At our first-ever Fill the Truck event on Saturday, October 17th, you stuffed the BNP Moving Truck so well, so generously, and we got to have so much fun in the process….

A big THANK YOU to everyone who came by with warm coats, personal care items, gift cards, and your smiles and generous hearts! On Monday we will drop these off at Bellingham Public School District Family Resource Center & the Interfaith Coalition’s Annual Winter Warmth Drive!

Here are a few photos from the day. And we will DEFINTELY be doing this again!!!

THANK YOU BELLINGHAM & FRIENDS OF BNP REALTORS!!!

The larger, green section shows the clear trend over the last decade, of declining inventory — that is Active listings of single family homes on the market — for all of Whatcom County.

The smaller, orange section shows the number of houses sold over the same period.

First, about that declining inventory. Year over year, every year, less and less to choose from — despite very real population growth over that time. (That’s another graph for another post).

In 10 years Active inventory has declined by 80%, from 1845 listings in August, 2010, to 368 in August, 2020.

Second, look at number of houses sold… especially as a percentage of inventory.

In August, 2010, 8.9% of the available inventory sold.

In August, 2020, THE #1 highest number of sales in MLS history… the percentage of sales to listings was 98%.

We’ll look at other fun things such as prices and population growth in future posts.

Source of graph: NWMLS

OK… so having read that, you’ve got the basics on what it costs to own a rental property, and what it costs to operate it.

With those figures determined, you know if you have positive, negative, or neutral cash flow. Cash flow can be important, but it is far from being the only way to make money with a rental.

In this post, let’s talk about the first of the other ways rental properties can make you money.

#1… Appreciation

Historically, property values go up over time, a phenomenon known as appreciation. Some years are better than others. In 2018, Bellingham’s average appreciation was north of 12%.

Some years see values go down, like 2009 through 2012 in the Bellingham market, following the Great Recession. (To be clear, as I write this in the midst of the Covid-19 pandemic, we are likely to see values go down somewhat in the short term future ahead. More on that later.)

But on average, even through market downturns, the average value of Bellingham real estate goes up. Going back to 2003, the average annual appreciation has been 5.15%. That is including the years through the Recession.

And that appreciation is happening whether or not you’re seeing positive cash flow. The key is to give the property time to appreciate. How much time? Let’s use 10 years as a nice, safe time period. As we tell our clients, the longer you hold a property, the more you mitigate the risk of over-paying on the front end, or being caught in a down-market when you sell.

In our example property in the first post in this series, we paid $500,000 for the house. We rent it out, take good care of it, and let the market do its average 5.15% thing for a decade.

After year 1, that $500,000 value has gone up to $525,750. A cool twenty-five grand in extra equity.

After year two, that value is now $552,826. We’re starting to really get somewhere.

After year FIVE, our rental house has a market value — on average — of $642,712. Remember, this is unrelated to the cash flow.

After year TEN… our $500,000 three bedroom, two bathroom rental house in the heart of Bellingham, has a market value of $826,157.

So while you were only pulling $1600/year in cash flow on year 1 — which is (let’s be honest), basically “breaking even”, you’ve been making some serious money through the magical effects of appreciation.

(Imagine having 10 of these rentals… ALL doing that nice 5.15% year over year in appreciation! It’s no wonder why Real Estate is the single biggest asset class (holder of wealth) in the world).

In the next post, we’ll look at the second of 4 additional ways your rental property makes you money BEYOND cash flow: Principal Paydown!

Why? For a few reasons.

First, it’s simple math. We’re not talking calculus here, or even algebra. This is basic arithmetic!

It’s applicable, real-world, “affects pretty much everyone” stuff.

In Bellingham, WA, where we’re based, 54% of all households are investor-owned and renter-occupied. More than half the populace!

So if you’re a renter, you should know the economics of how your housing situation works.

And real estate — including investment property — is the largest asset class in the US… and in the world. In the United States, the total value of real estate is estimated to be north of $16,000,000,000,000 — the 16 trillion dollars!

(World-wide, all real estate is estimated to be worth $228,000,000,000,000).

That’s more than all the other asset classes (stocks, bonds, commodities, and cash — combined.)

So yeah, back to my point: You should know the basics of how the math works… why someone would want to own investment real estate that other people — tenants — pay to live in.

Let’s use a single family home as an example in our study. Bellingham’s most common home type is a 3-bedroom, 2-bath home of about 2000 square feet.

First, let’s look at the income that property produces in the form of rent payments from the tenant.

Our sample home is a nice home in a nice neighborhood, and we’re going to say that it rents for $2500/month — a very real number in  many parts of Bellingham.

$2500 times 12 months equals $30,000 annually, so we’re going to say our “Gross Scheduled Income” is $30,000.

Now we’re going to look at the “operating expenses” — that’s the money it costs the investor to own the property, even though they don’t live there.

