Lots of local real estate news hitting today.
Here’s another short one: Moda Condos in Belltown goes rental.
When Moda Condominiums started accepting reservations in September 2006, prospective buyers lined up hours early and quickly locked up all 251 units.
Now, with the Belltown building two months from completion, Moda’s developers have changed it to rental apartments.
“The market and the financing conditions for condominiums have really taken a drastic turn,” said developer G. David Hoy, head of HMI Real Estate Inc. “The vast majority of (Moda’s) buyers decided not to proceed with the purchase of their unit.”
Some buyers found they could no longer get a loan, particularly for second homes or investment units, while others just got cold feet, Hoy said. “Because the vast majority have bailed out on us, we have no choice now but to turn it into a rental.”
Dang. The “vast majority.” I wonder how many of the other condo projects coming online in Seattle over the next couple years will meet the same fate.
(Aubrey Cohen, Seattle P-I, 08.12.2008)
A killer carpenter ant infestation sounds bad for you too.
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Markor,
So your advice is sell the units now, pay 6% commission, buy them back later and pay for closing cost again (which are now higher), a higher interest rate, and with a much larger down payment.
Please do not be insulted if I do not take your advice.
Can I remind you that the landlord does not pay the mortgage, the renter does? I am sure you are aware that you can depreciate the structure over 27-years. After 21 years the rental income minus costs becomes pure profit (assuming 13 payments per year on 30-year mortgage). In addition to rental income, you have an appreciating asset (house).
You are absolutely right, it is a leverage play. I paid a total of $12,000 for the closing costs and down payment. After 21 years, assuming only that I break even on rent and maintenance, I will own the house outright as well as receive monthly income that will likely be 2.5X what I currently pay for a mortgage based on inflation. Not to mention a house that would have likely doubled in value.
Please explain how your 4% CD or corporate 7% bonds are better?
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You did not seem to comprehend my post very well Harley. Rents should start going down next year, according to my logic and the market forces you are so confident you will retire well on. Of course no one can predict the future 100%, and that goes for you too. They have been rising in the last 2-3 years on the ground, BEYOND inflation, along with the bubble.
The RE bubble has officially popped in the PNW. There is usually a delayed reaction across the board in the PNW especially. Do you expect it to be different for you? Hold on to that thought and remember it next year.
I certainly DO have control over my decision to sign an overpriced lease or not. Not everyone just goes along like you seem to believe, and those who have higher incomes are going to want to get some value for it.
There is no “ground” to make up, when you have really not “lost” anything substanitively in the first place. Other than opportunity. That’s on paper, we are talking real money now. Meanwhile those renters were still covering your mortgage as it was appreciating. Median income, especially based upon two incomes, is not a sufficent crutch to lean on for justification of the rental market, and it does not dictate the rental market rates in isolation. That’s more appropriate for First Time Buyers.
You are also ignoring the other pressures that are coming to bear. Elasticity in the rental market will not likely work in your favor, according to your own logic. It might work better for those who double up, but does that not cut the number of units in demand in that same market as well?
I understand your postion more than you think I do.
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Well…I just spent the evening researching rents in my hood. Downtown new construction condos…not apartments. It appears that they have actually fallen over the last year.
One condo in my complex rented 04/07 for $2275 and just turned over on 4/08 for $2100.
That doesn’t even include the $1000 fee that the Landlord has to pay to the complex to move the person in nor the leasing agent’s fee.
Other renters I know in the complex are paying even less $/ psf…(view units I might add) and nobody I know has had their rent raised when their lease ran out. Maybe the landlords were happy to keep them?
Now let’s compare apples to apples when it comes to a comparable unit for sale.
this one…two floors below…pretty much a carbon copy.
http://www.redfin.com/WA/Seattle/910-Lenora-St-98121/unit-S1009/home/11905215
the original asking price of the above unit was $539k.
Now it’s at $488K
The buyer paid 508k 03/07 (let’s not forget the $505 Homeowners Dues in addition to taxes and “content” insurance)
And this is playing out comparably in other buildings also.
Not to mention… more units to come online shortly with no shortage of rentals at this end of the market at the current time.
So…Prices falling in my market, rents falling in my market….and I’m downtown. We’ll see if my Landlord really wants to hit me with a rent raise next year. I really can’t see that would be in his best interest however.
YMMV
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Econ E,
You are using two units to measure all of the rents in Seattle???
$2100 in rent is far above the $1350 median. Remember there is a complete opposite side of the the spectrum too… the bottom is coming up.
Lastly, I was not the one who made up that data. If you refute the study and its findings that’s fine, but please use something more than two units in your building as a rebuttal.
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Let’s see. After Homeowners Dues my LL has less than $1200/mo to cover his mortgage and taxes. After property taxes he nets around 10k/year (do landlords pay income tax on their rental income?). Even if he paid cash for the place, his return would be less than 2%. on his 500K+ (presale purchase price) condo?
How’s that better than a CD?
