

I may add this other house in if the price is right. I will wait and see. With the comments above I can see I am pretty well positioned for a coming downturn.

I have really enjoyed taking a 1922 brick house in Lower Queen Anne, turning it into a permitted legal duplex, and renting it for a premium. It's been a lot of fun and a ton of learning. I would like to do that a few more times but will remember to take my time and relax. No rush here.

Troy Fisher · Answer

http://www.bizjournals.com/seattle/news/2015/09/18/242-unit-apartment-complex-planned-near-university.html

Alex Chin · Answer

@Allen Clark- We have one Meet-Up  scheduled for the 29th at the Ram by the UW. I should be there, and I would expect a pretty healthy group of  local investors to be there as well.

Get in touch with @Tiffany Plovie and @Troy Fisher for an invite to the event. It'll be a very informal meet-greet-network.

Allen Clark · Answer

It's a good point @Alex Chin. I am new to this and in this year have bought two places. One for $350k across the street from Seattle U and one for $550k in Lower Queen Anne. The rentability on both is through the roof so I start thinking that I should do more. But I think the smart thing is to pause. See if the red hot market cools off a bit in the next year and then decide whether I should buy more. However, if this house for $750k comes to me for $650k then I might have to buy it.

My partner and I work full time downtown at demanding jobs so having the rentals close to downtown is important. It makes them easy to rent and they cash flow quickly. I know there are better deals farther from Seattle but that would take more time that I am not willing to invest at this point.

I do think about the next downturn and my theory there is that as long as my cash reserves are strong and the rentability is high then I'll be fine. These places will always rent (I think) but it is just a matter of price.

Would love additional views on how best to structure my small portfolio in order to be best positioned for a downturn that will surely come. I am 46 so I have lived through a few big recessions but never with investment real estate in my portfolio.

@Brian Fouts and all - would love to meet up at the next REI meeting and say hi. When do you go and where?

Old Seattle House - Worth it?

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