Is it a good time to buy a condo in Capital Hill or Queen Ann and rent it out for profit?

Asked by Shannon, Seattle, WA Sat Jun 21, 2008

My husband and I want additional income and it sounds like it is a "buyers market" . We would like to take advantage of lower prices by buying at least one condo to rent out in Seattle, preferably Capital Hill or Lower Queen Ann. Any advice on how the rental market is going in these areas?

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Rob Graham’s answer
Rob Graham, Agent, Seattle, WA
Sun Jun 22, 2008

Personally I think it is a great time to be an investor. Inventory is high, rates are still low, and the edge has clearly swung in favor of the buyer. Be sure and do your research though. Make sure you take into account exactly what the monthly costs to you will be. If it "pencils" go ahead and do it.

A few more items to keep in mind. Make sure you are aware of the terms of the loan. Many loans for non owner occupied homes require a higher interest rate. Also, check with the condo association, (or make sure your agent does) to be sure that the rental rate in the building has not been exceeded. Also have your agent check for special assessments in the building. All items that can make what looks like a great deal, not so attractive.

Happy hunting.
1 vote
Patrick Beri…, Agent, Seattle, WA
Sat Aug 30, 2008
These are traditionally strong rental areas. The answer to your question really depends on what a specific property will pencil out at. If you cover your costs with rental income, that's great--But of course you've got to buy something that will appreciate enough so that you could sell if you had to. There is a ton of inventory out there, as you know. Price sells everything, so if you can find a quality property that allows you to offer a reasonable rental rate, you should have no problem attracting renters.
0 votes
Ardell Della…, Agent, Kirkland, WA
Wed Jul 9, 2008
One of the advantages to buying to rent vs. own is that you can take "the runt of the litter" as to location at the lowest possible price. While sale prices vary based on location and location within the complex, rent prices generally do not vary as widely.

Still...I'd wait until Fall or Winter when the inventory is the highest and Days on Market are longer for those currently for sale.
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Mark, , Seattle, WA
Sun Jun 22, 2008
The rental market has been booming in Seattle as of late, and the areas that you mention are always desirable areas to live that command high rents.

One of the most important, if not the most important, things to consider is how much money you are going to have to put down to make the property cash flow.

In the areas that you mentioned, you are likely going to have to put 50% down so that you do not have to feed it every month.

I am working with a buyer that is looking for an investment property Queen Anne or Ballard, and in all of the properties that we have have researched, this has been the case.

If you are paying cash, you can expect around a 4-5% cap rate on your investment.

Feel free to contact me if you have any other questions.

My best,

0 votes
Stacey Lange, Agent, Kirkland, WA
Sun Jun 22, 2008
As a point of reference for you, I prepared a listed of properties (condos, townhomes & single family homes) that have rented on both Capitol Hill & Queen Anne over the last six months. This should provide you with a good idea of rent that you could receive, should you decide to pursue investing in a rental property.…

Best of luck to you!
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0 votes
Mark Despain, Agent, Seattle, WA
Sun Jun 22, 2008
Although buying rentals is a good investment, it is not an investment that will get you a profit for some years. For most investors the profit comes in the selling of the property. If you are looking for instant cash flow, you need at least 40% and more for a down payment.
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0 votes
Deborah Burns, Agent, Bellevue, WA
Sat Jun 21, 2008
Hi Shannon,

In your question you wrote that you are interested in "additional income" with the purchase of a rental. Property in those neighborhoods are good investments in the long term as Daniel earlier pointed out., But unless you make a considerable downpayment when you purchase the property to lower the mortgage paymemt to below what it would rent for, you won't see any positive cash flow (income) for sometime.

Check out Craigslist for rentals to get an idea of rents. A (very) rough idea of mortgage is for every $100,000 it takes to purchase a property times whatever interest rate you can get. If the 1 bedroom/1 bath condo is $250,000, 10% down is $25,000, and finance the remainder of $225,000. So 2.25 times lets say an interest rate of 6.85% you would have an approximate mortgage of $1,541 not including taxes, PMI, HODs, insurance, maintence on the condo, and the cost of the loan itself..

The "good investimate" that buying and renting out the property is would be in holding it for a number of years to sell after appreciation grows enough to give you a good return on the money invested. Over the years rents will rise too, but it maybe sometime before the amount you can rent it for is higher than the mortgage on the rental.

Rents in general are much lower in the short term than mortgages are, time is what makes a mortgage better than rent.

I hope this helps!

0 votes
Steve McDona…, Agent, Seattle, WA
Sat Jun 21, 2008
Daniel has already provided you some valuable guidance. It has been some time since the purchase of rental property in Seattle has turned a positive cash flow immediately unless you put a significant amount of money down (i.e., 50%). Generally, the best way to 'profit' in the long run is by leveraging other people's money to do the work. That means putting the minimum (20%) down. In your case 'other people's money' would be a mortgage or bank loan. You may have heard the phrase "does it pencil out?" This translates to an investment that generates enough revenue or income as to exceed the operating expenses. For example, buying a $300K condo or townhouse will likely result in a mortgage of $240K (or more). With current interest rates that means you will incur a $1,300 monthly payment plus any homeowner's dues. So for the sake of argument let's assume an overall monthly expense of $1,500. This doesn't account for any painting, repairs or vacancy time that may occur over time. If your not able to get the full $1500 in rent it's possible the property could still "pencil out" after taxes. That means once you take your deductions for mortgage interest, (some) homeowner dues and any maintenance expenses you could see it has a positive impact on your bottom line. I think the critical factor is the rental amount you might receive for a specific apartment (studio, one, two bedroom) in a specific locations (Queen Anne, Belltown, Capital Hill). I would suggest taking a look at where you can project what a likely rent would be. Then run the numbers. Chances are most places won't initially pencil out even with a Buyer's Market underway. Taking the long-term approach like Daniel suggests means you leave open the opportunity for appreciation of the property allowing you to experience a capital gain when it comes time to sell. It's not quite as complicated as it may sound but you do need to do your homework and make sure you're not investing on shoestrings should the rental market hit a rough patch.
Good luck,
0 votes
Daniel Jeung, , Woodinville, WA
Sat Jun 21, 2008
It is a buyers market right now, and yes, for many people with a long term outlook and income to support a purchase, now is a great time. Both Queen Anne and Capitol Hill are desirable areas for renters and owners alike.

Investment properties are a great way to diversify your portfolio but they do require more work than owning stocks. Normally, I would recommend against condos and townhomes because of the extra monthly homeowner dues, but the areas you mention are very desirable.

Before investing, make sure you do your homework and understand your cash flow. Also be thinking long term (5 yrs or more) for holding the property. I think the days of buying and flipping are long gone (at least in the foreseeable future). Best of luck to your growing portfolio!

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