The Equity Formula – Why “Buying Up” Can Net You Thousands

Even though prices in the Seattle markets are continuing to climb, this can be a great time to sell your home and “buy up”. Often when a home seller “buys up” he or she purchases a home that is 1.5 times the value of the current home. So if a seller’s home has a market value of $400,000, their next home will likely be $600,000.

For this example, let’s assume a homeowner owns a home in Queen Anne with a market value of $500,000 purchased eight years ago for $300,000. He put 20% down and he is paying 5.75% for a 30 year fixed rate loan:

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His goal is to buy a home in Ballard valued at $750,000 and he qualifies for 4.0% interest rate on a 30 year fixed rate mortgage:

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The above assumes all equity from previous home sale minus 7% of sale price for home selling expenses has been put towards this purchase.

Now, let’s look five years into the future and make some assumptions regarding appreciation. Assuming the Seattle area appreciates at an average of 5% per year, let’s compare his investments if he had stayed in the same $500,000 home with the same mortgage versus if he moved up to the $750,000 home:

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Wow! Both the reduction in the mortgage interest rate plus appreciation on the higher-priced home meant more equity! Now let’s project out ten years using the same variables:

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Of course, these are not a guarantee that an investment will perform as illustrated here, but the value of compounding interest (both on the mortgage and on appreciation) should not be underestimated. Please give me a call at (206) 226-5300 or send an email to sold@windermere.com  to learn more and strategize your next move.

Mortgage examples are for illustrative use only and are not an offer for a mortgage nor an indication that reader qualifies for such mortgage. Future market value amounts are examples of what could happen and are not a guarantee of future performance. Agent is not responsible for any financial losses that occur as a result of investments made as a result of this publication.

Seattle Real Estate Trends – By The Numbers

The Seattle Area by the Numbers

#1 Apartment Rent Growth in US  The Census Bureau reports median apartment rents have soared 11% between 2010 and 2013 and rents in downtown Bellevue are now higher than San Francisco.

#2 Technology Growth in US  Jones Lang LaSalle reports the metro area now employs more than 120,000 high-tech workers, second only to San Francisco.

#3 Lowest Unemployment in US  Seattle area dropped to 4.8%, its lowest level since August 2008 and third lowest of major metro areas in the US.

#4 Tightest Office Market in US  Since 2010, the Seattle and Bellevue commercial markets witnessed 9.4 million sq. ft. of occupancy gains with 1.7 million sq. ft. currently under construction, resulting in just 11.5% vacancy.

Washington’s Population Growth Nears 7 Million The Office of Financial Management reports the highest annual gains since 2008 with the majority relocating to the Central Puget Sound region.

Forbes Ranks Seattle #2 “Coolest City” in US Populous cities ranked on arts, culture, recreation, diversity, local eateries and youthful population.

Bellevue Ranked #2 “America’s Best Cities to Live” 24/7 Wall St. reviewed data on 550 US cities based on crime, employment, education and housing.

Seattle “Top 10” Relocation Market in US  Ranked #7, Money says new residents are drawn by strong job growth, especially in high tech segments making it also among the “Best Real Estate Markets in the US for 2014”, according to the Urban Land Institute.

Seattle “Smartest City in North America” With high quality schools and an ability to attract creative and entrepreneurial talent, Seattle earned Fast Company’s top ranking.

Multitudes of Millennials in Position to Purchase in Seattle Metro Area

According to the National Association of REALTORS® the Seattle Metro Area is one of the top ten markets in the country with the Millennial generation poised to lead the charge of first time homebuyers. Seattle, along with metros such as Austin, Dallas, Denver, Des Moines (Iowa), Grand Rapids (Michigan), New Orleans, Ogden, and Salt Lake City have strong job markets with jobs that appeal to this generation and the demand for housing hasn’t priced first time homebuyers out of the market like in New York, Los Angeles, and San Francisco.

According to NAR Chief Economist, Lawrence Yun, “NAR research finds that there are…metro areas millennials are moving to where job growth is strong and home ownership is more attainable. These markets are well-positioned to soon experience a rise in first-time buyers as the economy improves.”

The homeownership rate for young adults (under the age of 35) was 43% in 2005 (the peak) and the rate has fallen from that peak to 36% in the first quarter of 2014.

NAR measured current housing conditions, housing affordability (measured by incomes, interest rates and median home prices), job creation, and population trends across the country in metro areas that have a large millennial presence. NAR expects that as life events present themselves (marriage, kids) millennials will want to settle down and purchase a home rather than rent and live in close quarter. As long as market conditions hold and affordability is maintained, millennials are poised to be our next wave of first time homebuyers.

What does this mean for current homeowners? I expect demand will continue to be strong in our region as job growth is strong in our region. Over the next few years, if you own a home with market value under about $400,000, I expect that price point to increase in demand unless our builders complete new homes to meet that growing need. If you have questions for me or would like to learn more, please give me a call or send me an email: (206) 226-5300 or sold@windermere.com.

Build Wealth Through a Seattle Real Estate Investment

Often I am asked about the profitability of real estate investing. Real estate can be a very lucrative investment and there are a number of different avenues you can take depending on the amount you can invest, your preferred level of involvement, and your desired investment return.

Rent in the Seattle market is very high due to the demand for housing. Employment in the city limits is strong and the Seattle Times reported that average apartment rents jumped 4.1% in the second quarter of 2014 alone. Although rent rates and appreciation varies from area to area and type of rental, according to the Seattle Times, vacancy rates in King and Snohomish County are at the lowest number in nine years.

So how does this translate into a real estate investment?

Let’s take a look at one of my current listings at 12526 8th Ave NE in Pinehurst. The list price is $375,000 and with 20% down, and assuming the rent is $1,750 per month, you can see the monthly cash flow is in the negative:

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Negative cash flow? How on earth can this be a good investment? Read on!

Let’s look five years down the road. If the property has appreciated at a very modest 5% per year, the $375,000 investment which had $75,000 equity when purchased now has $207,786 in equity (due to appreciation and the investor paying the mortgage for five years).

But what about the cash flow? It is true that the investor was paying out more than $100 per month in excess of what they were bringing in, but remember, that rent was at market five years ago. Let’s also account for a 5% per year increase in property taxes and insurance, and even rent (although current demand indicates this rate could be much higher). Where does that leave our monthly cash flow?

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This is only for a 5% annual increase in rent. What if it were more like 7.5%?

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That cash flow is in addition to the increase in equity!

Of course, this is assuming that the owner is managing the property his or herself and it doesn’t take any repairs or modifications into account. However, each property is different and has different needs.

Intrigued? Please contact me to learn more! Email me at sold@windermere.com or give me a call: (206) 226-5300