Buying my first home in Seattle - advice needed!

[Tiffany Kung]

Hi everyone!

I'm new to BiggerPockets, and am looking for some advice!

My husband and I are looking to buy our first home in Seattle, and in neighborhoods with good access to shops and restaurants. Our initial plan was to buy a house and live in it for 2-3 years, then rent it out, and move to a second home.

The challenge I'm running into is that the neighborhoods we like don't seem to offer good investment opportunities. I used the 1% rule and calculated GRM of a few properties we found on zillow, and the numbers just don't seem to work.

I'm not sure what the right next steps should be, but I've considered a few scenarios:

1. Buy a single-family home in a neighborhood we like; at least our $$ is building equity in our own home rather than going to rent. We then save up, and buy a rental property later on.

2. Buy a single-family home, and rent out the basement to help pay down mortgage.

3. Continue to rent, and buy an investment property elsewhere. I think the rent will likely be higher than the cash flow we can get from the investment property.

I'm new to RE, and appreciate any advice you may have.

Thanks so much for your help!

[Patrick Britton]

@Troy Fisher Thanks for the shout out. :)

@Tiffany Kung  The 2% rule is pretty much useless for a market like Seattle. The people who come up with this sort of thing get this number thanks to the data collected from all over the United States. In a market like Seattle, it's simply too hot and does not make any sense, so throw it out the window.

Quite frankly, I think the very best way to get into real estate is something that Troy touched on. 

Find some kind of multifamily property, ideally a triplex or fourplex. Purchase it and live in one of the units allowing you to get an FHA loan and requiring a mere 3.5% down payment. While the total rent may not cover your entire mortgage payment, it will certainly help while building significant equity. Furthermore, as you reorganize the multifamily you can increase rents, pass on certain expenses to the renters and add additional sources of income, such as washer/dryer, parking, storage, etc. after a year of doing this, you will have the numbers that justify a significantly higher sales price. For instance, suppose you buy a $500,000 property providing net operating income of $25,000. Therefore, you're operating at a 5% cap rate. But suppose after a year of reducing expenses, adding additional income and increasing rents, your NOI is now $35,000. Well, given the prevailing cap rate of 5% your property is now actually worth mathematically $700,000. So what you do now is sell it for $600,000 (sometimes it doesn't pay to be greedy), and take your $100,000 and put it towards another property. Or if you want to keep the property, do some kind of home equity takeout and apply that to the purchase of something else.

With the FHA loan, so long as you occupy the property for at least one year you can do this up to 10 times (assuming you have no other financed properties).

And while this is a fantastic idea in theory, here are some of the drawbacks/catches/negatives: 

1.  you will have to live in one of the units. And let's face it, not everybody wants to live right next to their renters. 

2.  Another drawback is that it will require a fair bit of work, just like anything else. You will have to increase rents and decrease expenses somehow and very often this could mean doing some kind of renovation work to add separate metering for certain utilities. 

3.  As well, it may require the outlay of some cash for the purchase of income-producing assets, like a coin-operated washer and dryer. 

4. And last but not least, you will not be able to do it for every multifamily property you find. FHA guidelines clearly state that for triplexes and fourplexes, the total gross rental income of all units including the one you will live in must be greater than the total mortgage payment.

So let's say you have a fourplex that rents for $1000 a unit. This means it produces gross rental income of $4000 per month. You will have to find a property in which a total monthly mortgage payment is less than $4000. And when I mean total monthly mortgage payment, I mean principal plus interest plus taxes plus homeowners insurance plus mortgage insurance.

So when you find a property that looks appealing and you make an offer on it, make sure that your broker has a financing contingency, along with any other contingency. As well, it never hurts to have a lease review contingency.

Trust me, you do not want to be in a situation where you make an offer on a property, go through the whole process of paying for an inspection and an appraisal only to hear that the total rental income will not cover the total monthly mortgage payment and the FHA will not provide the loan. This is a costly mistake as you will have to pay for the inspection as well as the appraisal. Total cost could be anywhere between a low of $800 to as much as $1200 or higher.

Make sure that the real estate broker understands this and has connections to lenders who are also familiar with this type of purchase.