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Updated almost 8 years ago, 01/07/2017
Duplex VS house-hacking a single-family house as a 1st purchase?
To any active investors in the Seattle area, as you know, we live in a hot seller's market (King County) where the cheapest duplex you'll see is asking at least $500k +. My question today is, even with an FHA loan, in this market, is it feasible for a newbie investor to start off by having their first purchase be a duplex? Or would it be wiser to try and house-hack a single-family house with multiple rentable bedrooms? Also, with us approaching the bursting-point of this market bubble we're in, should this influence my decision on which property type to buy?
Many thanks!
@Lennox Matsinde In my opinion, multi unit is the way to go! Especially if you can pick up a duplex in the Seattle area for $500k. Its hard to find a single family for much less or close to that price. I don't know about you but I don't like the way a lot of people live and could not live with most people. I would not want to rent rooms out..... Units on the other hand are a different story.
Thanks @Matt Gragg. That's my main qualm with renting out rooms in a house. I don't like how most people live so i would definitely need my own space. Thanks again!
There are duplexes selling for $350k in renton highlands on mls as we speak. Take action!
@Harrison Liu Pm me the info you have for the duplex. I would love to check them out!
Just go to redfin and search for multifamily in 98056. There are two listings. They both can cash flow. I have a couple of triplex in the area. I know the area pretty well.
Thanks for the heads up @Harrison Liu
I have a house in Columbia City that I rent "house hack" to students and young professionals. I live super close to the light rail and public transportation. The cash flow and appreciation is great but you have to be very selective in your criteria if you want quality roommates.
I also have multifamily units as well. If your main concern is sharing your space then definitely go for multifamily!
You have to ask yourself whether you're willing to accept the low or potentially negative cash flow (depending on how much maintenance it requires, or how unlucky you get with tenants) that comes with purchasing a $500k duplex in Seattle. The cap rate would be unfortunate.
If you plug in some numbers here, you'll get a good idea
http://www.proapod.com/calculator/free/o_cap.php
Let's assume $500k acquisition, $5000 per month income * 12 = $60,000, 5% vacancy, and to be conservative/realistic 50% operating expenses.
That nets you a 5.7% Cap rate.
Originally posted by @Jan Wanot:
You have to ask yourself whether you're willing to accept the low or potentially negative cash flow (depending on how much maintenance it requires, or how unlucky you get with tenants) that comes with purchasing a $500k duplex in Seattle. The cap rate would be unfortunate.
If you plug in some numbers here, you'll get a good idea
http://www.proapod.com/calculator/free/o_cap.php
Let's assume $500k acquisition, $5000 per month income * 12 = $60,000, 5% vacancy, and to be conservative/realistic 50% operating expenses.
That nets you a 5.7% Cap rate.
Hey Jan,
What's a good cap rate? Thanks for sharing that tool.
Thank you for the input @Kay Keovongphet.
@Jan Wanot the cap rate discussion is one that i had been ignoring for far too long. I've since shifted my focus further south along I-5 (primarily the rapidly gentrifying Renton area). It doesn't look like there are any solid multi-family deals left in the city of Seattle. :-/
It is feasible if you have the money to purchase a duplex. Whether it meets your goals is a different story. You need to clearly define your goals both short term and long term and I think that will guide you to the decision you need. You can find MFR all along Tacoma, Puyallup, Des Moines and all along South King county that could work, but does it jive with what you want to do?
My wife and I were very much considering purchasing a MFR to house hack as our first investment. We sat down and ran the numbers and evaluated our exit strategies and compared them toour long term goals. At the moment it doesn't fit with what we want to do, so we are holding off on it. We still would like to house hack to offset our monthly living expenses, but we have a personal capital goal to hit before we do that.
Thank you @Pete Perez, that makes a lot of sense. I'm ideally looking at a buy & hold on an MFR with the eventual hopes of doing a 1031 exchange into a higher occupancy MFR, so the idea of figuring out one's exit strategy prior to the purchase is still very foreign to me (too many unknowns, e.g. state of the market etc). I guess that's something i'll need to flesh out a little bit more.
I think that it is important to have a few exit strategies in mind prior to making a purchase. I can't speak to your goals, but I am an examples guy so I will use ours as an example.
The MFRs that we have seen that we could house hack and would be cash flow neutral would require somewhere between $20-$40k down depending on location and number of units (we have looked in south king county and pierce county). That is almost ALL of our capital. So we could do the deal, but from our perspective tying up almost all of our capital isn't worth the 12 months it would take us to save that money back up. We'd rather invest another way.
So if you plan on holding onto that MFR for the long term then buy one!
Best of luck,
Pete
@Lennox Matsinde I recently bought an SFR a couple blocks from Othello lightrail and converted the basement to a 1BR mother-in-law. I am renting it on Airbnb for $1300-1600/month while living upstairs. I bought in the high $200s, spent ~$85 gutting and rebuilding it, and am sitting on a $1793/month mortgage (tax & insurance included in the mortgage). I went from paying $1700/month for my 1BR apartment in Fremont to paying $500/month after all expenses to live in my own house. It was recently appraised at $405k, but I think the market would pay $425-450 for it.
Separating the spaces through a basement unit allows you to collect income on the property without having to a) rent bedrooms in the space you live or b) pay a premium for a duplex. This concept only exists in the SE and SW of Seattle as prices for SFR in prime neighborhoods are out of control, but the model could be applied to other areas of King County, parts of Pierce and Snohomish without problems. Airbnb and other short-term rentals are more risky as GPR shifts month-to-month and occupancy is testy- you need to think of it like a hotel. A short-term rental insurance policy runs you higher than a standard homeowners policy, but you can still milk an additional 15-20% out of your unit if you market and manage it correctly. Keep in mind it is considered an unpermitted ADU, but the City is working on ADU regulations now and is not cracking down on mother-in-laws or Airbnbs at this time. In the future, it may be best to rent it on a standard lease, but for now I'll take the extra couple hundred/month.
