Methods of looking for good deals in greater Seattle areas

[Xiaolong Yin]

Hi, I am looking for good multifamily deals in greater Seattle areas that meet my investment criteria: positive cash flow, 12% cash to cash return, and 8% cap rate. However, I am not able to find such deals through popular real estate sites (Zillow) or my brokers. Any suggestions? Thanks! 

[Eric Fernwood]

Hello @Xiaolong Yin,

There may not be any multi-family properties that generate the cash flow and return you are seeking in Seattle. There are none in Las Vegas. But, be aware that there is a significant difference between paper and actual returns.

A few years ago, we studied vacancy costs for the three major tenant pool segments in Las Vegas. The results are shown in the table below.

For example, suppose I owned a C Class 4-plex generating an 8% return. I will assume that the property costs $400,000. If I ignore debt service, management, maintenance, etc., the annual paper rent would be $32,000/Yr or 8% cash/cash. If I subtract vacancy cost (4 x $3,200), the net rent reduces to $19,200/Yr, or a 4.8%. Also, consider maintenance costs. With a 4-plex, you have 4 water heaters, toilets, appliances, HVAC, etc.

Properties are not islands. When you buy a property, you also lock in multiple other costs, regulations, and more, as shown below.

When you buy a property in Seattle, you also buy the regulatory environment. Seattle has a pro-tenant, anti-landlord regulatory environment. For example:

• The Seattle City Council passed the bills last month. The first requires landlords to give six months’ notice of any rent increase, up from the current two months. The second requires landlords to pay certain tenants relocation assistance if the landlord raises the rent by 10% or more and the tenant moves out.
• Mayor Durkan Announces January 15, 2022 Extension of Eviction Moratorium and Continuation of Additional COVID-Related Protections
• On Thursday, the Washington State Supreme Court ruled in favor of a Seattle law that requires landlords to rent on a first-come, first-served basis. It’s called the “first-in-time” rule.

All of these regulatory costs reduce your profitability. I am aware of these costs and regulations because we have had multiple clients use 1031s to sell their Seattle properties and buy in Las Vegas, which is landlord-friendly.

In summary, when you are evaluating a property, do not rely on the paper return. Determine vacancy cost, the cost of regulations, and much more for your property and tenant pool, and include all these costs in your calculations. You will be surprised at the difference between paper and probable return. The best place to get such cost information is to interview multiple local property managers with a significant population of units under management similar to what you are considering.