Urban Living’s Seattle Investment Property Guide
Welcome to Urban Living’s 2017 investment property guide! Written by Matt Goyer, a real estate broker and publisher of Urban Living, the information in this guide is based off of his nearly 20 years of landlord experience and helping many first-time real estate investors. We wanted to give you an overview of what it takes to buy an investment property in the Seattle area, and this guide will also give you a good sense of what it is like to work with us. Still have questions? Reach us at [email protected].
- So you want to be a landlord?
- Short-term vs. long-term rentals
- Hire a pro or manage it yourself
- Rental property types
- Finding a rental
- Keep it legal
- Rental registration
- Other reading
So you want to be a landlord?
Are you ready to deal with:
- Tenants dropping keys down the elevator shaft
- Tenants having their keys stolen
- The doorknob to your place falling off
- The dishwasher backing up
- Tenants or pets peeing on the walls or floor
- Tenants alleging their car has been stolen from your garage (not but really!)
- Bounced checks
These are all things I’ve had to deal with over the years of renting out a few condos in Seattle. If you think you can tolerate the possibility of any or all of the above, and worst of all, eviction, then read on!
Short-term vs. long-term rentals
Many first-time landlords approach us wanting to buy a condo to rent out through Airbnb. Unfortunately, your best bet if you want to run an Airbnb “hotel” is to buy a house or townhouse since almost all condo buildings in Seattle prohibit this type of rental. If you’re set on a condo, there are a handful of buildings that allow it (or perhaps more accurately, don’t disallow it.)
- 2727 Franklin Ave E – 50% rental cap though
- Austin Bell – 2324 1st Ave ($350 fee, copy of lease required)
- Belltown Court – 2415 2nd Ave
- Elliot Bay – 524 6th Ave West
- Elektra – 1400 Hubbell Place (three night minimum)
- Fifth Avenue Court – 2132 5th Ave
- Montreaux – 425 Vine St ($50 fee, background check required)
- Newmark Tower – 1415 2nd Ave ($50 fee, background check required, minimum 7 days)
- Pike Lofts – 303 E Pike
- Seaboard – 1500 4th Ave
- Waterfront Landings – 1950 Alaskan Way ($100 fee, background check required)
However, most have such low owner occupancy rates that you’ll have a hard time financing a purchase in them and will likely need to purchase the unit with cash (double-check with your lender though).
If you don’t want to manage your Airbnb yourself, you can use services such as Pillow or Vacasa to manage it for you, but using one of these services will cost you between 15% and 40% of your revenue.
Hire a pro or manage it yourself?
The easiest thing to do is to have a property management firm take care of your rental for you. Typically, the company will charge you the equivalent of one month’s rent to find a tenant and then will charge you 5%-10% of your monthly rental income to keep an eye on the property and deal with issues as they arise. The company will handle the logistics of any issues that come up (repairs, etc.), but you will need to foot the bill for them.
I prefer to self-manage my rentals because professional management is expensive and finding a tenant doesn’t usually take very long in the Seattle market. To find tenants, I post my rentals on Craigslist and Zillow. I do recommend getting professional photos taken, or using the photos from when your place was last for sale. To facilitate background checks and make collecting rent easy, we recommend you use Cozy, an online service for independent landlords.
Rental property types: condos, houses and townhouses
The huge advantage of condos is that a condo is generally much cheaper than a house or townhouse so it is the cheapest way to get started. They are also generally low maintenance since the homeowners association will take care of exterior maintenance. The downside is that you need to find a building that doesn’t have a “rental cap” or has a rental cap that hasn’t been met yet. What’s a rental cap? It is the number of units (or a percentage of units) that can be rented at any given time. Most older buildings have rental caps between 20% and 40%, meaning that no more than that percentage of units can be rented at any given moment. Most buildings built in the past 10 years don’t have a rental cap. Most co-ops don’t allow rentals.
Why do buildings have rental caps? A rental cap is primarily intended to keep the owner occupancy percentage high so that buyers can use financing to purchase in the building and because owners are usually better neighbors than renters. Once the owner occupancy rate falls below 60%, most lenders will not finance a purchase for an investor in the building, and once it falls below 25%, most lenders will not finance an owner-occupied purchase in the building. So before moving forward with a condo purchase to use as a rental, you’ll want to fully understand the building’s rental cap situation, rental rules and any move in/out fees.
To determine if a building is investor-friendly, look for phrases like “no rental cap” or “investor friendly” in the marketing description of the listing. Otherwise, ask your real estate agent to check. They’ll ask the listing agent or the building’s management company.
The advantage of single-family homes is that you can generally charge much more in rent and the tenants may stay for multiple years. The downside is that maintaining a house is a lot of work!
These are the best of both worlds. Townhomes can be relatively affordable, require less maintenance since they’re generally newer, and don’t have the rental restrictions that condos have.
Finding a Rental
We highly recommend that you use a NWMLS-powered site or app to search for homes. Wait, what is the NWMLS? The Northwest Multiple Listing Service (NWMLS) is an organization of Seattle area real estate agents who agree to work together to better assist their clients. Real estate sites that get their list of homes for sale from the NWMLS have the most up-to-date information on what is for sale and what has sold.
Universal home-buying tip: No matter where you’re house hunting, look for a site (or app) that’s powered directly by the local MLS. In the fast-moving world of real estate, you don’t want to waste time lusting after homes that may have already been sold!
