Rent or Sell Townhouse in Seattle

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Zzdave
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Rent or Sell Townhouse in Seattle

Post by Zzdave » Wed Jun 10, 2020 3:43 pm

We are trying to figure out if it would be better to keep or sell this townhouse. Here are the details:

We own ( or rather the bank owns ) a 1300 sqft, 3 bedroom, 2.5 bath, 1 car garage townhouse in downtown Seattle. It is 2 blocks north of the Seattle Center in Lower Queen Anne and has a great view of the Space Needle from the master bedroom window.

We moved out of it 3 years ago and have been renting it to 1 renter and his family for $3500. This has covered the mortgage, taxes, and other expenses, but the renter is now moving out at the beginning of July. And wouldn't you know it, I also received a notice from the tax man, that the taxes have gone up.

The total for the mortgage with the new taxes, and insurance is about $3650 a month. We currently have the following:

Main Loan - $359,000 - 3.38% rate
Equity line - $111,400 - 4.99%

The current value of the town home is approximately $900,000.

On the Seattle real estate appreciation, I bought and lived in the townhouse since 2005. I originally purchased it for 430k, then refinanced a bunch of my debt into it. The value of the townhouse in that time has a little more than doubled.

We are trying to figure out if it would be better to sell it now, and invest the profit into the market for the next 20 years, or to refinance it and continue to rent it out?

Any help would be greatly appreciated.

Thanks
Dave

Bronko
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Re: Rent or Sell Townhouse in Seattle

Post by Bronko » Wed Jun 10, 2020 3:48 pm

Besides the financial issues, if it was mine I would be skeptical about the current political climate in Seattle and whether the outlook for the city is on the rise, or cratering. I won't say more to keep it within forum rules.

Best of luck either way.
Never let a little bit of money get in the way of a real good time.

MadHungarian
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Re: Rent or Sell Townhouse in Seattle

Post by MadHungarian » Wed Jun 10, 2020 3:55 pm

Being a landlord might get tougher here as time goes on.

annu
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Re: Rent or Sell Townhouse in Seattle

Post by annu » Wed Jun 10, 2020 3:59 pm

If you are looking for real answer on rental strategy, post on biggerpockets, here understandably answers will be aligned to equities.

What is typical vacancy rate for your property, due to covid I would multiply it by 2. Can you afford to make Mortgage and HOA payments for that long?
If the vacancy gets you into winter, when no one normally moves, and covid might be causing issues again, you may have to pay for longer worst case.

I personally prefer rental investments, but your expected rent is really high, with covid limitations and acceptance of remote working, folks can just live at a cheaper place and save on rents. But if your property is close to big tech, it might be possible to rent, as I still go in few days a month as something can only be done in-premise, so there is a benifit to living closer to work, but will depend on income, so if close to amazon, google, MS, might be able to rent.
I will put the listing on zillow and other rental sites right away, try to see if you can get a renter now, and at the same time do some research.
If you try to sell, depending on the market you may have to take some loss, and if that is comparable to paying mortgage put of pocket for few months I might go for it, as I said I like rental investments :D

annu
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Re: Rent or Sell Townhouse in Seattle

Post by annu » Wed Jun 10, 2020 4:01 pm

Bronko wrote:
Wed Jun 10, 2020 3:48 pm
Besides the financial issues, if it was mine I would be skeptical about the current political climate in Seattle and whether the outlook for the city is on the rise, or cratering. I won't say more to keep it within forum rules.

Best of luck either way.
Look at the tech presence in Seattle. It is huge. This is besides all the startups and proximity to Vancouver. Your concern is more due to politics than anything based on the City/tech presence.

Bronko
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Re: Rent or Sell Townhouse in Seattle

Post by Bronko » Wed Jun 10, 2020 4:05 pm

annu wrote:
Wed Jun 10, 2020 4:01 pm
Bronko wrote:
Wed Jun 10, 2020 3:48 pm
Besides the financial issues, if it was mine I would be skeptical about the current political climate in Seattle and whether the outlook for the city is on the rise, or cratering. I won't say more to keep it within forum rules.

Best of luck either way.
Look at the tech presence in Seattle. It is huge. This is besides all the startups and proximity to Vancouver. Your concern is more due to politics than anything based on the City/tech presence.
No it's not. It's due to the extreme hardship facing the city due to current trends in taxation, regulation, and community distress. Sure there is tech. Can tech companies move to better places for business? Anyway I was just offering a point, don't take it personal.
Never let a little bit of money get in the way of a real good time.

