Washington State has a well-diversified economy and modest but steady population growth, particularly from those leaving more expensive regions in California. It’s the top state exporter in 16 industries, including aerospace, timber, seafood, and concrete, and unemployment is slightly lower than the national average at only 3.6%.
The state’s fast economic growth and reasonable migration assure real estate investors an excellent return on investment should they choose to buy property here. However, there are specific elements unique to Washington that new investors should be aware of before they begin their property hunt and secure a loan. Whether you’re looking to get started or grow your real estate business, this is what you need to know about investing in Washington State.
Use Rental Control Laws to Your Advantage
According to the World Population Review, Washington State has some of the highest rents in the nation: they rank #6 with an average price of $1,965. This is contrasted with the fact that no market in the state cracks the top ten for home prices, which ensures a good return on investment for landlords.
It’s clear that Washington State is a good choice compared to nearby Oregon. Though homes are pricier at around $565,000 in comparison to Oregon’s $487,750, Washington’s southern neighbor only has an average rent of $1,284. This means that Washington’s home values are 1.15 times higher, but rents are an astonishing 1.5 times higher. If you can afford the upfront cost of a pricier Washington property, you’ll reap the rewards of higher rents.
Real estate investors can also sigh in relief at the fact that Washington state has no rent controls; in fact, it is illegal for any municipality to restrict a landlord’s right to raise prices in accordance with fair market rents. The fact that neighboring Oregon imposed statewide rent control in 2019 makes Washington a reasonable alternative for those seeking to invest in the Pacific Northwest. Oregonian properties will likely remain undervalued in rent thanks to these strict controls.
A lack of rental control laws brings opportunities to boost your income should you price effectively. Review the local market and ensure you’re well within the midrange of what others are offering. In addition, pay close attention to the economy to determine when it’s appropriate to raise prices.
Falling Prices Open the Door for New Investors
Median home prices are down by 5.4% from 2022 to 2023; they’re still quite high relative to Midwestern or Great Plains states, but this allows new investors to get involved before prices pick up again.
We may soon see an upswing in pricing: 30.3% of homes in Washington sold above the list price in September 2023, up 5.9 points from last year. While sales volume has been low as of late, this may be due to another critical issue: a lack of housing.
This is the perfect time to expand your real estate portfolio before prices rise by looking for undervalued regions and renovating existing properties or by developing raw land, as we’ll discuss below.
Housing Shortage Uncovers a Need for Real Estate Developers
The Washington State Department of Commerce postulates that the state will need over 1 million new homes in the next 20 years, as there is a critical shortage of homes in all price ranges.
Housing inventory is calculated by months supply, which is the time it would take for all of the properties currently on the market to sell if they were not replenished. A well-balanced market should have between four to five months’ supply; Washington currently has only a 1.9 months’ supply. Compared to the national average of 2.7 months, you can see an urgent need for more housing across the state. Public housing has a lengthy waitlist, but even more conventionally priced properties often have numerous renters competing for only a few units.
This shortage is only exacerbated by the fact that construction slowed significantly in multifamily units; construction permits dropped by 7,000 units in the second quarter of 2023, according to the Economic and Revenue Forecast Council. However, single-family home permits rose significantly, from only 4,600 in the first quarter of the year to 18,800 in the second quarter. Single-unit properties are likely to be overvalued in the coming years, with a greater need for multi-family apartments, especially those for economically disadvantaged individuals.
Thankfully, Washington State has abundant undeveloped land, including many choices below $50,000. LandWatch, a well-respected resource for land purchases, lists 2,622 properties across the state, many of which only need light clearing. Buy land cheap and build an apartment complex, which boosts the housing inventory and ensures you will get multiple rents from the same property.
Participating in the Housing Choice Voucher Program May be a Lucrative Opportunity
Though all price points need more housing, the most urgent need is in extremely low-income (ELI) affordable housing; in fact, the Washington State Department of Commerce predicts that over half of the 1 million needed homes must be either public housing or economy rentals.
Those willing to develop these more budget properties will have a large market; there’s a huge waitlist for these properties. Being able to quickly develop these properties will ensure you almost immediate income upon completion of the project, and it will also help relieve pressure on the state for these more affordable options. Thankfully, you’ll have access to plenty of resources: Washington State has issued over $80 million in grants and loans to those who intend to develop public housing.
The voucher will cover 70% of your requested rent, and the tenant will then pay the other 30%, meaning that you won’t lose out on income by participating. However, becoming a Section 8 landlord does make you beholden to certain restrictions. The local Public Housing Association will need to approve the rent you change, which means you won’t always be able to meet the local market rents, and you won’t get the rent immediately: typically, the tenants will only pay after they move in. You’ll also have to complete annual property inspections; should you fail, you may be removed from the program.
Despite these downsides, the dire need for affordable housing in Washington State will ensure you have a steady income throughout the years, as the pace of development is nowhere near the level of demand.
Look Outside the Major Cities for Boundless Opportunities
Despite the recently depressed prices, Washington State’s dire housing shortage demonstrates that those seeking to build or invest have plenty of opportunities, but certain regions have proven incredibly promising. Spokane and Seattle remain strong contenders; however, new investors may consider the smaller markets of Bellingham and Woodinville to get started.
Only 21 miles south of the US-Canada border, Bellingham is a popular launching point for Alaska cruises and a major fishing port, which affords opportunities for both retail and rentals. There’s an anticipated market growth of 5.5% by July 2024, partly due to the serious housing squeeze in this particular area.
Zillow ranked Woodinville, a Seattle suburb, the nation’s most popular housing market in 2022, with an 11.2% price increase. This is thanks to its affordability compared to neighboring Seattle; many tech workers have gone remote and are less concerned with a short commute. There’s major population growth in the region: it’s expected to grow by 38% from 2021 to 2040. The fierce competition for housing encourages many to rent and allows for higher market rates than in other areas of the country. Choosing to develop areas directly outside of Bellingham and Woodinville will almost guarantee you a healthy profit.
Utilize DSCR Loans to Jump Into the Housing Market Fast
The housing shortage makes property sell 16.9% faster than the national average: it only takes about 69 days to sell a home. In Snohomish County, properties take just 18 days to sell, emphasizing the need to act quickly if you’d like to get prime real estate.
Conventional loans are a lengthy process due to the meticulous investigation into your personal finances; you’ll need to procure information about your tax returns, pay stubs, and debt-to-income ratio. While waiting for your approval, you may lose out on numerous advantageous properties, making time of the essence when securing finances.
To ensure you have the best chances of success, consider a DSCR loan in Washington State. A Debt Service Coverage Ratio loan relies on the income potential of the property rather than your own finances; the lender will divide the expected rental income by the mortgage, insurance, taxes, and association fees in order to develop a ratio, which will then inform them whether your property will generate a profit. This means you don’t have to provide personal income information other than permitting the lender to run your credit score; all you must provide is an appraisal and a rent schedule. Less paperwork means prompt approval and better opportunities to make a profit.
Conclusion
Washington State’s tight housing market and robust economy are highly favorable for investors, particularly those seeking to develop raw land. Prices have dropped from historic pandemic highs, but rents continue to grow, ensuring a good profit margin for new and seasoned purchasers.
A lack of rent control enables investors to keep up with inflation and secure strong income from their properties. Combine this with a strong need for housing and large swaths of undeveloped land, and you can see that developers have a cutting edge in this particular market.
The smaller economies of Bellingham and Woodinville show great promise, especially as their housing market enjoys brisk sales. To ensure you won’t miss out on the best opportunities, consider using a DSCR loan rather than a conventional mortgage.
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