Sell or keep renting in Seattle?

[Roses]

My husband and I own a 3bed 2bath house in a desirable upper middle class neighborhood in Seattle. Close to major workplaces, the university and transit but also a quiet, family-oriented area. We bought it 5 years ago for $465 and lived in it until a year ago. Because we had a 2nd baby on the way and wanted to get the older kid enrolled in a particular school, we rented another house just a few blocks away (we’d like to buy a home to live in the same area but the market is insane with multiple bids going way above asking so I think we’ll be renters for a while). We made the decision not to sell the old house mostly because we were attached to it and wanted to keep our options open for now (possibly living in it again later). We are renting out the house for $3000/mo not including utilities. There is crazy demand so I could probably get away with charging a little more. Our mortgage + tax is 2K/month so applying the 50% rule to assume a ‘profit’ of $500/mo. Even with this assumption and assuming no vacancies because of high demand, our yearly profit would only be 6K or .05%. We have 100K of our money tied up in the house and it has appreciated a minimum of 100K (despite the fact that we did nothing but cause more wear & tear). So if we were to sell we’d have some 200K to use for other, better, investments. I feel I should probably sell the house and get a couple or more properties that yield at least 1% in rent or just park the money in Vanguard. (The latter is probably what I’d do right now because to get 1% properties I have to go well outside of Seattle and it’s not realistic for me to manage long-distance properties right now with 2 little kids. But maybe in a few years when both are in school full time.)  My only concern with selling is maybe missing out on more appreciation. Everyone seems to think we’re the next SF. Amazon is expanding at breakneck speed and taking over the city with new buildings everywhere and new hires coming from all over the world. Microsoft and others are going strong and the Chinese are snapping up properties left and right. Seattle also weathered the recession better than other cities so all this makes me think the appreciation will keep going up for a while. But I know it’s a gamble. So, sell or keep renting it out? Thanks for any input!

[Another Reader]

50 percent of $3,000 is $1,500, so over time you can expect negative cash flow of -$500 a month.  Not sure how you came up with the +$500.

This market is like musical chairs.  Once the music stops, you need to find that chair and get out of the property.  If it's rented, you won't be able to put it on the market for what the property is worth to an owner-occupant.  It might be better to get out at an opportune time, when the property is vacant, rather than trying to squeeze out every last dollar of appreciation.

[CashFlowDiaries]

The 50% rule includes taxes and insurance so you shouldnt be using that rule in this situation because your mortgage already includes those figures.  Right?  You should be using actual numbers to come up with your cash flow.

Based on my numbers and educated assumptions based on the info you provided.  This house is positive cash flow $670 per month.  I did not include property management because it sounds like youre doing it yourself already.

Montly figures:
Mortgage                           = -2000
Rent                                   =  3000
10% future maint/repairs = -300
3% future vacancy           = -90       (i did 3% because its a hot area)
Cash Flow                           = $670

If you know for sure that you can take out that 100k and get more then 670 cash flow per month then go for it but keep in mind that your principal is being paid off by someone else and youre writing off all that interest, deprecation and rental expenses on your taxes.  Which only increases your ROI.

The fact that it is in a desirable area of seattle is just icing on the cake.  I would keep this one. I guarantee you wouldnt be able to find another investment like this in seattle right now.  A lot of investors would be very happy with this kind of return in a super hot market like youre in.

[Another Reader]

Missed the taxes (and probably also the insurance) as being in the mortgage payment.  However, CFD is underestimating the other expenses in my opinion.  You should look at the averages over your anticipated holding period, not just in a hot market.  Eventually you will hit a bad tenant and have collection loss and major repairs.  Vacancy will increase.  Capital improvements will need to be made - roof, furnace, water heater to name a few.  The lives of carpet and paint are 5 to 7 years.  Property management is an expense that accrues to the property.  If you DIY, you are paying yourself to do a job.  You would have to employ a manager if you moved away from Seattle. 

