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         Listing and Selling duplexes in Austin, San Antonio and Dallas

         Sean Little, Broker/Owner Austin Lone Star Realty

Phone: (512) 243-7696
Email: info@austinlonestarrealty.com
Main Website: austinlonestarrealty.com

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Our Landlord Searches For His Next Investment

By Jane Hodges

Despite more than $5,000 in repairs required at his rental property in South Seattle's Lakeridge neighborhood, Jeff Jones forged ahead with a search for a second investment property during September and October. He believes that the October to December period is an optimal time to buy because sellers who list homes then are more apt to be flexible on pricing than those listing in summer. Fall sellers, Mr. Jones says, usually have to move due to work relocation or financial issues and are more likely to negotiate downward to complete a deal.

He'd like to buy a multifamily property -- a duplex, triplex or fourplex -- in an up-and-coming neighborhood. But he hasn't ruled out single-family homes either. He's looked at single-family properties in such established areas as Montlake, his own neighborhood near the University of Washington. He has also looked in Queen Anne, a hilly neighborhood with water and city views and close proximity to theaters, restaurants and downtown, and in Ballard, a neighborhood with Scandinavian roots and a strong fishing legacy, where boaters have easy water access and a historic district boasts kitschy restaurants, pubs and shops. He's also looking at such gentrifying areas as Delridge and other parts of West Seattle, a section of the city linked to downtown by a bridge that crosses over the Port of Seattle, with its stacks of giant containers and shipping machinery.

As Mr. Jones searches, though, he's begun to chew on a philosophical question that plagues many real-estate investors: Should he pursue purchases that offer immediate returns from rent or where initial losses on rent will be more than recouped when he eventually sells? Over the lifetime of a property, does it really matter how the profit comes -- in small increments from annual rental income or in one large lump at resale? In many cities, including Seattle, it seems as if asking prices for real estate are so high that new owners won't initially profit on rent and may even take a loss for the first few years.

What seems virtually assured in the Seattle market, though, is home-price appreciation, so does an initial loss on rent really matter? As he does the math on properties he sees, Mr. Jones continually asks himself this question. With his Lakeridge rental property, the difference between his mortgage costs and his rental income is minimal and, factoring in income-tax deductions, allows him to break even in the short run. But he knows he'll begin to make money on the property within three to five years.

Here's an example of Mr. Jones's price dilemma as he seeks his second Seattle investment property: He viewed a well-groomed duplex in Queen Anne with parking, landscaping and other amenities. However, the asking price on the property was $799,000. With less than a 20% down payment, Mr. Jones would have to ask $2,500 rent per month for each of the 1,100-square-foot, two-bedroom units just to break even. That's between $700 and $1,000 more rent per month than most two-bedroom apartments (or even entire houses) in Queen Anne or other gentrified neighborhoods cost.

"For that much rent, people could go ahead and buy," says Mr. Jones.

Despite the discouraging math, Mr. Jones has vowed to look for the right property first and evaluate financing second. He's whittled his list from seven to five Seattle neighborhoods. He's talked to a few mortgage brokers and has learned that he may be eligible for loans requiring no down payment to a 10% down payment -- unusual for investors, who typically must put down a minimum of 20%. But the low-down-payment programs make him somewhat nervous, he says, and he wants to know what "strings" are attached. Regardless, he's aware that if he wants a second property, especially a multifamily property, prices may force him to put less than a 20% down.

"Do I do a 5% or 10% down now, or wait until I can increase the percent down?" asks Mr. Jones. "I'm just not a very patient guy."

Some of Mr. Jones's impatience is understandable. He has spent most of his life in the Puget Sound region and has watched property values rise steadily -- and steeply -- over time. New residents flocked to the city and state during the tech boom in the 1990s, and, despite relatively high unemployment and growing traffic problems, people continue to move to the area for quality-of-life reasons. The price of undeveloped land has increased throughout King County, where Seattle is located, as well as in commuter-heavy Snohomish County to the north. The state's Growth Management Act of 1996 placed zoning restrictions on cities and suburbs to curb sprawl, further driving up the price of housing within some jurisdictions. Meanwhile, builders of multifamily housing now pay more for land as well as for insurance, thanks to a wave of condominium-development litigation that has affected builders here and increased condo prices.

Mr. Jones says he has had to devise his own concept of what, in Seattle, constitutes a healthy net-operating income (NOI) on an investment property. A simple way of calculating NOI is to subtract ownership and operating expenses from gross-rental income. The target NOI most landlords strive for is 1%, says Mr. Jones. On a $300,000 house, for instance, NOI of $3,000 per month would be desirable.

"One percent is impossible in Seattle," he says. "You should really shoot for 0.25%  or 0.5%." That said, he believes those should be initial figures only. Rising property values and annual rent increases should allow a landlord to generate a 1% NOI within three to five years of purchase. That's what Mr. Jones is projecting for his Lakeridge house.

To find well-priced homes, Mr. Jones has started verifying the information in realty listings by plotting property addresses on www.redfin.com, a Seattle real-estate Web site that offers aerial views of neighborhoods and lets him better understand a home's topographic position. This way, he can check whether a property would really offer a view as marketed and the proximity to schools and amenities claimed.

He's also working to find for-sale-by-owner (FSBO) listings offered by investors, rather than commissioned listing agents via the Northwest Multiple Listing Service. While many FSBO properties are sold by owners who don't want to work with agents (and who, consequently, may not price their homes realistically), Mr. Jones has also encountered FSBO listings offered by savvy investors. And he's found a few bargains, especially on www.craigslist.org.

"A place typically goes on Craig's List before it hits the market," Mr. Jones says. "A lot of the people doing listings are investors. Most of the advertising language there is geared toward investors."

As of this writing, he's considering making an offer on one FSBO property he's located online: It's a 1905 home on a hill in the Queen Anne neighborhood that a 27-year-old had uploaded a posting to www.craigslist.org on behalf of his aging grandmother. The home has had only two owners since 1905 and is in dire need of an update. (Mr. Jones compares it to a frat house.) At 700 square feet, it's small but well-situated.

"This home has been on the market for six months," he notes. "I might make an offer on it, but for well below [the asking price of] $399,000."

But before he bites, he says, he'll run the numbers.

-- Ms. Hodges is a free-lance writer in Seattle and writes the Investor Profile and Landlord Chronicles columns for RealEstateJournal.com.