Need advice on my North Seattle rental

[Alex Lucille]

Newbie here, looking for advice on how to evaluate my current rental.  My goal is to use a buy-and-hold strategy to develop cash-flow properties over the next 10 years by investing 30-50k/year while still working full-time.  Specifically looking at whether my plan should be to hold this rental for the long-term and eventually do a 1031 exchange once its fully depreciated or sell it within the next two years to take advantage of the tax-free capital gains.

Details:

Location/description: North Seattle 1400 sq foot 3br/2ba 3 story townhome built in 2009, rough neighborhood on the border of a good one to the south.

Address: 1238 n northgate way seattle, wa 98133

Purchased as primary residence in 2014 for $360k with $72k down, $65/mo HOA which covers landscaping and governance

In 2016 after meeting 2yr occupancy req., property appraised for $475k so we pulled 70k our by refinancing into a 30yr @3.75% with a principal+interest payment of $1600 + 300 for taxes and insurance and rented it out for $2500/mo, renter pays utilities, we manage the property, new loan amt is $340k.

Other identical townhomes in our development and others like it have sold for $600k, so I would say that I could conceivably sell the home once the current lease is up and walk away with $200k factoring in all selling costs.

I expect that we will be able to raise rent to 2700-2900 in the next 2 years or so and possibly up to 3200 in 2021 as there is a light rail being constructed that will drive a lot of demand from people commuting to downtown seattle.

Specific Questions:

Since I refinanced and took my initial investment out of the property, this seems to skew all of the standard evaluation metrics (IRR, Cap Rate, etc...), if I factor equity into the equations this looks like a terrible return and if I don't its a great return. How would you evaluate this property? are there other factors/numbers I need to look at?

Applying the 50% rule to this property it looks like we are running negative, however since this is a brand new home, we are managing it and demand for this type of rental is through the roof I think that this rule does not apply, is there a more precise calculator anyone could recommend for estimating costs for newer homes?

Applying the 2% rule to this property, it would need to rent for $7200/month, this is not in the realm of reality for any properties in seattle, even 1% is a lofty dream.

If I sell this property I would likely either be sitting on cash for a while or I would need to look at out-of-state deals as the seattle market does not currently offer many lucrative buy-and-hold REI opportunities, are there other options I am not seeing?

Thanks in advance for your thoughts!

Alex

[Account Closed]

@Alex Lucille if I were in your shoes I would sell and 1031 into a 6-10 unit in either Tacoma or Everett. This move will get you a nice mix of appreciation and cashflow. That cashflow can really help get your snowball rolling in the early stages of investing and because you will be in your own backyard you still know the market and can self manage. I am biased because we own and operate 35 units in Everett but we started with just 4 back in 2013. That mix of appreciation and cashflow has helped tremendously over the last few years.