New investor looking for advice with a deal in Greater Seattle

[John Co]

Hi All,

I'm a proud aspiring new real estate investor after reading Rich Dad Poor Dad and listening to many Bigger Pockets Podcasts.

My girlfriend and I are looking for our first rental property / potential house hacking deal, however it has been challenging to find the property with numbers that makes sense in the Greater Seattle market. Below is the first deal we found with potential Cash on Cash return > 10% and would like to run it through experienced investors in WA to make sure we are on the right track and not making any major mistake as we begin our real estate investing journey. If successfully executed, this will be the biggest purchase either of us have ever done!

Location: Federal Way, WA

Property: Condo, 3 beds 2 baths, 1114 sqf, was rented out for $1300/month. Asking Price: $179,000. Offer price; $170,000.

Scenario 1:

We are looking to rent out by room instead of the entire unit (based on a podcast we recently listened to) and based on our Craiglist search, rooms for rent are generally priced at $700/room. We hope to achieve $700/room for the two rooms that will be sharing the bathroom, and $900/room for the master bedroom with a separate bathroom. To be conservative, we are assuming $100 less per room, hence the monthly income to be $2,000 ($600 * 2 + $800).

20% or $34K down payment, 4% interest rate

3% or $5,100 closing costs

$2K Rehab costs (the place looks move-in ready and we are assuming that if any issues revealed through the inspection, the Seller would pay to fix them).

$642 Monthly Mortgage

$123 Property Taxes

$250 HOA (water, sewer, gabage)

$31 Homeowner Insurance

$220 or 11% Management Fee

$200 or 10% vacancy rate (5.2% based on Neighborhood Scout)

$100 or 5% Repairs

$100 or 5% Capex

Tenant pays for other expenses (electricity, etc)

$133 Tax benefits assuming 25% tax rate

Scenario 2:

We also project another scenario where we house hack – live in the master bedroom, rent out the other 2 rooms. Monthly rent will be $1,400. We won’t have management fee in this case (manage ourselves).

Result:

Scenario 1 – Rent out all 3 rooms: Cash on Cash Return 12.7%, Cap rate 6.6%

Scenario 1 – House hacking – Live in the master bedroom and rent out 2 rooms: Cash on Cash Return 5.5%, Cap rate 4.8% and we get to live for free.

Questions:

Please let us know if we are missing any assumptions/expense item in our model?

We’ll appreciate any insights or comments from folks who are familiar with Federal Way. We have done some online searches and drive around but not sure if this is a good area to invest in. We bought a report from Neighborhood Scout which shows that comparing to the state, the price over rent ratio is one of the highest in this area but also high crime rate and majority of the population have lower income, high unemployment rate and low education.

Our biggest concern is the monthly rent assumption of $2,000 in scenario 1 and $1,400 in scenario 2. Any insights/thoughts would be super valuable.

Anything else we are missing here?

Thank you for reading this far and we are excited to have Bigger Pockets as we start out this exciting journey. We have to close the deal in 10 days so would love to hear soon from the more experienced investors in this forum. If you are in the area, we would love to buy you coffee / lunch to hear your thoughts and connect. In that case, please leave us your contact info.

Cheers,

John