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Ben Mathew
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Re: Rent or Sell Townhouse in Seattle

Post by Ben Mathew » Wed Jun 10, 2020 4:12 pm

Are you still within the window of the capital gains tax exemption for primary home (occupied two of last five years)? If you can manage to sell within that window, I would exit this accidental investment. If you want more real estate exposure, you can get it from REIT funds. Less hassle, less risk.

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Ben Mathew
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Re: Rent or Sell Townhouse in Seattle

Post by Ben Mathew » Wed Jun 10, 2020 4:21 pm

Zzdave wrote:
Wed Jun 10, 2020 3:43 pm
We moved out of it 3 years ago and have been renting it to 1 renter and his family for $3500. This has covered the mortgage, taxes, and other expenses
What that does not cover is the opportunity cost of your home equity. Looks like you have about $470K loan on a $900K property. So equity of is about $430K. You are losing the return you could have earned on that if it had been invested elsewhere.

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Sandtrap
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Re: Rent or Sell Townhouse in Seattle

Post by Sandtrap » Wed Jun 10, 2020 4:26 pm

Zzdave wrote:
Wed Jun 10, 2020 3:43 pm
We are trying to figure out if it would be better to keep or sell this townhouse. Here are the details:

We own ( or rather the bank owns ) a 1300 sqft, 3 bedroom, 2.5 bath, 1 car garage townhouse in downtown Seattle. It is 2 blocks north of the Seattle Center in Lower Queen Anne and has a great view of the Space Needle from the master bedroom window.

We moved out of it 3 years ago and have been renting it to 1 renter and his family for $3500. This has covered the mortgage, taxes, and other expenses, but the renter is now moving out at the beginning of July. And wouldn't you know it, I also received a notice from the tax man, that the taxes have gone up.

The total for the mortgage with the new taxes, and insurance is about $3650 a month. We currently have the following:

Main Loan - $359,000 - 3.38% rate
Equity line - $111,400 - 4.99%

The current value of the town home is approximately $900,000.

On the Seattle real estate appreciation, I bought and lived in the townhouse since 2005. I originally purchased it for 430k, then refinanced a bunch of my debt into it. The value of the townhouse in that time has a little more than doubled.

We are trying to figure out if it would be better to sell it now, and invest the profit into the market for the next 20 years, or to refinance it and continue to rent it out?

Any help would be greatly appreciated.

Thanks
Dave
So, you rented it for $3500/month.
Your adjusted new expenses are $3650/month.
Right?

So, even if you rented it out somewhere near "break even", your actual CAP Rate would be negligible.
So, why are you keeping the property?
Do you plan to move back to live in that property very soon?
Do you plan to give it to a family member?
Do you plan to rent it to a family member for a break even price very soon?

If not, there's not much to think about here.
Sell.

j :happy
Wiki Bogleheads Wiki: Everything You Need to Know

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MrBobcat
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Re: Rent or Sell Townhouse in Seattle

Post by MrBobcat » Wed Jun 10, 2020 4:36 pm

Ben Mathew wrote:
Wed Jun 10, 2020 4:12 pm
Are you still within the window of the capital gains tax exemption for primary home (occupied two of last five years)? If you can manage to sell within that window, I would exit this accidental investment. If you want more real estate exposure, you can get it from REIT funds. Less hassle, less risk.
That was my first thought as well. I would really hate to pay tax on a $470,000ish gain if I didn't have to. I'd move back into it if possible to avoid the gain. Still will probably be some depreciation recapture, but...

Trader Joe
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Re: Rent or Sell Townhouse in Seattle

Post by Trader Joe » Wed Jun 10, 2020 4:42 pm

Zzdave wrote:
Wed Jun 10, 2020 3:43 pm
We are trying to figure out if it would be better to keep or sell this townhouse. Here are the details:

We own ( or rather the bank owns ) a 1300 sqft, 3 bedroom, 2.5 bath, 1 car garage townhouse in downtown Seattle. It is 2 blocks north of the Seattle Center in Lower Queen Anne and has a great view of the Space Needle from the master bedroom window.

We moved out of it 3 years ago and have been renting it to 1 renter and his family for $3500. This has covered the mortgage, taxes, and other expenses, but the renter is now moving out at the beginning of July. And wouldn't you know it, I also received a notice from the tax man, that the taxes have gone up.

The total for the mortgage with the new taxes, and insurance is about $3650 a month. We currently have the following:

Main Loan - $359,000 - 3.38% rate
Equity line - $111,400 - 4.99%

The current value of the town home is approximately $900,000.

On the Seattle real estate appreciation, I bought and lived in the townhouse since 2005. I originally purchased it for 430k, then refinanced a bunch of my debt into it. The value of the townhouse in that time has a little more than doubled.

We are trying to figure out if it would be better to sell it now, and invest the profit into the market for the next 20 years, or to refinance it and continue to rent it out?

