Jeff and I recently bought a duplex in North Tacoma that we’re pretty excited about. We weighed the pros and cons of purchasing in the current market and ultimately decided that the property met our needs, both for the short term and the long. In light of our recent purchase, I thought it might be a good time to share some thoughts and observations about investing in real estate in Tacoma’s North End.
According to a recent report from Redfin, Tacoma has the hottest housing market in the nation. That doesn’t come as a complete surprise to brokers in the know. Tacoma has a lot to offer potential residents in terms of amenities and culture, but a big part of the city’s appeal has to do with affordability. You just get more for your housing dollar in Tacoma than you do in neighboring Seattle.
Not surprisingly, rents are on the rise in Tacoma. Between April of last year and April of this year, rents in Tacoma rose about 10%. Developers have been building new apartment buildings, but not enough to outpace demand. That means rents are likely to continue rising for the foreseeable future, making a strong argument for investing in rental properties in Tacoma.
Investing in real estate is a great long term strategy for accruing wealth but, like any type of investment, it does involve risk. That’s why it’s important to educate yourself before becoming a landlord.
5 Things to Consider BEFORE Becoming a Landlord
- Will you manage the property yourself or will you hire a property management company? If you decide to manage the property yourself, you may still benefit from assistance with screening potential tenants and/or evicting tenants if things don’t work out. Landlord Solutions is a great local resource for those types of services.
- Will you allow pets? Cats? Dogs? Large? Small? Allowing pets will obviously increase your potential applicant pool, but pets can take a toll on a house, which might cost you more than it’s worth in the long run.
- If your property is located near the University of Puget Sound, Tacoma Community College or UW Tacoma, will you rent by the room to attract students? You may be able to earn more income if you rent by the room, but you can also expect more wear and tear on your property.
- Have you talked to your insurance company to find out if there will be an increase in your premium if you convert a homeowner’s policy to a landlord’s policy? Our preferred insurance agent Jerry Hallman at Farmers is a great resource for exploring your insurance options.
- Have you spoken with your accountant about the potential tax implications associated with owning a rental property, converting your primary residence into a rental or selling a rental property? What expenses can be counted as deductions on your tax returns? How can you avoid capital gains taxes when selling a rental property?
Short Term Rentals?
With the emergence of marketing platforms like VRBO and Airbnb, short term rentals have become a very popular way for homeowners to generate income. Short term rentals may offer a greater return on your investment than a traditional rental property, but it feels like the short term rental market in Tacoma is becoming saturated. Jeff and I were initially thinking about using our new duplex units as short term rentals but are now leaning towards a more traditional long term rental approach.
If you have questions about investing in Tacoma real estate, please don’t hesitate to contact me. I’m here to help.
Mark Pinto is a top-producing Realtor with Windermere Professional Partners, specializing in residential real estate in Tacoma, Gig Harbor, University Place and Lakewood.
Mark Pinto: (253) 318-0923
I’d like to begin this post with a disclaimer. The information I’m sharing here is anecdotal in nature, and my opinions are based largely on my own personal experience investing in and selling residential real estate since 1993. I know that quite a few Realtors may disagree with me, but I’m having a distinct feeling of “déjà vu” with respect to the local housing market, a feeling that reminds me of the months just before the market peaked in August of 2007. Median home prices in Pierce County are currently well above that 2007 peak (see the chart below) and well above the levels we would expect to see with normal appreciation (the red line). While the numbers differ by county in the Western Washington area, the overall trends remain the same.
FIRST SIGNS OF A CHANGE? Watching what new home builders and developers are doing is never a bad idea. I was recently showing homes to relocation clients interested in new construction in Puyallup, and what I saw gave me pause. Builders were working their crews around the clock to finish houses that were already under construction, but there seemed to be little to no new ground being broken for additional homes. Builders’ agents were also offering heavy, unadvertised incentives (in some cases 10-15% of a home’s total value) to buyers willing to purchase in June. The MLS data below shows a recent decline in pending new construction home sales in Pierce County (the red line), consistent with a decrease in new housing starts. Of note, Time Magazine has pointed to this decrease in new housing starts as an early warning sign of a broader recession (SEE THE FULL ARTICLE HERE).
IS A RECESSION AROUND THE CORNER? For seven leading economists interviewed by Forbes Magazine in May of this year, the answer is yes. Predictions for the start of that recession range from late 2018 to 2022. SEE THE FULL ARTICLE HERE. A lot will depend on the fiscal policies of the current administration, but rising interest rates in combination with a recession will almost certainly have a negative impact on our local housing market.
SHOULD YOU PANIC? The answer here is no. I’m not expecting a market drop like we experienced in 2007 because the fundamentals of home mortgage lending are significantly different than they were back then, but I do anticipate a decline in real estate values within the next year. Is now a good time to buy? It depends on how long you’re planning to own the house and how much equity you’ll have in the house at the time of purchase. We’re advising clients who expect to have their house for at least five years and who have the capacity to hold on to the property through a market downturn to buy at a price they feel is reasonable. If buyer clients tell us they might have to resell a house within the next two to three years and/or if they don’t have a lot of equity to put into a house, purchasing now may be riskier. Is it a good time to sell? Absolutely. For seller clients thinking of selling “in the next few years”, we’re recommending that they do it sooner rather than later. While today’s sellers could be missing out on additional appreciation, timing the housing market for maximum gain can be difficult. If selling now fits with your larger life plans, sell now and avoid the risk of a loss in value if and when the market shifts.