Operating expenses include all the various bills and payments made on behalf of the property — EXCEPT mortgage payments. These would be paid whether or not you paid cash or got a loan to buy the property.

Let’s list them out, and note that these are expenses paid by the investor / landlord:

• Property taxes: $3500/year
• Insurance: $900/year
• Home maintenance: $1200/year
• Landscape maintenance: $0/year (because the tenant takes care of the landscaping). 
• Vacancy: $0 (because your tenant is there for 12 months and has asked to renew for another year).
• Professional property management: $0 (because  you’re managing the property yourself).

With single family rentals in Bellingham, the tenant pays utilities (water, sewer, garbage, electricity, natural gas or propane, cable), and the tenant is typically responsible for taking care of the landscaping. So those are NOT operating expenses for the investor / landlord.

OK, if we add up those operating expenses above, we arrive at an annual total operating expense of $5600/year.

If we subtract that off our gross scheduled income of $30,000 we arrive at a total of $24,400. This is called our net operating income.

That’s how much pre-tax money you would put in the bank if you had paid cash for the house, or had paid off a previous mortgage in full.

But let’s assume you have a mortgage on the house… let’s do that math.

First, we’re going to say that our sample investment house has a price tag of $500,000.

To get a loan on an investment house, you’ll need a minimum 20% down payment, but for our example let’s use a 25% down payment, or $125,000.

So we’re going to borrow $375,000, and on that loan, because it’s a “non-owner occupied” house, the current interest rate is 4.5%.

The monthly payment on that loan is $1900… or $22,800/year.

So from our $24,400 “net operating income” we’re going to pay out $22,800 in mortgage payments, leaving us a “cash flow” of $1,600/year in year 1.

As long as you don’t have any surprises like replacing an appliance, a water heater, or a roof leak in that year, you’ll be profitable to the tune of $1,600 that first year.

In the next post… we’ll talk about the first of 4 other ways your rental house is (potentially) making you money, on top of that cash flow!

They don’t want to miss anything.

They don’t want to over-pay.

And they don’t want to buy a house with something critically wrong with it.

All completely reasonable concerns. Today I’m going to talk about the middle one — the fear of over-paying — and what factors will significantly mitigate that.

Prices in most markets — certainly in the Bellingham real estate market — have gone up measurably in the past 5 years. The average per-week appreciation of single family homes in that time has been $771.00… or just over $200,000 total.

That’s great if you bought then. It makes it hard for many buyers now, with the average Bellingham price over the past 30 days — the SLOW time of year — cresting $603,000!!!

In the spirit of reducing your over-paying fears when you’re about to pull the trigger on a Bellingham home, keep these 5 things in mind…

1. How Long Will You Stay?

Or, more accurately, how long will you keep the house? The longer you own a home in Bellingham, the more time it has to appreciate and the less your risk of losing money when you sell. It costs money to sell — historically about 8% all in, with commissions, excise tax, title insurance and escrow fees. In recent years that amount of appreciation has occurred in 6 or 7 months time… but we don’t advise counting on that short time frame. Really, we tell our clients that a 5-year hold is a good target. If you can foresee keeping the next house you buy for 5 years or more, that will significantly reduce your risk of paying a premium price now.

2. Does It Have Upside?

This means, can the property be materially improved during your ownership in ways that will increase its value? Is it somewhat dated and in need of an update? Can an extra bed and bath be easily added? Can the lot support an ADU — accessory dwelling unit? Can a basement be finished? There are 100 ways to improve or expand a property to push it into a new price category, and it’s a valuable skill to be able to identify those ways while you’re looking at it. If you find yourself falling in love with a house that is, for example, super small with no room to expand, on a lot that has no more room to grow (or put an ADU), in absolutely updated, cherry condition inside and out with full updates already made, and on the higher end of the price spectrum for its setting… that’s one that will be difficult to infuse more value into, other than just waiting for the market to further appreciate.

3. Is The Neighborhood a Market Favorite?

If you’ve been watching the market for a meaningful amount of time, you will have seen areas where relatively few homes actually go up for sale, when they do they sell quickly, and for eyebrow raising prices per foot. In Bellingham, this would be the Core Neighborhoods, as one example.  There is consistent, strong demand for homes in the Core ‘Hoods, so buying there is a safer bet. Qualities like walk-ability, proximity to parks, brewpubs and coffee shops, the option to forego owning a car… those are becoming more popular in  society in general, so buying in a location with those qualities is a solid bet.

4. How Does This Home Compare To Neighbors’ Homes?

For any given neighborhood or even a particular street, there are homes on the extreme end of size, quality, and price. The rule is simple: You don’t necessarily want to buy THE nicest, most expensive house in the entire neighborhood — not if mitigating risk of over-paying is your goal. Neighborhoods have a “range” their homes fit into, typically. To be safe, you buy near the middle of that range. To increase the odds of making money, you buy at the more humble, less-expensive end of that range. For example, if 90% of houses in a given neighborhood are selling  in the $400K to $600K range, you may be taking a risk buying that one unique place that’s listed at $950K and is twice the size of anything else in the surrounding half-mile radius. On the flip side, if you find something for $300K with room to expand and update… that could be a money-making score if you approach it right during your ownership.