Any help would be greatly appreciated.

Thanks
Dave
I would sell asap.

ronno2018
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Re: Rent or Sell Townhouse in Seattle

Post by ronno2018 » Wed Jun 10, 2020 4:54 pm

I would guess townhomes in/near the city center will continue to appreciate above the inflation rate -- climate, schools, entrepreneurship are all good in Seattle and will continue to improve (yes some down years too). So keep it if you do not mind the management of it and want to avoid some taxes upon selling (which you will pay whenever you sell down the road as well).

Personally I would not enjoy finding tenants, doing the maintenance, etc and would prefer to own equities but plenty of people do great with small real estate investing.

renegade06
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Re: Rent or Sell Townhouse in Seattle

Post by renegade06 » Wed Jun 10, 2020 5:00 pm

Bronko wrote:
Wed Jun 10, 2020 3:48 pm
Besides the financial issues, if it was mine I would be skeptical about the current political climate in Seattle and whether the outlook for the city is on the rise, or cratering. I won't say more to keep it within forum rules.

Best of luck either way.
+1

Helo80
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Re: Rent or Sell Townhouse in Seattle

Post by Helo80 » Wed Jun 10, 2020 5:06 pm

How far away is all the violence and looting?

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8foot7
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Re: Rent or Sell Townhouse in Seattle

Post by 8foot7 » Wed Jun 10, 2020 5:11 pm

renegade06 wrote:
Wed Jun 10, 2020 5:00 pm
Bronko wrote:
Wed Jun 10, 2020 3:48 pm
Besides the financial issues, if it was mine I would be skeptical about the current political climate in Seattle and whether the outlook for the city is on the rise, or cratering. I won't say more to keep it within forum rules.

Best of luck either way.
+1
Sharing only facts, there is a multi-city block zone that has been abandoned by police and authorities and ceded to protestors around the Capitol Hill area, colloquially known as the Capitol Hill Free Zone. Saying nothing about the appropriateness of that, I can’t help but think the rental market in that area may well be more troubled in the short term than other places.

ronno2018
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Re: Rent or Sell Townhouse in Seattle

Post by ronno2018 » Wed Jun 10, 2020 5:21 pm

8foot7 wrote:
Wed Jun 10, 2020 5:11 pm
renegade06 wrote:
Wed Jun 10, 2020 5:00 pm
Bronko wrote:
Wed Jun 10, 2020 3:48 pm
Besides the financial issues, if it was mine I would be skeptical about the current political climate in Seattle and whether the outlook for the city is on the rise, or cratering. I won't say more to keep it within forum rules.

Best of luck either way.
+1
Sharing only facts, there is a multi-city block zone that has been abandoned by police and authorities and ceded to protestors around the Capitol Hill area, colloquially known as the Capitol Hill Free Zone. Saying nothing about the appropriateness of that, I can’t help but think the rental market in that area may well be more troubled in the short term than other places.
I am bullish on the Pacific Northwest and Seattle specifically. Long term the quality of life will continue to improve, people will get wealthier and the urban area more livable. There will be down years sure, but long term you will do well to invest in the Pacific Northwest/ BC Canada. Current turbulence is short term.

Panky
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Re: Rent or Sell Townhouse in Seattle

Post by Panky » Wed Jun 10, 2020 5:38 pm

Absolutely sell if you have lived at the property for 2 of the last 5 years (capital gains exception eligible).
Probably still sell regardless.

Context:
I was born in Seattle, went to school at UW, and owned a home there 2015-2018, which we ended up selling at a large profit.

Right now the Seattle market is still very hot - had one family friend sell in Bellevue within first 6 days for well over asking price (asking was $1.88 million), and inventory on our street sold on first day for asking price.

Whereas the rental market is not doing well - we own rentals in Bellingham and have folks behind on rent, currently anticipating we will need to eat sine that cost at end of term.

In Seattle proper the city council has passed/is signally passing more tenant protections - politically I tend to be in favor of these, but as a practical matter it likely makes being a small scale landlord difficult as you have additional hoops to jump through.
For the price of the property, you can buy a multi-unit in another location, effectively diversiving your tenant pool, and also which have better returns as a percentage of current value (Bigger Pockets, suggested by others, talks about this a lot; prior to the market getting so hot you could get 11% returns in markets an hour outside of Seattle).

I have the name of a great agent who specializes in that area as well I can provide if you want to privately message me, don't want to be seen as spamming this group.

If you do keep it:
If you do want to keep it, you may want to consider taking out a larger loan on the property, so that your costs are higher, so that your net profit per month may be lower. Use that additional cash you secure to pay down your primary home, or make another prudent and conservative investment.

