Author Topic: Case Study in Hot Seattle Market  (Read 3009 times)

asytsma

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Case Study in Hot Seattle Market
« on: July 30, 2015, 04:35:19 PM »
Is anyone available to review a case study?

My husband and I aren't sure if we should sell our rental. It's located in the center of Seattle where rent prices and home prices are at an all time high. We want to capitalize on the "hot" market, but do we do this by selling the home or by reaping the rewards of high, stable rent? Also, we moved out of the home a little over a year ago, so if we're going to sell, then we're thinking it would be a good idea to do it before capitol gain taxes kick in. Thoughts?

Thanks so much!

Market Value: $450,000-$500,000 (I put this range because the Seattle market seems to change monthly.)
Original Purchase price: $400,000
Original Mortgage Amount: $375,000
Interest Rate: We refinanced under Obama’s Making Home Affordable program, so the mortgage details are a little funny. We’re currently paying 2% on a balance of $312,528.62 and 0% on $30,979.80. Starting on 6/1/16, the 2% interest will increase by 1% a year until is caps out at 5% on 6/1/19. The 0% interest portion will stay at 0% for the life of the loan.
Mortgage Term: 40 years
Term remaining: 36 years
Amount remaining on mortgage: See above
Gross Rents: $2195 plus all utilities. Our tenant moved in on May 1, 2014. She recently signed a new two year lease that will end June 30, 2017.
Principal and Interest (the P&I of your PITI - should match with the above info): $1044.05 per month through 6/1/16
Taxes and Insurance (the T&I of your PITI): $403.25 per month
HOA costs: $0
Deferred maintenance notes: We pay a gardner $50 a month to maintain the yard. The home is about 10 years old, so while nothing is broken now, we may need to start replacing appliances, paint, etc. soon.
Anything else special or unique in regards to the numbers of the property (not the property itself; things such as city assessments, back taxes, special costs due to unique features of the property, etc. etc.): No

jooles

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Re: Case Study in Hot Seattle Market
« Reply #1 on: July 30, 2015, 04:48:05 PM »
Things to think about -

Selling expenses run about 7-8% of total sales price (commissions to realtors and Wa St excise tax), more if you pay buyers closing costs.
Capital gains taxes can be delayed with a 1031 exchange.  Look into that and see if it works for your plan.
Moving back into this home prior to sale is another way to avoid capital gains taxes.  You simply have to live in this house for 2 years out of the last 5 years when you go to sell.

If I kept this rental I'd plan the maintenance costs and divert rental payments into a savings account until the expected maint. amount is reached.  Savings is Murphy repellent. 
Appliances can be purchased used for a significant savings.  Sears has a great appliance maintenance and repair policy. 

Can your month over month expenses handle these mortgage payments if you go without a renter?

What is your long term plan and how does holding or selling this property advance your plan?

CashFlowDiaries

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Re: Case Study in Hot Seattle Market
« Reply #2 on: July 31, 2015, 09:52:29 AM »
Well in my opinion it depends on what you would do with the money from selling the house.

Here is how I see it:

475k (assumed sale price)
-8% fees ($60k)

leaves you with
$415000
- 375k (to pay mortgage)

leaves you with:
40k profit.

What would you do with that 40k profit and will it give you better returns then youre making now?


Right now, based on my own calculations:

$2195 rent
-210  (10% to handle future repairs)
-100   (5% to handle future vacancy/turnover)

leaves you with:
$1885
-1448  (PITI)

leaves you with:
$437 straight cash flow per month.

Are you going to be able to use that 40k to get you that kind of passive income per month?

Not to mention all the added benefits of:
3-5% equity appreciation per year if you keep the house.  Probably more in seattle.
+ tax deductions on owning real estate.  All that interest and other rental deductions you can write off make a significant positive impact on your yearly taxes.

It would be difficult to top what youre getting now with that 40k from selling.

That is why I would keep it.  Hope that makes sense and helps.

 

Ricky

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Re: Case Study in Hot Seattle Market
« Reply #3 on: August 01, 2015, 10:59:11 PM »
I think your expenses will eventually eat into a lot of the profit/cash flow. I wouldn't be comfortable sitting on that big of a mortgage and only cash flowing ~$400 personally.

From an investor's point of view, I would sell. There are plenty of places for great returns in real estate investing. Seattle isn't one of them (in general) unless you're hoping for appreciation.

cheddarpie

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Re: Case Study in Hot Seattle Market
« Reply #4 on: August 08, 2015, 03:34:23 PM »
I'm in Seattle too. I would probably keep it. It sounds like you have a good tenant in place at a profitable rate for the next two years, which is awesome, and I am drinking the Koolaid that the Seattle market is going to continue to be hot. I think we are probably in a bit of a bubble now and the market will decline at some point, but I have no doubt that the city is going to keep growing significantly in coming years. I myself am a climate refugee from the east coast and I know there are more of us coming! :) Especially if you're in central Seattle with an easy commute to downtown and the east side, coming transportation improvements and redevelopment of 23rd, and increasing density/zoning changes, you're in a good spot to hold on for a while.

I don't totally understand how your mortgage works, though -- I assume as the interest rate goes up, it just means you're principal/interest ratio won't change that much over the first few years of the loan, or the interest portion might even increase? That's my only hesitation on this scenario, if you're not actually going to be building good equity in the home.

 

cheddarpie

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Re: Case Study in Hot Seattle Market
« Reply #5 on: August 08, 2015, 03:35:26 PM »
P.S. ... if you do decide to sell, let me know because I might be interested and we could avoid the broker fees with a direct sale. ;)

Bearded Man

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Re: Case Study in Hot Seattle Market
« Reply #6 on: August 10, 2015, 04:32:45 PM »
I  agree in that Seattle is a crappy market at these prices. Rents don't match the housing prices and it is cheaper to rent than to own. On a mortgage that size, with little profit, it's tempting to sell it, but the transaction costs are ridiculous. It is a crap shoot either way. I'd say since you have a stable tenant, leave them in there for a couple years, the assess again. Keep in mind the principal portion of your payment is also money that goes to your asset column, not just cash flow. And that principal payment increases every month, year by year. As do rents. Since your mortgage is "Fixed" at 5% cap, eventually this house will be really good since rents will go up, and principal payments will increase.

Frugal D

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Re: Case Study in Hot Seattle Market
« Reply #7 on: August 10, 2015, 05:11:01 PM »
I wouldn't sell anything in Seattle right now unless you absolutely need the cash. Unless Amazon suddenly goes out of business I can't see any scenario where prices stop increasing.
« Last Edit: August 10, 2015, 05:18:56 PM by Frugal D »

zoltani

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Re: Case Study in Hot Seattle Market
« Reply #8 on: August 10, 2015, 05:14:49 PM »
If you decide to sell how would it work with the tenant currently in the property with a 2-year lease? That might help make up your mind one way or the other.