5. Don’t Get Caught Up In The “Bidding War” Frenzy

There are a LOT of  multiple offer sales in the Bellingham market these days. That means a new listing goes Active on the MLS, buyers crawl all over it for a few days as the frenzy builds. Then, as offers are written, most or all of them use an “escalation addendum” to make increasingly higher bids on the house, beating the next highest by a stated increment, hoping their maximum amount is enough to win the day. The escalation addendum is a great tool, meant to help avoid over-paying by only beating competing offers by a relatively small amount (usually a few thousand dollars). But it can be easy to get caught up in the frenzy of competition for the house, and writing in a max offer price that is well above what the data supports. The best strategy to avoid over-paying in these “auction” style sales is to objectively pick a price that you’ll feel good about if you get it, and also if someone else is willing to go above it. Put differently, offer YOUR high price, not someone else’s.

In Summary

Every buyer, every house, and every sale is unique. The tips above are general rules meant to keep in mind during your buying journey — they’re not hard and fast in all situations. The ABSOLUTE best overall strategy is to team up with an experienced, highly-reviewed, widely-respected Realtor who can help guide and translate throughout the complete buying and owning journey. That’s what we do here at Brandon Nelson Partners.

About 90% of the time when we’re first contacted by a buyer, they’ve decided to begin the process and they (wisely) want to meet, talk, find out more about the market, learn about us, really get a sense of “how this all works” before launching in.

That’s our preferred order of events, too. That approach allows both the buyer and us to ask lots of questions, avoid a lot of confusion and misunderstanding, and properly set expectations.

But about 10% of the time we’re called by someone who fits one of these two profiles:

• They’ve been casually looking at the market, and suddenly a house they love has popped up and they want us to meet them at that house. We’ve not previously met… they may not know anything about us (or about the home buying process)… and they want to just dive in.

or…

• They’ve been working with, or are currently working with, another agent, but that’s not going well and they want to either explore a switch to our firm, or they feel that having multiple agents trying to help them would be more effective.

We’ll meet and talk with buyers (and sellers!) “wherever they are” in the process. Though more and more, we try to avoid short-cutting it by skipping that first sit-down meeting.

We see across-the-board benefit to taking that time — even if they’re in a rush or fixated on one particular house. We’ll get there… but there are a lot of steps in front of us and we find immeasurable value in first getting on the same page.

The first step in the buyer meeting is a Q&A session, where we go through a list of questions to access the buyer’s prior experience and knowledge.

Here are some of the questions we’ve found to be super helpful to discuss in that initial meeting:

• Have you ever bought a house before?
• Did you use a Realtor for that purchase?
• How did that go?
• Thinking back on it, is there anything you’d like to have go totally different this time?
• If you’re a first-time buyer, tell us about any research or learning you’ve done, whether from friends or family, or on your own.
• Why is now the right time to buy (or start looking) for you? 
• Is there a date you need to be moved in by? 
• Is there a house, or houses, that have your interest right now? 
• Do you know your budget for this house? 
• Have you researched the lending process? 
• Have you met with, or submitted info to, a lender yet?
• Who was that? (Or, if you haven’t, can we make you a referral?)
• Do you have any burning questions about that process right now? 
• How familiar are you with the current Bellingham / Whatcom County market conditions? 
• How familiar are you with the different Bellingham neighborhoods / County areas in terms of where you’d ultimately like to be? 
• How refined is your criteria for the house you’re looking for? 
• What condition (from fixer to brand new) are you open to for this house? 
• If we can organize any work that may need to be done on the house, are you more open to something less “move-in ready?”
• Tell us about the house itself, in terms of beds, bath, size, style, etc.? 
• Are you open to condos or townhouses?
• Tell us about the actual property, the lot, in terms of size and characteristics. 
• Any other “must haves” like a garage, shop, view, etc?
• Are there any “absolutely not’s” on your list. 
• How long do you envision keeping this house? 
• Are there any other decision-makers involved in this purchase?
• What is your availability/flexibility for touring houses?
• How do you prefer to communicate?
• Are you familiar at all with the contract(s) used to make an offer?
• Are you familiar with the various other professionals who’ll be involved in the transaction?
• Do you have help you can call on for the actual move?
• Do you know how Realtors are paid?
• What questions do you have?
• Are you ready to begin talking about our process of searching for your home, making offers, and transaction management?

By starting our working relationship with these questions and the discussion that ensues, we’ve found it creates an overwhelmingly smooth experience for our clients and for us when compared to the short-circuited alternative.