We have cash on hand (technically stock holdings) that is sufficient to pay off our other rental, which we considered, but then realized that would greatly increase the nominal profit, and our tax burden, for the rental. Instead we run at a nominal loss for that rental (including deprecation) and are slowly fixing that rental unit up to eventually sell it at a higher price, or at least lower maintenance costs/liabilities, and command a higher rent.

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8foot7
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Re: Rent or Sell Townhouse in Seattle

Post by 8foot7 » Wed Jun 10, 2020 5:42 pm

ronno2018 wrote:
Wed Jun 10, 2020 5:21 pm
8foot7 wrote:
Wed Jun 10, 2020 5:11 pm
renegade06 wrote:
Wed Jun 10, 2020 5:00 pm
Bronko wrote:
Wed Jun 10, 2020 3:48 pm
Besides the financial issues, if it was mine I would be skeptical about the current political climate in Seattle and whether the outlook for the city is on the rise, or cratering. I won't say more to keep it within forum rules.

Best of luck either way.
+1
Sharing only facts, there is a multi-city block zone that has been abandoned by police and authorities and ceded to protestors around the Capitol Hill area, colloquially known as the Capitol Hill Free Zone. Saying nothing about the appropriateness of that, I can’t help but think the rental market in that area may well be more troubled in the short term than other places.
I am bullish on the Pacific Northwest and Seattle specifically. Long term the quality of life will continue to improve, people will get wealthier and the urban area more livable. There will be down years sure, but long term you will do well to invest in the Pacific Northwest/ BC Canada. Current turbulence is short term.
I don't necessarily disagree on your long-term outlook for Seattle real estate in general, but OP has already more than doubled his money on the price side, is in a natural transition period with the lease running out, and the numbers don't look great from a rental perspective with the tax increase and current market. I would be selling.

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LilyFleur
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Re: Rent or Sell Townhouse in Seattle

Post by LilyFleur » Wed Jun 10, 2020 5:56 pm

Ben Mathew wrote:
Wed Jun 10, 2020 4:12 pm
Are you still within the window of the capital gains tax exemption for primary home (occupied two of last five years)? If you can manage to sell within that window, I would exit this accidental investment. If you want more real estate exposure, you can get it from REIT funds. Less hassle, less risk.
It looks like you might be right on the edge of losing your capital gains exclusion.
https://www.irs.gov/taxtopics/tc701

allones
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Re: Rent or Sell Townhouse in Seattle

Post by allones » Wed Jun 10, 2020 6:16 pm

The Queen Anne neighborhood is not near the current epicenter of Seattle protests on Capitol Hill. It's in fantastic proximity to tech companies downtown and in SLU. Easily walkable or bikeable on fair weather days.

I faced a similar situation in 2017. I had a single-family home in Greenwood that had doubled in value since I purchased it in 2007. I had renters for just under two years that covered my mortgage and then some. Seeing rents increase at such a rapid pace year after year definitely made me consider the potential huge upside of hanging on to the house as an investment property.

But, I decided to sell and have no regrets. I DCA'd the proceeds into a ETFs and feel great, especially in this covid world, that I have liquidity and am not dealing with renters who cannot pay rent.
Last edited by allones on Wed Jun 10, 2020 11:29 pm, edited 1 time in total.

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Watty
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Re: Rent or Sell Townhouse in Seattle

Post by Watty » Wed Jun 10, 2020 6:28 pm

MrBobcat wrote:
Wed Jun 10, 2020 4:36 pm
Ben Mathew wrote:
Wed Jun 10, 2020 4:12 pm
Are you still within the window of the capital gains tax exemption for primary home (occupied two of last five years)? If you can manage to sell within that window, I would exit this accidental investment. If you want more real estate exposure, you can get it from REIT funds. Less hassle, less risk.
That was my first thought as well. I would really hate to pay tax on a $470,000ish gain if I didn't have to. I'd move back into it if possible to avoid the gain. Still will probably be some depreciation recapture, but...
+1

You should have sold it six months ago when you would likely have qualified for the homeowners capital gains exemption.
Zzdave wrote:
Wed Jun 10, 2020 3:43 pm
It is 2 blocks north of the Seattle Center in Lower Queen Anne and has a great view of the Space Needle from the master bedroom window.
Be careful about this. I know someone that had a nice high rise condo in Belltown in downtown Seattle with a postcard view of Puget Sound and the sunset.

Until they built a new high rise low income housing apartment building a block west of her condo.

quantAndHold
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Re: Rent or Sell Townhouse in Seattle

Post by quantAndHold » Wed Jun 10, 2020 6:32 pm

Jeez, the comments here...