If you keep this house, return from cash flow will be very low.  You are really betting on appreciation.  That's worked out well recently, but how sustainable is it when the economy and the market turn? 

[CashFlowDiaries]

Trust me im definitely not underestimating the other expenses.   Based on my calculations, as long as the owner actually keeps the maint/vacancy fees in a separate account that will add up to $4680 per year (300*12 + 90*12) to be used for the sole purpose of all those items you mentioned.   That is the whole point of including those in the calculations.  Exactly to cover those expenses.  All those items will not give out at one time and $4680 per year should be fine.  On top of that, the owner is still cashing flowing over $600.

As for property management, this is true. Eventually you will not want to do this yourself and if thats the case then you need to deduct another 10% of your monthly rent income per month.  Its not so bad though, this year alone, I have spent about a total of 3 hours handling property management stuff.  Thats right, 3 hours this whole year.  If you properly screen your tenant and get a good person(s) in your house and you make sure the house is well maintained before you rent it then you shouldnt have any tenant issues or have them destroy the house.  The normal wear and tear that happens with roof, furnace, water heater, HVAC and others is covered in your $4680 that you are saving every year just for that purpose.

[Another Reader]

One eviction in Seattle would probably cost two years of that fund in lost rent and eviction costs.  A roof is probably more than $10k today, and up there the life is around 15 years for asphalt shingles because of the climate.  Carpet and paint depend on the square footage, but are probably going to cost at least $5,000 every 7 years.  Kitchen appliances generally have 8 to 10 year lives because tenants are harder on them.  In that price range, you can't buy the cheapest stuff in the marketplace, so $2,500 every 8 to 10 years.  Water heaters seem to go at 10 years these days.  The furnace lasts 20 years, that's the good news.

Don't get me wrong, I'm all for buying and operating rentals, which I have done for almost 20 years.  But I'm for being realistic, not wildly optimistic.  The OP is not selling now because she's hoping for appreciation.  The market is cyclical and at some point it's going to (gasp) go down.  She and her husband need to balance anemic cash flow against the risk of a downturn.  Are they going to be as satisfied with this investment if it goes back to or below the $465k they paid?  Are they willing to wait 5 or 10 years until the market recovers to sell?

[Roses]

Thanks so much for weighing in.  I do feel like we're betting on appreciation since we could do more with the money.  On the other hand, so far I really like managing the house.  I'd love to have a couple more but it's hard to find something worthwhile in the area right now.  I'm not literally paying myself for management but I know that figure has to be included in calculations and we have a healthy account for house-related expenses.  That said, the house is small, 1400 sf not including the unfinished basement, laundry & garage.  Hardwood floors except carpet in one small room and hall.  So those costs shouldn't be too high.  Tenants seem to be extremely reliable professional types and so far have been found via a large local parents group, not Craigslist.  I think I've done very thorough vetting.  So that makes me feel more secure but I suppose eventually we'll have an eviction.

[Roses]

Thanks, Ihamo.  It does have room for expansion & improvement and you're right it's a super hot area.  We're in Bryant.  With the light rail coming in and all the development I suppose it will keep getting better for a while.  Husband is leaning toward keeping it.  I'll PM you now.

[helgajones]

It is really up to you if you still want to rent your house. If you are having second thoughts, you should try remodeling your house. You will surely have a wonderful time looking for the perfect designs. You should try buying some furniture or changing the paint color of your house in order to have a new look. You just have to be creative.

[Cressida]

Don't get me wrong, I'm all for buying and operating rentals, which I have done for almost 20 years.  But I'm for being realistic, not wildly optimistic.  The OP is not selling now because she's hoping for appreciation.  The market is cyclical and at some point it's going to (gasp) go down.  She and her husband need to balance anemic cash flow against the risk of a downturn.  Are they going to be as satisfied with this investment if it goes back to or below the $465k they paid?  Are they willing to wait 5 or 10 years until the market recovers to sell?