In the Seattle area, examples of NWMLS-powered real estate sites (or apps) are Redfin, Estately, Windermere and John L Scott. We highly recommend Redfin because we feel it is the easiest to use, has the most features and is available on the web, iPhone and Android. We’re also biased because Matt spent seven years working at Redfin.
What about Zillow, Trulia or Realtor.com? These sites do not receive their home listings directly from the NWMLS, so we recommend against using them. Their listings come instead from individual agents and their brokerages, who may not have the resources to provide the most up-to-date information or remove listings as soon as a home goes off the market.
If you decide to use Redfin, here are a few tips to get the most out of your experience:
- Create an account: This allows you to “Favorite” homes so you can keep track of what you like. You can also share your list of favorites with us!
- Keep tabs on the market: Get a jump on the competition by signing up for Instant Alerts. You’ll receive a notification as soon as a new home comes on the market.
- House hunt on the go: Download the Redfin app for iPhone or Android, so you can keep searching wherever you go.
- Do your research: One great way to understand what to expect in your own search is to look at sold homes. Note how much lower or higher the sale price is from the list price and how long a home was on the market. Look for trends among the types of homes and in the areas you are interested in.
Here’s a few other home search tips:
- Google Street View: Check out the area and see what the homes of your potential neighbors look like.
- Walk Score: See how many restaurants, bars and shops are within walking distance of a home you’re considering.
- Seattle In Progress: See what has been permitted nearby in case you’re worried someone might block your view.
To finance an investment purchase you’ll typically need to put at least 20% down, with “good” interest rates starting when you put 25% down. First-time investors who can’t afford 20% down may purchase a condo or other property and live in it for a few years before converting it to a rental.
Key clauses you want in your lease:
- Deposit, non-refundable charges, application fees
- Termination of tenancies
- Utility charges
- Resident obligations
Keep it legal
You should definitely familiarize yourself with the relevant city, state and federal laws.
Fair Housing Act (overview):
- Federal law prohibits most landlords from refusing to rent to a person or imposing different rental terms on a person because of race, color, religion, sex, handicap, familial status (having children or seeking custody of children) or national origin.
Washington Residential Landlord-Tenant act highlights (full act):
- State law requires landlords and tenants to act in good faith toward one another.
- A landlord must give the tenant at least a two-day written notice of intent to enter at reasonable times (which means you can’t pay a visit at 3 a.m., for instance).
- If a deposit is collected, the law requires that the amount be within the written rental agreement, the tenant be given a written receipt, a checklist describing the condition of the rental be filled out, and that the deposit be placed in a trust account.
- Once a tenant has signed a rental agreement, the tenant must continue to pay the rent to maintain eligibility to bring actions under this act.
- Generally speaking, if the landlord wants to change the provisions of a month-to-month rental agreement, such as raising the rent or changing rules, the tenant must be given at least 30 days notice in writing.
- Under a lease, in most cases, changes during the lease term cannot be made unless both landlord and tenant agree to the proposed change.
- The sale of the property does not automatically end a tenancy.
- A tenant must be current in the payment of rent including all utilities to which the tenant has agreed in the rental agreement to pay before exercising any statutory remedies, such as repair options.
- The following actions by a landlord are deemed illegal: lockouts, utility shutoffs, taking the tenant’s property, renting condemned property and retaliatory actions.
- If the tenant moves out at the expiration of a lease, in most cases it is not necessary to give the landlord a written notice.
- A tenant who leaves before a lease expires is responsible for paying the rent for the rest of the lease term. However, the landlord must make an effort to re-rent the unit at a reasonable price.
- A landlord must provide a receipt for any cash payment made by a tenant.
Seattle Landlord-Tenant Laws (full code):
- Building owners must provide safe, clean and secure living conditions.
- Owners are not required to make cosmetic repairs after each tenancy, such as installing new carpets or applying a fresh coat of paint.
- Tenants must maintain rental housing in a safe, clean manner.
- Landlords must have good cause in order to terminate a month-to-month tenancy.
- A 30-day written notice is required for rent increases of less than 10%.
- A 60-day written notice is required for rent increases of greater than 10%.
- Security deposit plus move-in fees cannot exceed the amount of the first full month’s rent.
- Pet deposits are limited to 25% of the amount of first full month’s rent.
- Non-refundable move-in fees are limited to only tenant screening reports, criminal background checks, credit reports and cleaning fees.
- Total non-refundable move-in fees are limited to 10% of the first full month’s rent.
- Landlords must allow an installment plan to pay a security deposit, a pet deposit, move-in fees and last month’s rent.
- Security deposits must be returned within 21 days of the tenant leaving the property.
- Prior to accepting a prospective renter’s application, landlords must provide the renter with information on the landlord’s minimum screening criteria. When the landlord receives a completed application, the landlord must note the date and time that the application was received. The landlord must then screen applications in the order they were received and make offers to qualified renters in that order.
The Rental Registration and Inspection Ordinance requires landlords to register all rental housing units in Seattle, from single-family houses to large apartment buildings. Be sure to register yours.
When drawing up a budget for your rental, remember to include all expenses, not just your mortgage payment! Here are the line items you should include:
- Mortgage payment
- Property tax
- Homeowner dues (if applicable)
- Move-in and other fees (if not passed on to the tenant)
- Rental registration with the city of Seattle
- Utilities (if not passed on to the tenant)
- Cleaning (try and defer with cleaning fees charged to tenant)
- Maintenance (don’t underestimate this)