OP owns a place within walking distance of Amazon, in a super desirable location on the other side of downtown from the protests. Get over yourselves.

If this were my place, I'd just move back into it. Since it's not, and you're not really right side up on the place, I would sell it, pay off the loans, take the profits, and invest the rest. Less work, simpler life.
Yes, I’m really that pedantic.

ronno2018
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Re: Rent or Sell Townhouse in Seattle

Post by ronno2018 » Wed Jun 10, 2020 7:33 pm

8foot7 wrote:
Wed Jun 10, 2020 5:42 pm
ronno2018 wrote:
Wed Jun 10, 2020 5:21 pm
8foot7 wrote:
Wed Jun 10, 2020 5:11 pm
renegade06 wrote:
Wed Jun 10, 2020 5:00 pm
Bronko wrote:
Wed Jun 10, 2020 3:48 pm
Besides the financial issues, if it was mine I would be skeptical about the current political climate in Seattle and whether the outlook for the city is on the rise, or cratering. I won't say more to keep it within forum rules.

Best of luck either way.
+1
Sharing only facts, there is a multi-city block zone that has been abandoned by police and authorities and ceded to protestors around the Capitol Hill area, colloquially known as the Capitol Hill Free Zone. Saying nothing about the appropriateness of that, I can’t help but think the rental market in that area may well be more troubled in the short term than other places.
I am bullish on the Pacific Northwest and Seattle specifically. Long term the quality of life will continue to improve, people will get wealthier and the urban area more livable. There will be down years sure, but long term you will do well to invest in the Pacific Northwest/ BC Canada. Current turbulence is short term.
I don't necessarily disagree on your long-term outlook for Seattle real estate in general, but OP has already more than doubled his money on the price side, is in a natural transition period with the lease running out, and the numbers don't look great from a rental perspective with the tax increase and current market. I would be selling.
I agree with you, I was just sort of pushing back on the guy above who was bashing Seattle due to the protesting in the Capitol Hill neighborhood recently. It's not like other cities are not seeing the same thing.

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Ben Mathew
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Re: Rent or Sell Townhouse in Seattle

Post by Ben Mathew » Wed Jun 10, 2020 7:48 pm

To evaluate this as an investment property, we can try to estimate its intrinsic return without leverage:

Rent (11 months rented, 1 month vacant) = $3,500*11=$38,500
Property tax around $8,000?
Maintenance: $3,000
Management fee: $0 (self managed)

Net annual income produced by asset: $27,500

Price of investment = $900,000

Return (cap rate) = $27,500/$900,000 = 3.1%.

This would be the real rate of return if prices, rents, and all costs stayed constant in real dollars (i.e. kept up with inflation.) If rents go up faster than inflation, the real rate of return will be higher. Clearly, since this cap rate is lower than what you would find in many parts of the country, housing here is being priced to reflect its the growth potential. i.e. This is priced like a growth stock, not a value stock. Factoring in real rent and price appreciation, we get:

Prices and rents in Seattle keep up with inflation (0% real appreciation), real return = 3.1%
Prices and rents in Seattle rise 0.5% faster than inflation (0.5% real appreciation), real return = 3.6%
Prices and rents in Seattle rise 1% faster than inflation (1% real appreciation), real return = 4.1%

Compare that to stocks: the earnings yield for VTSAX (US stocks) is 4.8%, and VTIAX (international stocks) is 7.2%. This would be the long term real rate of return if the earnings and valuations of these companies stayed constant in real terms. If you think the earnings of these companies will grow faster or slower than inflation, you can add or subtract to that estimate.

Back to real estate, leverage of course will increase both the expected return and the risk of the investment. One might argue that it's relatively safe to leverage an investment property in downtown Seattle, so we should be comparing leveraged returns on the investment property to stocks. On the other hand, the risk is concentrated in one business in one location. Is a leveraged investment in local real estate as safe as VTSAX or VTIAX which is also leveraged (because firms borrow) but are diversified across many different businesses and markets. It comes down to what offers a better risk/return tradeoff. But, in my opinion, an unleveraged real estate investment in Seattle is unlikely to beat the stock market over the next thirty years.

CatchingDaggers
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Re: Rent or Sell Townhouse in Seattle

Post by CatchingDaggers » Wed Jun 10, 2020 8:10 pm

Sell now. Property values for townhomes in Seattle have been on the decline since Amazon announced they will not be expanding anymore in Seattle. If your new renters decide not to pay rent you have no recourse whatsoever until at least the end of this year. We do not yet know the full extent of the effect of the shift to work from home, but it cannot be positive for property values in the urban center.

