How to calculate the cost of a first rental property in Seattle

Are you considering buying a first rental property in Seattle? Owning a rental home can be a significant step in growing economic stability while securing an excellent nest egg towards retirement. Over the longterm, real estate is one of the safest and most stable investment opportunities. The current record low-interest rates could not make for a better time than now. So, what does it take to get started?

A simple three-bedroom, two-bath home in Everett is listed at $450,000. Typically, with income property, the best loan rates require a 20% down payment or $90,000. Since this is an income property, banks also need from six to 12 months of cash available for reserves. Using the 12-month, or $24,000 value for this example, with 20% down, a loan value would be $360,000, with a loan rate of 3%. That's a monthly payment of approximately $1,525.

When adding in taxes and insurance, total monthly costs works out to roughly $2,000. The initial cash needed to make this purchase is $123,000. This amount includes $90,000 for a down payment, $24,000 for reserves, and 2% or $9,000 towards estimated closing costs. Not included in this total are any updates to the home. Having calculated the total initial money needed, we are ready to move on to this example’s rental potential.

Today rentals of single-family homes in Everett are between $15 and $20 per square foot annually. To calculate this, take the square footage and multiply it by these values. With this total, divide by 12 to figure out the monthly rental price range. In this case, the square footage is 1,450. This works out to $1,812.50 to $2,416,67 or rounded off to $1,850 – $2,400 rental per month.

We are now ready to figure out cash flow. At the low-end of the rental scale, there is a small shortfall. You will need to be careful that the rental home you are looking at is in an area that can generate more than the minimum. If you plan on using a property manager to take care of the property, you can expect to pay 10% or more. In other words, a range of $185 - $240 per month. For this home, you will want to be towards the top of the price range. Keep in mind; rent typically increases over time. While you will experience some increase in maintenance and taxes over time, rent will most likely grow at a higher rate, meaning that cash flow should improve.

At first glance, you may think that managing this rental yourself is the best course of action. Indeed, it does save a lot of money each year. However, managing a piece of property has its challenges. You need to be available when things go wrong. For example, the water heater breaking over the weekend while you are on vacation. The rental process also requires experience in advertising, screening potential tenants, credit applications, etc. It can be a daunting process. If you don’t have this experience, the advice is to use a professional. Keeping the home rented without delay or vacancy and free of headaches is ideal for a first rental.

While this series of calculations looks quite rosy, as with all investments, there are risks involved. Additionally, these calculations may not be representative of everyone or every scenario. The purpose here is only to illustrate how one might add to one’s real estate portfolio. As with all investments, working with an investment advisor and, in this case, a good and reputable mortgage broker is worth the time and money. Along with a qualified real estate broker, you can build a realistic plan that protects your financial security while allowing you to increase your holdings and future financial position.