I’d say that he’s subsidizing my rent more than I’m paying his mortgage.
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Harley…there are many many more. As I said, YMMV (your mileage may very)…I also specified that the market I was looking at was the downtown market and it’s playing out the same way in other buildings.
What used to get $3000/ mo at Cristalla now gets $2250
What used to get $3500 and Hotel/1000 Madison Tower is now asking $2900.
Same thing happening at Concord, Newmark Tower etc etc.
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You worry about your neighborhood Harley…and I’ll worry about mine. ;o)
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Explorer,
Form 2000 – 2006 rents were flat… they did not go up with inflation. They are currently priced 10% – 15% below the norms based on median income. Which means if they were going to stay in line with inflation, like they historically have, they will likely come up to meet that measure in the future.
When? I do not know. All I know based on the data is that there is a 2.9 vacancy rate which means currently the market is not in your favor and rental rates will likely rise.
Yes, you do not have to sign anything. But it is does not mean you are entitled to or will receive bargain basement prices on your rental. If you are ever forced to move the rental market if statistically not in your favor.
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At some unit price drop % per year you would certainly come out ahead by selling now & buying back later, vs. staying a landlord. Do you know approx. what that % is for you? A 15% drop in the next year seemed conservative to me, esp. since you can sell for a 4% total commission (1% flat fee for seller’s agent, 3% for buyer’s agent).
I don’t know for sure. I was just hypothesizing. At some reward% / risk, another investment certainly becomes better than being a landlord, albeit such investment may not exist. Do you know what that reward% / risk is for you? Risk can be difficult to quantify, but what is the annual gain % (the reward) you expect on average? If it was, say, 5%, a CD is almost certainly a better investment, considering your risk. At 10+% you may be better off as a landlord, even when your risk is factored in. You make being a landlord sound potentially lucrative, but a leveraged investment that does 7% annually (unleveraged) with moderate risk can also be lucrative. (There is a precise way to compare apples to apples between investments, like between your landlord investment and investing in a stock index fund. It’s easily done in a spreadsheet. To calculate the risk you need to know the value of your investment on a periodic basis, factoring in all your costs including your time.)
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EconE,
All landlords are not in the same position.
My sole point is rents collectively are going up and they should based on historic norms.
There are several dozen neighborhoods in Seattle and several other buildings and units in Downtown. Collectively rental rates are going up across Seattle and vacancies are down.
Whether it is the bottom moving up on Rainier Beach, I do not know.
I will keep my eye on area 700!!! ;>)
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Markor,
I do not know the specific risk percentage and imagine is varies greatly based on the amount leveraged, annual cost, and the return on investment.
You can mitigate risk greatly through purchasing intelligently, fixing your costs, and through insurance.
I purchase properties that are near job cores, with good access to mass transportation, and/or educational districts, where rental demand is high and will likely remain high (no suburbs). Ideally you want to get a house where you can rent it for close to cost for the first few years (obvious).
I do like sweat equity, so if a slight fixer upper is in a good or transitioning neighborhood I would consider that as another way to reduce downside risk. Look for houses or condos on the lower end of price/sqft in good or up and coming neighborhoods that are not completely trashed. Painting, plastering, moulding, and installing light fixtures are all doable jobs. Stay away from foundation, roof, and plumbing issues. In general, I have lived in the houses for two years and gradually made them look pretty, before moving on. So far, all have cash flowed when I have turned them into rentals.
I only buy properties that I know I can afford to pay for them even if they were to be vacant. As the rental begins to cash flow take the profit to first develop a rainy day fund (maintenance and vacancies).
I then take any extra profit to pay down the mortgage with the goal of one extra payment per year. If you make one extra payment per year you can reduce the mortgage by 7 years and save almost 1/2 the cost over the life of the loan.
I mitigate increasing costs by getting a fixed rate loan. I have also been able to refinance two properties to lower rates. However I think I have seen the bottom.
The problem with the flippers was they over leveraged themselves well beyond what I would consider for risk and never fixed their costs. Many bought as many houses as they could possible leverage with out ever thinking they would have to make a mortgage payment. The other bought as much house as they could afford at 1.99%. 30 Year fixed is the only way to go!
Insurance covers me for catastrophic events.
As rents go up and my profits increase I look for new houses.
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Yes Harley, but we expect rents to go down and real estate values to go down because we want it both ways. Bleeeeh, Winning a gold medal in beer drinking used to be easier on me. Markor, how much have I lost on my inintial $25,000 that turned into $1,000,000. It really hasn’t lost much, but even if or when it does I don’t care. I’m not selling for at least another 20 years so I should be able to outlast Sniglets global depression. I have to go now. I have a JOB.
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No, rental rates have little correlation to the landlord’s costs. Look at how rent prices are dropping in Miami, San Diego, Minneapolis, Phoenix and Las Vegas even while taxes, maintenance, have remained the same or even risen. The median incomes haven’t even declined much in the last couple years, yet their rents are falling anyway.