Xrayman69
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Re: Rent or Sell Townhouse in Seattle

Post by Xrayman69 » Wed Jun 10, 2020 8:14 pm

We have sold 2 rental as over the past 10 years in seattle. Significant gains over the purchase price. First rental was our starter home. When we upgraded home we kept it as a rental for 5 years. Didn’t make much annually. Sold the second rental about 18 months ago. The regulations for small business rental owners of single family units was and is increasingly risky.

Dumped profits into taxable S&P 500 fund have shown to be comparable returns with no need to be a landlord.

I think the WFH requirements for most techies going into October (and likely will permit those who want to do so long term) could potentially have an affect upon supply and demand in the south lake union and adjacent core neighborhoods of downtown.

To the OP I would say sell as this is not likely your occupation and main business. A bad renter or an unfortunate event will put you back with moneys, TIME, and mental effort.

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Zzdave
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Re: Rent or Sell Townhouse in Seattle

Post by Zzdave » Fri Jun 12, 2020 3:14 pm

Ben Mathew wrote:
Wed Jun 10, 2020 4:21 pm
Zzdave wrote:
Wed Jun 10, 2020 3:43 pm
We moved out of it 3 years ago and have been renting it to 1 renter and his family for $3500. This has covered the mortgage, taxes, and other expenses
What that does not cover is the opportunity cost of your home equity. Looks like you have about $470K loan on a $900K property. So equity of is about $430K. You are losing the return you could have earned on that if it had been invested elsewhere.
That does make a lot of sense. And I guess it would be the same thing going forward...

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Zzdave
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Re: Rent or Sell Townhouse in Seattle

Post by Zzdave » Fri Jun 12, 2020 3:15 pm

Ben Mathew wrote:
Wed Jun 10, 2020 4:12 pm
Are you still within the window of the capital gains tax exemption for primary home (occupied two of last five years)? If you can manage to sell within that window, I would exit this accidental investment. If you want more real estate exposure, you can get it from REIT funds. Less hassle, less risk.
That is a good question, I need to check on that!

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Zzdave
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Re: Rent or Sell Townhouse in Seattle

Post by Zzdave » Fri Jun 12, 2020 3:17 pm

Sandtrap wrote:
Wed Jun 10, 2020 4:26 pm
Zzdave wrote:
Wed Jun 10, 2020 3:43 pm
We are trying to figure out if it would be better to keep or sell this townhouse. Here are the details:

We own ( or rather the bank owns ) a 1300 sqft, 3 bedroom, 2.5 bath, 1 car garage townhouse in downtown Seattle. It is 2 blocks north of the Seattle Center in Lower Queen Anne and has a great view of the Space Needle from the master bedroom window.

We moved out of it 3 years ago and have been renting it to 1 renter and his family for $3500. This has covered the mortgage, taxes, and other expenses, but the renter is now moving out at the beginning of July. And wouldn't you know it, I also received a notice from the tax man, that the taxes have gone up.

The total for the mortgage with the new taxes, and insurance is about $3650 a month. We currently have the following:

Main Loan - $359,000 - 3.38% rate
Equity line - $111,400 - 4.99%

The current value of the town home is approximately $900,000.

On the Seattle real estate appreciation, I bought and lived in the townhouse since 2005. I originally purchased it for 430k, then refinanced a bunch of my debt into it. The value of the townhouse in that time has a little more than doubled.

We are trying to figure out if it would be better to sell it now, and invest the profit into the market for the next 20 years, or to refinance it and continue to rent it out?

Any help would be greatly appreciated.

Thanks
Dave
So, you rented it for $3500/month.
Your adjusted new expenses are $3650/month.
Right?

So, even if you rented it out somewhere near "break even", your actual CAP Rate would be negligible.
So, why are you keeping the property?
Do you plan to move back to live in that property very soon?
Do you plan to give it to a family member?
Do you plan to rent it to a family member for a break even price very soon?

If not, there's not much to think about here.
Sell.

j :happy
No, probably never move back into it. We kept it because everyone always tells us how great the real-estate is in Seattle and how much it will be worth tomorrow.

Thanks for your advice!

ScubaHogg
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Re: Rent or Sell Townhouse in Seattle

Post by ScubaHogg » Fri Jun 12, 2020 3:28 pm

Might be a non-issue, but it’s worth considering that several notable tech companies have either committed to or are considering a more permanent work from home policy (or at least the option). If Amazon chooses to go that route it seems like it would affect the local real estate market in a way negative to you as some number of workers would presumably choose to work from elsewhere.
“There is no problem so bad you can’t make it worse.” - Chris Hatfield, Astronaut mantra

Topic Author
Zzdave
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Re: Rent or Sell Townhouse in Seattle

Post by Zzdave » Fri Jun 12, 2020 4:12 pm

8foot7 wrote:
Wed Jun 10, 2020 5:11 pm
renegade06 wrote:
Wed Jun 10, 2020 5:00 pm
Bronko wrote:
Wed Jun 10, 2020 3:48 pm
Besides the financial issues, if it was mine I would be skeptical about the current political climate in Seattle and whether the outlook for the city is on the rise, or cratering. I won't say more to keep it within forum rules.

