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Mistakes to Avoid When Buying Rental Property

Man shaking hands with his Realtor® after buying rental property in Seattle
Featured image

Investing in a residential or commercial property can be a lucrative endeavor. However, don’t expect to become a real estate investment expert overnight. As with other business opportunities, it isn’t always as simple as it appears. It is possible to generate money by buying and selling real estate, but it requires knowledge, perseverance, and skill. To accomplish it successfully—and profitably—there are a lot of different elements and subtleties to consider. To help you make the process of buying rental property in Seattle, we’ve prepared a list of the most common mistakes you should avoid.

Avoid these mistakes when buying Seattle rental property

One of the best ways to make money and build wealth over the long term is to invest in rental property. If you run it well, it should help you make more money and grow your capital. However, before you start looking for a Seattle investment property, you need to be prepared well. Start by familiarizing yourself with the most common mistakes investment property buyers make and do your best to avoid them.

Couple sitting across the desk from their Realtor® and discussing buying rental property in Seattle.
Buying a rental property in Seattle is a big endeavor, so you must ensure you’re prepared well and have a good Realtor® on your side.

#1 Not doing a thorough research

Many real estate investors, especially first-timers, make the mistake of not doing enough research before committing to a rental property. Always keep in mind that a good investor should do their research on the property’s size and type to figure out what kind of tenant they want to rent to. This includes a study of the property’s local market trends and how likely it is to make money. The location of a property depends a lot on what the potential renters want.

Think about how nice the neighborhood is and what it has to offer. Make sure that all of the clauses in the contract meet your needs, and if you need help, talk to a good law firm that deals with property management. Also, before buying rental property in Seattle, make sure to estimate how much money it will make and compare that to other properties in the same area. To do this, you can use different cap calculators you can find online.

#2 Overestimating your budget

The golden rule when investing in real estate is when you set your budget, you need to make sure to stick to it. We are frequently seduced by the glamor and glamour of a more expensive residence that is “just a little bit more.” Before you know it, you’ve purchased a property that’s far too expensive for you, and you’re having trouble making the payments.

Again, remember why you’re investing, and don’t get emotionally invested and connected to a specific property. Making payments, you can’t afford will make your life more difficult and your financial situation worse. As a result, take care not to overextend yourself. So before you even start browsing Seattle properties online, take your time to analyze your finances thoroughly and set a realistic budget.

Two women sitting at a table, one of them taking notes while the other one is explaining something on her laptop.
You can always hire a financial advisor and get help with setting your budget.

Consider even the smallest expenses you expect to incur, even the ones not related to this purchase. For example, you might be moving to Seattle from a completely different part of Washington, and you’ll need to team up with trusted experts to help you with your long-distance move. Hiring movers will cost you and can make a significant dent in your budget. Or, if you’re buying a Seattle rental property from out of state, you need to factor in the costs of frequent flights you’ll need to take.

#3 Underestimating what’s involved in being a landlord

It’s not a secret that most people buy investment properties with the intention of profiting. Others may inherit them and believe they may profit from them. In either case, owners of investment properties frequently underestimate how involved they’ll need to be in order to make a profit. Therefore, before buying a Seattle rental property, make sure to understand how much effort and time you’ll need to dedicate to it.

First, in order to get a good lease price, there may be some physical labor you’ll need to do. Then, you’ll have to advertise the property (to the right people at the right price). You’ll also be responsible for maintaining the property and ensuring everything is in working order. Of course, you’ll also get to actually collect the rent. All of this takes time, as well as knowledge and abilities. It is not just a weekly requirement that you can handle within one hour.

#4 Not hiring a good Seattle Realtor®

Many people think that buying an investment property is the same as buying your family home. This makes them believe that handling this task on their own is a good idea. After all, how different and how difficult can it be? Well, that’s yet another mistake buyers in Seattle (and all over the US) tend to make.

Therefore, hiring an experienced Seattle Realtor® is a must, especially if you are investing from out of state. They will help you understand Seattle market trends and find a neighborhood where you’ll get the most of your investment. On top of that, they’ll help you stay within your budget by only showing you properties you can afford.

#5 Buying a property in a depreciating market

You might think it’s a good deal to buy an investment property in a place where prices are going down. Well, think again. When you invest in property, you hope its value will increase over time. So buying in a market where prices are decreasing isn’t always a good option. It can be just the opposite.

Two people sitting at a desk, working on their laptops and writing notes on a paper.
Your Seattle Realtor® will have market insights that are crucial for you to make the right purchase.

No amount of research or statistics can tell you for sure when prices will start going up again in that area. If there are fewer people in an area, there are fewer people who might want to buy or rent there. This usually means that prices will go down, too. Therefore, always look for investment properties where demand is growing faster than supply, as this tends to drive prices up.

Good luck buying rental property in Seattle!

We hope you enjoyed reading and, more importantly, that our article made buying rental property in Seattle that much easier for you. Remember—the key is in hiring experienced and knowledgeable professionals to assist you along the way. So, before anything, make sure to reach out to Seattle’s finest Realtors®, and you’ll ensure you have a smooth and successful real estate adventure!