The key factor governing rental rates is the quantity of units for rent and the number of people looking to rent. In regions where there are high numbers of foreclosures, many home-owners turn to renting their properties on the “shadow” market since they can’t sell. Further, people living in declining markets are re-assessing their needs for accomodation, and deciding to downsize. Thus, you wind up with people who used to live in individual appartments moving to shared accomodations, some people moving back in with their parents, etc.
I’ve read plenty of stories from these declining markets where landlords proclaim their pain at being forced to rent their properties for far less than their costs. As I said, the landlords “costs” have little to do with the rent prices when there is a mass of vacant inventory.
Unfortunately, Seattle is headed in the same direction as these other declining markets. The inventory of unsold homes is growing, more and more condo projects are being converted into rentals, and people are starting to change their preferences for accomodations (see my anecdotes about colleagues who are down-sizing). Even the foreclosures are starting to pick up around here. Given another year of continued expansion of the foreclosure rates we should expect to see a lot more properties show up on the rental market.
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Sniglet, you would be completely right based on what the other markets are doing if everything was the same. Those other markets had appreciations in rent also while we did not. That does make our market different. I agree that you can only get what you can get, but right now that is pretty good. You guys want it all ways.
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Not really. Florida, California, Arizona and Minesota saw very little rent price appreciation during their boom years. Rents only rose right at the very apex of their real-estate markets (when buying prices stopped appreciating while fewer people wanted to buy). San Diego is an excellent example of this. Their rents were in the dumps, with almost no increases, for a LONG time. There was a brief period of a couple years where rents rose (right when all their new downtown condo complexes were under construction), but then things headed downhill as soon as all the new construction came back on line.
In short, rents never really appreciated all that much in these currently declining markets. That brief 2 or 3 year period of rental appreciations was quickly undone when the foreclosure rates grew significantly and countless home/condo owners began throwing their units on the rental market since they couldn’t sell.
I don’t see how our market is different. Our rents were in the tank for most of this decade and have really only started to see increases in the last year or two. Additionally, we have a tonne of new condo developments under construction. Lastly, our foreclosure rates are now starting to increase at dramatic rates. It looks like we are following EXACTLY the same pattern as everywhere else. By mid 2009 I expect to see Seattle area rents see a lot of downward pressure.
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Here’s my rent increase anecdote on the 1200sq ft, 1.5 ba, 1 car garage townhome apartment I’ve been renting for 8 years in West Seattle:
January 2001 $1050
January 2002 $1050
January 2003 $975
January 2004 $975
January 2005 $975
January 2006 $995
January 2007 $1085
January 2008 $1170
January 2009 $1290
As you can see, my rent pretty much stagnated until last year, when my rent increased nearly 18% to its current price. However, if you factor in how much it’s increased since I moved in 8 years ago, I’m roughly at a 2.6% yearly inflationary increase. My rent only increased as housing in Seattle hit its actual peak in the summer of 2007.
But, I suspect that my once apartments-condo-to-apartments landlords won’t be able to squeeze out much more. And since at least 3 apartment-to-condo projects have all reverted back to apartments in the last 8 months in West Seattle, the contraction of available rental units that forced the uptick is now reversing into an expansion of available units. I can only imagine this will at least dampen any rent increases in the area.
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Harley Lever, sounds like you’re doing everything right in the landlord business.
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We call that area “the hive”.
But Belltown is so “hip”…..LOL!!!!!!
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In 2007 houses and condos were still appreciating. My how things can change in just a year! I think the rental market is still fairly tight, but don’t expect it to continue that way. The simple fact is that there is an oversupply of homes in this market. Some of the oversupply will go to the rental market which will flatline rents. No amount of former owners becoming renters or landlords rasing rents while laughing all the way to the bank is going to affect the housing oversupply.
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The developer sold MODA out, but had trouble finding a crane to build it until recently. As the market changed the past year he sold to an investor who is renting it out.
The whole thing was based on numbers with the developer originally making about ten million dollars. Worst case, he only nets four million. All in a year’s work.
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There are a few large apartment holders currently in buying negotiations for some condos that are unsold or have broken ground. These will be bought and rented by these groups. Do not however expect lower then market rents as these groups are not using financing and have the pulse of the rental market pretty well tuned.
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Any business that rents out property for less than market rates would certianly be foolish.
However, that does not mean that market rates will not drop.
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A simple income analysis could have prevented some of these unfortunate people from buying. In Seattle, from 1976 to 1981, I was able to buy new condominiums at an average 7.45 price-to-rent ratio (based on data contained in my book: How to Invest in Condominiums). These condos when rented yielded an immediate positive cash flow. In 1986 I purchased my last investment condo with a 14.2 price-to-rent ratio. It had a negative cash flow. Too many buyers were willing to pay much too much driving up price-to-rent ratios to about double from where I stared to experience a negative cash flow. How could they take on such incredible risk? In my book I warned how over-priced condos in downtown Seattle were, already in 1998!
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