Best of luck either way.
+1
Sharing only facts, there is a multi-city block zone that has been abandoned by police and authorities and ceded to protesters around the Capitol Hill area, colloquially known as the Capitol Hill Free Zone. Saying nothing about the appropriateness of that, I can’t help but think the rental market in that area may well be more troubled in the short term than other places.
Yes, that is one of my major worries. I lived in Lower Queen Anne for at least 12 years. Lower Queen Anne was one of the best areas to live in the city for a long time. About 5 years ago, they decided to open a homeless shelter for drug addicts in the area. It allowed 100 drug addicted men to sleep there from 10pm to 6am. At 6am, they had no where to go, except the streets and the Seattle Center. You started to see families that used to walk around in the area disappear. Lower Queen Anne became the highest car prowler/break-ins in the city over the next few years. The mayor didn't seem to think it was an issue. Well.....today, you can see how much they care about the working, tax paying citizens.

CatchingDaggers
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Re: Rent or Sell Townhouse in Seattle

Post by CatchingDaggers » Fri Jun 12, 2020 4:18 pm

I live in queen anne/interbay. We have a full on meth-encampment with multiple RV labs straight out of Breaking Bad setup next to Staples three blocks away. They don't even need to hide it.

Topic Author
Zzdave
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Re: Rent or Sell Townhouse in Seattle

Post by Zzdave » Fri Jun 12, 2020 4:20 pm

allones wrote:
Wed Jun 10, 2020 6:16 pm
The Queen Anne neighborhood is not near the current epicenter of Seattle protests on Capitol Hill. It's in fantastic proximity to tech companies downtown and in SLU. Easily walkable or bikeable on fair weather days.

I faced a similar situation in 2017. I had a single-family home in Greenwood that had doubled in value since I purchased it in 2007. I had renters for just under two years that covered my mortgage and then some. Seeing rents increase at such a rapid pace year after year definitely made me consider the potential huge upside of hanging on to the house as an investment property.

But, I decided to sell and have no regrets. I DCA'd the proceeds into a ETFs and feel great, especially in this covid world, that I have liquidity and am not dealing with renters who cannot pay rent.
Yes, I lived in the townhouse for about 12 years and was able to walk to work near Lake Union.

I am starting to feel like it might be best to sell it!

:)

Topic Author
Zzdave
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Re: Rent or Sell Townhouse in Seattle

Post by Zzdave » Fri Jun 12, 2020 4:21 pm

Thanks everyone for your input! I am going to do some homework on the IRS rule and see if I still qualify!

92irish
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Re: Rent or Sell Townhouse in Seattle

Post by 92irish » Fri Jun 12, 2020 4:26 pm

I am from the Seattle area - my vote is to sell. You enjoyed a nice run up in value over the past years, but I am afraid the future economic prospects for Seattle proper are slipping along with other headaches for residential landlords coming down the pike. I'd take advantage of the personal residence gain exclusion and look for greener (less headache) pastures.

quantAndHold
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Re: Rent or Sell Townhouse in Seattle

Post by quantAndHold » Fri Jun 12, 2020 4:27 pm

Personally, I would sell it, unless you want to be a professional landlord. Especially with this particular place, it's too much mental energy for too little profit.

We were in the same situation a few years ago, except the place was in Magnolia. We don't regret selling for a second. We made a nice profit, and I'm quite happy never having to think about tenants or repairs again.

OTOH, a friend has a 3-plex on Ward St. He has tenants in 2 units, and AirBNB's the unit with the best view. It does quite well. But he's a professional landlord, and has multiple places all over two different cities.
Yes, I’m really that pedantic.

Topic Author
Zzdave
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Re: Rent or Sell Townhouse in Seattle

Post by Zzdave » Fri Jun 12, 2020 11:49 pm

quantAndHold wrote:
Fri Jun 12, 2020 4:27 pm
Personally, I would sell it, unless you want to be a professional landlord. Especially with this particular place, it's too much mental energy for too little profit.

We were in the same situation a few years ago, except the place was in Magnolia. We don't regret selling for a second. We made a nice profit, and I'm quite happy never having to think about tenants or repairs again.