Posted in: Investment Property Tagged: Real Estate Investments, Rental Market

Delille Cellars to Open a Wine Tasting Room in Partnership with Realogics Sotheby’s International Realty in Downtown Kirkland

Following is a press release regarding our new Realogics Sotheby’s International Realty office in Downtown Kirkland of which we are Founding Brokers.  We look forward to better be able to serve our clients East of Lake Washington!

https://www.rsir.com/blog/?p=3741

Posted in: Buildings, Condos, Kirkland, Waterfront Tagged: Condominiums, Kirkland, Real Estate, Real Estate Investments, Waterfront

Investing in a Self Directed IRA

My success investing my SEP-IRA retirement money in the stock market has so far only met limited success.  For one I am not very skilled at betting on the right horses and in part this success has been limited by fees from investment brokerages.  I have been looking for alternatives to invest my retirement funds in to create better, more consistent results for my portfolio.  One day I attended an in-house office meeting and listened to a presentation of a local attorney that assists clients in setting up Self-Directed IRA’s.

A self-directed IRA is a lesser known of our IRA options.  It requires account owners to make active investments on behalf of the plan. To open one, an owner must hire a trustee or custodian to hold the IRA assets and be responsible for administering the account and filing required documents with the IRS.

Similar to other IRA accounts, owners can invest in stocks, bonds and mutual funds, but they can also invest in real estate and small businesses. You are not allowed to personally benefit from the asset outside the tax deferred income into the IRA.  For example, one cannot purchase real estate in a self-directed IRA and use it as a second home, buy a vacation rental property and ever use it yourself or purchase a boat slip for your boat.

The process of using a self-directed IRA to jump into investing in real estate requires preparation and a little caution.  Investors are recommended to seek legal advice from an attorney who is experienced in this field, as well as seek input from an accountant and a real estate agent. It is also recommended they become familiar with the rules for the type of IRA they’re using. Whether it is a Simple IRA, Roth or Traditional IRA, SEP or Solo 401(k), contribution limits apply and just like more conventional IRA’s, there are penalties for early withdrawals.

Over the years I have heard many real estate brokers talk about Self directed IRAs, but I never seemed to meet a broker that had done a transaction like this nor one that had invested in this themselves.  I became more and more fascinated with this type of investment and noticed that my IRA account balance was still not going up much while the stock market was supposed to be recovering.  Being self-employed I have been able to contribute to a SEP IRA.  Each year I have maximized my contribution and because of this I accumulated a sizable portfolio, substantial enough to purchase 1-2 modest properties with it. I decided to dig out the business card of the attorney who presented at our office and call him to discuss such an investment in detail.

After a brief consultation, this attorney assisted me in creating an LLC which contains the IRA assets and helped me hire a custodian / trustee that holds the IRA assets.  Once the LLC was formed, I opened a bank account in the LLC’s name and then transferred the funds I was going to invest from my IRA to the custodian / trustee who then subsequently transferred those funds to the LLC’s bank account.  From there I was able to purchase a property with funds in the LLC’s bank account.  Be careful at this point not to commingle any personal funds with funds from your IRA as a large income tax bill and penalties may follow.

I also learned that I did not want to invest my entire portfolio into real estate for several reasons.  I was concerned that if I would ever come to pass, my heirs would have to pay personal income tax over the amount and so it would be prudent to keep sufficient funds more liquid so this can be taken care of.  The other reason has to do with how an IRA will be distributed over time once I reach the age I have to draw from these funds.  Taking this into consideration, I decided to keep around 50% in my SEP IRA and I planned to use the other 50% to purchase a property.

I have since purchased this property and was able to rent it from 3 days after it closed.  I am very pleased with the results because:

1) Any income from rent is tax deferred.  I ended up purchasing a condominium in Belltown, Seattle as I really believe in the building as well as the location.  After paying property taxes and HOD’s, I have a 4.3% annual ROI not taking into consideration any appreciation on the property value.

2) if I estimate a very conservative average of 4% appreciation over time, I come up with a very desirable return on my investment of 8.3% with very minimal expenses.  I anticipate the results will be better, but of course, results will vary and any investment brings also along risks of losses.

3) all income tax on my rental profits are deferred to a time when I anticipate to have less income.  I hope to be taxed at a lower tax rate at that time.

4) I like owning real estate, especially when it is free and clear of a mortgage.  This asset will be appreciating another 20 years or so before I will need to liquidate it and draw from those funds.  In the mean time it will provide a very steady income stream into my retirement account.  I also anticipate that the value of the asset will have close to tripled by that time as property values on average in this area tend to double every 10 years or so.

If you are also interested and would like to have a discussion about making such an investment, please contact me.  It will be a pleasure to answer any questions you may have and to assist you in making such an investment.

Enrico Pozzo, Realogics Sotheby’s International Realty

Click here to see a Wikipedia definition of a Self Directed IRA

 

Posted in: Self-Directed IRAs Tagged: Individual Retirement Account, IRA, Real Estate Investments, tax deferred income

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