@Harrison Liu Sunset Area in Renton is a good bet, but do they cashflow in the short-term? The City has been applying for CNI money with no success, but I predict they will get it in the next year or two. They are working on zoning allowances for townhouse development, and many of the duplex lots are capable of hosting 4+ units once the developers stream in. Agree that it is a solid play, but question short term cashflow.
In terms of your long-term plan, keep in mind much of our supply data indicates over-supply in mid 2018, which will result in negative rental annual rates of change throughout 2019 and some of 2020, decreased net-income, etc. If the data proves accurate, we should see some softening in prices in late-2018, bottoming-out in mid-2020, and rising again by end of 2020 or early 2021. That said, the time to buy a large MF asset in the area is not now, but you may be in a good position to capitalize on this projected softening in a couple years with some strategic plays in the short-term. Of course, major fluctuations in the macro-economy or significant unforeseen conditions could impact these projections.
@Jan Wanot I don't think that cap rates are the most meaningful metric for his situation, where valuations will be based on comps not income and he will live in one unit. He will almost certainly be in negative cashflow and will have to make assumptions about rent for the unit he is living in. I would focus on the raw pro-forma and net cashflow over cap rate until you are looking at investing in a larger MF asset. @Roger Wagoner we are seeing cap rates in Seattle in the 5% range, some dipping below with realistic underwriting. Pretty lousy.
@Graydon Manning Great input. My spouse and I recently did something similar. Bought a home with a $1800 mortgage (taxes and insurance included) in Des Moines, WA. However, we live in the 800 sq ft ADU and rent the main home for $1500/month. This allows us to save the money we would be paying on rent, or a mortgage and save for our next investment.
We just put an offer on a duplex in the Sunset area of Renton, and were having the same debate you were posing above. That short-term cash flow would be low, but we could hold for a while and develop a 4 plex on the large lot, as the city of Renton is approving a lot of these in this area. Also, the short term cash flow would be worth it for us because we would live there for the next year and be in a much more central location (cut our commutes in half). However, too many others thought the same thing and an offer that was able to put 50% down was accepted over ours.
It is tough to get an offer accepted right now, especially when you are competing with others who are paying in cash. Sellers don't want to risk your financing falling through if the home is not appraised high enough. This situation has happened to us a few times now. This is leading us to look more into Puyallup and Tacoma areas for investments.
@Lennox Matsinde
@Graydon Manning
The two duplexes listed on MLS in renton highlands they are both cash flow for the listing price. Since my last post they are now all in pending status. Have I not owned two triplexes in the area already I would had made an offer on one of them. The location is great, the land has a lot of potential value that will appreciate when the gentrification is complete. The cash flow is fantastic because of close proximity to Bellevue. The rent has more than doubled since I owned them. The over supply of rentals are mostly in Seattle and because of low inventory of SFH, as long as job growth continues people will need a place to live and they will have to turn to rentals so I don't see that being a major concern especially if you are only 10 minutes away from Bellevue and 20 minutes away from Seattle. That being said, the area is still a C neighborhood so you will not get same type of tenants say in Bellevue and for that reason you can still get cash flow properties but I don't know how long it can last because the new constructions are selling in the upper 600s to lower 700s. This is type of the properties you want to hang on for a long time.
I have 2 duplexes in Puyallup. The most recent one purchased last summer. I think it's a great area for this type of investment. Both have great cash flow and are in high demand as rentals. I have chosen this area because I've lived here for over 30 years and it's very familiar to me.
@Jan Wanot I'm in Portland but here, a 5.7 cap would be considered very good, especially in neighborhoods between I-205 and highway 217. I imagine 5.7 would be even better in most parts of Seattle. Also 50% expenses, especially if they are house-hacking/self managing, would be quite high (unless the property is pre-1925-ish and already needs a lot of work).
Ultimately the OP will consider where to invest and what cap they're willing to accept based on their personal goals and specific investment philosophy. If you're simply trying to get a high cap rate and cashflow, you'd probably invest in the Midwest or try other strategies like becoming a hard money lender. But if you're a landlord and appreciation/wealth building is part of your plan and you "buy right" (e.g. undermarket or in a neighborhood poised for development or a property where you can add value, etc.) then a 5.7 cap in a generally appreciating market where you also want to live sounds pretty great to me.
Thank you all for the valuable insight. I've since decided that the cost of buying an MFR in the Seattle neighbourhoods i'm interested is just not feasible at this time (with this impending market crash, pouring excessive amounts of capital into something that might exponentially depreciate in a couple years sounds risky). It sounds like finding a SFR with an ADU could easily achieve what i'm going for.
I have a question for those of you who have posted that own multiple MFR's or have mentioned developing on their current lot. I have a duplex in Seattle on a large lot and have thought about
a) Building a larger MFR or building townhouses
b) Buying a neighbors house that has a potential for a legal MIL
I currently don't have much cash but have equity in a home and the duplex as well as good income and credit. As far as I know I would need 25% down in order to buy something else (I don't have that much) and I am not sure about building loans. Any advice on getting loans for either of these situations or any input is helpful?
Thanks!
I'd suggest going to a local meetup like the one Dima hosts every week. He has done a few developments like the one you want to do. You can have most of your questions answered.