OTOH, a friend has a 3-plex on Ward St. He has tenants in 2 units, and AirBNB's the unit with the best view. It does quite well. But he's a professional landlord, and has multiple places all over two different cities.
Thanks for your info. I am not a professional landlord and NEVER want to be one, especially in Seattle! :)

I am now planning on selling!

drk
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Location: Seattle

Re: Rent or Sell Townhouse in Seattle

Post by drk » Sat Jun 13, 2020 1:46 am

In your position, I would sell it. You get to take some tax-free gains and don’t have to start a second job as a landlord.

As a local, though, it’s hilarious to read the hysterics in this thread.

milktoast
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Re: Rent or Sell Townhouse in Seattle

Post by milktoast » Sat Jun 13, 2020 1:08 pm

OMG this thread. Seattle is clearly being portrayed oddly by some media.

Good location. Likely to rent quickly to tech worker who wants to walk to work.

But there is a huge increase in rental units in the core. And a ton along the East link and north link lines. So even if the core fills up, we are only a couple years from all those units also having great transit to downtown/ amazon.

So rents aren’t likely to go up very much. And the new transit probably reduces pressure on sales price as well.

I would sell.

CMD1
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Re: Rent or Sell Townhouse in Seattle

Post by CMD1 » Sat Jun 13, 2020 1:18 pm

If your on the fence there is always the Amazon meter - how many open corporate roles do they have in Seattle (in your neighborhood) - 8,139 right now. Over 3,000 tech jobs, these numbers are hard to wrap your mind around they are so large for openings....during a pandemic no less.

Topic Author
Zzdave
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Re: Rent or Sell Townhouse in Seattle

Post by Zzdave » Tue Jun 30, 2020 11:46 am

Ben Mathew wrote:
Wed Jun 10, 2020 7:48 pm
To evaluate this as an investment property, we can try to estimate its intrinsic return without leverage:

Rent (11 months rented, 1 month vacant) = $3,500*11=$38,500
Property tax around $8,000?
Maintenance: $3,000
Management fee: $0 (self managed)

Net annual income produced by asset: $27,500

Price of investment = $900,000

Return (cap rate) = $27,500/$900,000 = 3.1%.

This would be the real rate of return if prices, rents, and all costs stayed constant in real dollars (i.e. kept up with inflation.) If rents go up faster than inflation, the real rate of return will be higher. Clearly, since this cap rate is lower than what you would find in many parts of the country, housing here is being priced to reflect its the growth potential. i.e. This is priced like a growth stock, not a value stock. Factoring in real rent and price appreciation, we get:

Prices and rents in Seattle keep up with inflation (0% real appreciation), real return = 3.1%
Prices and rents in Seattle rise 0.5% faster than inflation (0.5% real appreciation), real return = 3.6%
Prices and rents in Seattle rise 1% faster than inflation (1% real appreciation), real return = 4.1%

Compare that to stocks: the earnings yield for VTSAX (US stocks) is 4.8%, and VTIAX (international stocks) is 7.2%. This would be the long term real rate of return if the earnings and valuations of these companies stayed constant in real terms. If you think the earnings of these companies will grow faster or slower than inflation, you can add or subtract to that estimate.

Back to real estate, leverage of course will increase both the expected return and the risk of the investment. One might argue that it's relatively safe to leverage an investment property in downtown Seattle, so we should be comparing leveraged returns on the investment property to stocks. On the other hand, the risk is concentrated in one business in one location. Is a leveraged investment in local real estate as safe as VTSAX or VTIAX which is also leveraged (because firms borrow) but are diversified across many different businesses and markets. It comes down to what offers a better risk/return tradeoff. But, in my opinion, an unleveraged real estate investment in Seattle is unlikely to beat the stock market over the next thirty years.
Awesome details on the value of this. Thank you very much!

I am working on selling it. I found out, I have one more full year to enjoy the 500k tax write-off!

I am amazed at the valuable info that everyone has provided. Wow, this is an amazing forum!

Thanks all
Dave

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Watty
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Re: Rent or Sell Townhouse in Seattle

Post by Watty » Tue Jun 30, 2020 12:08 pm

Zzdave wrote:
Wed Jun 10, 2020 3:43 pm
We moved out of it 3 years ago and have been renting it....
Zzdave wrote:
Tue Jun 30, 2020 11:46 am
I found out, I have one more full year to enjoy the 500k tax write-off!

Are you sure about that?

Unless there is something going on like you have been in a nursing home or in the military and stationed somewhere else then how does that work?

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ohboy!
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Re: Rent or Sell Townhouse in Seattle

Post by ohboy! » Tue Jun 30, 2020 10:30 pm

Im not scared of the news whatsoever but I advise selling it. Investment properties are a headache. You’ve done well, time to move on.

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