Written by Edward Krigsman

Oftentimes we’re asked the question, how do you determine the value of an investment property? There are several ways to do it, and different approaches work best for different properties. For smaller duplexes, and fourplexes often times a quick and dirty way to discuss the value is to look at a gross rent multiplier. So you would take your gross rents, maybe $30,000 a year and multiply it times the gross rent multiplier or GRM that prevails for similar places in the neighborhood. So a property may sell for 10% or 20% its gross rent.

A property where the gross rents are $30,000, it may sell for $300,000. For example that would be a GRM of 10. With investment property, we also look at the price per square foot. A very similar metric as with single-family homes and since investors really look at the rent rate per square foot, which in the Seattle area could range from $1.50 per month for gross rents up to maybe $3 or $4 per square foot for smaller properties or newer and better properties.

You can look at the price per square foot since again, rents and value are related to size and since you’re renting out square feet that can be another tool for calculating the value. You can look at the prevailing price per square foot of similar investment properties. Duplexes, fourplexes, and the like in the area and then multiply that area times the square feet for the subject property, and you come up with an estimation of value.

That figure also works well for bigger, five units or greater, multi-family and commercial properties as well. But for bigger properties, we really rely on a capitalization rate to determine value. So a cap rate prevails in different neighborhoods differently. So in a very high demand area, you may see a cap rate of 3% or 4% or 5%. And that maybe like in Capitol Hill, in an urban area where there’s very, very focused demand and limited supply for rentals and limited land.
Cap rates again can be 3% of 4%. Whereas they may be 7% or 10% in outlying areas maybe Tacoma, Everett areas further out where there’s less demand for housing, lower incomes and so forth. Cap rate is determined by taking the NOI, the net operating income and looking at the ratio of that to its asset value. So, for example, if a property sold for a million dollars and it had a net operating income of $100,000, then the cap rate would be 10%.

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Written by Edward Krigsman

A decade of limited supply of rental units and heightened demand due to strong local employment caused a dramatic increase in Seattle’s rent rates. They surged nearly 70% over the past decade, nearly 8 times the national average. During this period, apartment developers responded by constructing new apartment units. The past decade saw the construction of 20,000 new rental units, and there are about 30,000 in the construction pipeline.

As a result of these factors, Seattle’s rental market has finally cooled off, providing some relief to renters and a shift in profitability for investors. Rising vacancies combined with renter-incentives (at least in the newer, more expensive buildings) diminished investor returns. Combine these factors with slightly increasing interest rates and you have a receipt for slightly higher cap rates when properties are traded. Not surprisingly, development of new units is slowing. New apartment construction is down 22% over last year, the first such drop in a decade.

What does this shift mean for you?

If you are a renter

Now is a good time to renegotiate your lease. Landlords will likely be putting forth effort to retain your business, and perhaps without the rental increases you may have experienced before. They may even be willing to sign a lease longer than the standard 12-months. Take advantage of this blip in the market.

If you are considering buying investment property

If you want to get a foothold in Seattle’ market and are willing to deal with some short-term softness, now is an excellent time to explore your options.Our investor-buyers are encountering a surprising range of choices, often at cap rates that are a bit higher than they would have been in 2016-17. Flattening rents and increasing vacancy loss combined with rising interest rates have made some investors skittish at a time when apartment values seem to have peaked. Investors without a long-term time holding horizon are choosing to cash out now, rather than risk future market softness.

If you own investment property

If your time horizon is short, you might considering cashing out now. But if your investment horizon is five years or longer, it may be wise to hold onto your property. Seattle’s business environment remains favorable, and our city will likely continue to attract highly-compensated workers, especially from areas that are less affordable. I believe that Amazon and other newer tech firms are poised to produce the region’s next generation of entrepreneurs and start ups. If this happens, it will create another boom of new jobs and heightened demand for workers. So if you share my favorable long-view, then consider weathering the softening market because Seattle is likely to remain a strong place to live, work, and own property. To address the current cooling market however, increase rents only after carefully assessing today’s rent rates at nearby buildings. Work carefully to retain your most desirable tenants.

To discuss the opportunities and threats posed by the cooling rental market, please contact us at 206.387.6789 or edwardk@ekreg.com

Seattle’s last ten years witnessed what may be remembered as its juggernaut real estate decade, marked by year-over-year price increases often in the double-figures. For property owners, this market was a windfall. But for many home homebuyers it has been dispiriting.

But change may be coming: You may have noticed a higher number of houses for sale this month, more price reductions, and a longer market time. Do these trends reflect a seasonal summer slowdown? Or might we have reached the peak of a real estate cycle? While the jury still out, these shifts have caught our attention.

Seattle real estate historically moves in 10-year cycles, so a shift toward equilibrium is logical, expected and probably healthy for long-term stability. EK clients as well as our colleague-brokers visiting from historically more costly markets (such as New York and San Francisco) have remarked recently Seattle property prices are “high.” Other markets nationally (Los Angeles, for one) and globally (Japan) have seen their highly appreciating markets recalibrate in the last eight months. As the cost of entry for home ownership in Seattle’s most conveniently located neighborhoods now exceeding $1M, a slowdown seems inevitable.

Over the last three years, dozens of our clients—mostly Baby Boomers—have pulled up stakes; selling their historically-highly valued Seattle home to move out of the area. Some have purchased small downtown condos to maintain a local foothold. Others have moved away altogether, remarking that while Seattle is now a world class city, it has also become a place they no longer recognize, one marked by traffic congestion, fractious urban politics, and increasing levels of homelessness. Most are looking forward to living in sunnier places with less complicated lifestyles: In Eastern Washington, Southern California, and even Panama.  Young working families are often selling their first Seattle house and buying a new one for less, but in locations like Shoreline, often near future light rail stations. This trend may increase Seattle inventory and ultimately slow price appreciation.

In 2016, economists projected that “secondary markets” (those outside the nation’s urban hubs) would outperform major cities. This prediction is being realized. Our younger clients—particularly those NOT employed in the lucrative technology fields—increasingly ask us to show them homes outside of Seattle in places like Tacoma. There, they discover “half price housing,” as well as an urban scene with less traffic. On a corporate level, Amazon’s decision to open headquarters beyond Seattle may also reflect this tendency.  This trend may increase Seattle inventory and soften slow appreciation rates. For historically more affordable areas like Burien, Renton, Tacoma, Bremerton and Everett, it is already having the opposite effect.

Whether Seattle’s increasingly real estate inventory reflects a historical ten-year appreciation cycle remains to be seen. But we’ve noticed trends which could indicate this is the case. Whether you are a home buyer, seller, savvy investor or home owner, periods of change bring new risks and rewards. Please contact us if you would like to review your current position and explore options.

Next month, we will explore trends in apartment and condominium construction that may be contributing to structural changes in Seattle’s real estate market.