That's not going to happen. Seattle real estate is heading toward Bay Area levels of ridiculousness. Real estate did decline around here during the recession, but that's because that bubble was specifically around real estate. Regular economic cycles aren't going to significantly affect home prices in Seattle.

OP, I would say that a house you already own in this market is worth a lot and will be worth a lot more. If you're just looking for places to park your money that will provide a good return, I'd hang onto that one.

[former player]

Why don't you wait until you've got your older child enrolled in the school you want and then go back to living in the house you own?  It sounds fine for bringing up a family of four, other than the school issue.

If you want to stay in an area with a rising market, you don't sell the property you've got unless you are buying at the same time, otherwise the market will just get further away from you.

[Another Reader]

Don't get me wrong, I'm all for buying and operating rentals, which I have done for almost 20 years.  But I'm for being realistic, not wildly optimistic.  The OP is not selling now because she's hoping for appreciation.  The market is cyclical and at some point it's going to (gasp) go down.  She and her husband need to balance anemic cash flow against the risk of a downturn.  Are they going to be as satisfied with this investment if it goes back to or below the $465k they paid?  Are they willing to wait 5 or 10 years until the market recovers to sell?

That's not going to happen. Seattle real estate is heading toward Bay Area levels of ridiculousness. Real estate did decline around here during the recession, but that's because that bubble was specifically around real estate. Regular economic cycles aren't going to significantly affect home prices in Seattle.

OP, I would say that a house you already own in this market is worth a lot and will be worth a lot more. If you're just looking for places to park your money that will provide a good return, I'd hang onto that one.

"It's different this time."  When the rug gets pulled out from under the Chinese buyers or we have a significant recession, you will find out it isn't different this time. 

[Roses]

That's not going to happen. Seattle real estate is heading toward Bay Area levels of ridiculousness. Real estate did decline around here during the recession, but that's because that bubble was specifically around real estate. Regular economic cycles aren't going to significantly affect home prices in Seattle.

OP, I would say that a house you already own in this market is worth a lot and will be worth a lot more. If you're just looking for places to park your money that will provide a good return, I'd hang onto that one.

You might be right.  I'm reading this all over the place.  We'll hang on for at least another year.  I guess we have that luxury since we have other investments too.  The next question is do we buy something else in the area as a primary residence since we're currently renting.  Easier said than done as there are always multiple offers these days.

[Roses]

I would at least wait another year.  Then if you do want to sell, you can still pocket the earnings tax free. 

I might be ready to buy from you in a year, too :)  Or I could try to find you a Chinese buyer.  I'm only half jokingly considering trying to get some real estate agency to take me on as a trainee, using the argument that I can tap the Chinese market AND understand what local sellers want/need.

Just curious, if you are willing to share:  which school did you move to get into the zone for?  Seems to me all the NE schools are pretty strong, but I'm wondering what you were moving from/to.  Just in case my DD does end up coming with me and DS, I need to be thinking a bit about elementary school zones.

I PM'd you about this.  Let me know if you don't get it.  I think my original message didn't go through.

[Roses]

Why don't you wait until you've got your older child enrolled in the school you want and then go back to living in the house you own?  It sounds fine for bringing up a family of four, other than the school issue.

If you want to stay in an area with a rising market, you don't sell the property you've got unless you are buying at the same time, otherwise the market will just get further away from you.

Going back to the house is a possibility in a few years but not right now. The layout is such that kids bedrooms would be on the main floor and our master upstairs. We bought the house before kids and didn't realize this would be a problem. It's not for a lot of people but it is for us while the kids are small. I need to have them both on the same floor as us for now. There are too many nighttime wake ups, night terrors, etc. We got several bids for remodeling but it's way too expensive. The rental we're living in at the moment has all bedrooms together and it's a dream. There is also the issue of getting the younger one into the same school in a few years. We won't get in if we live in that house because of their age difference there will be no sibling privilege. So we'll either be renters for a few years (so far it's working out great) or we'll buy something to live in if the frenzy ever dies down (multiple offers with no-limit escalation clauses).