Washington Real Estate Investing and Lending

Learn about real estate investing and lending in Washington State. Rocky Butani interviewed Lesa Say from Rain City Capital to learn about real estate trends, hot markets, and much more.

ROCKY BUTANI:

So just in general, is there anything you could tell us about real estate investing in Washington State at this time, like trends or what you’re seeing with the types of loans that you fund?

LESA SAY:

Yeah, absolutely. Real estate is always a good time to buy. Like, no matter who or what says it, it’s how you’re buying and making sure the math makes sense and you’re doing the gut check. Opportunity is still rampant. We are seeing tons of investors that are jumping in the game. Some would say, oh, it’s slow. It may be slow on the end user and people buying because they don’t wanna move up. Like, they have a 3% interest rate. They don’t wanna move up, so there’s not a lot of inventory. But guess what? There’s not a lot of inventory. So an investor that’s being able to find a deal maybe off-market or where they’re finding their deals and they definitely are They’re putting it on the market and then selling really quickly with multiple offers because there is none the first time homebuyer is definitely that market is, there is no inventory.

So that market’s hot. Like if I was gonna buy, that’s where I would go or multi-unit. Washington in itself is strong. We have strong employment. We don’t see like the decline as fast as others people would be, but there’s low inventory. Investors are seizing the opportunity. They’re just being smart with their numbers and they’re not over buying, hoping for appreciation. They’re actually looking at their numbers and saying, Okay you know what? I’m comping it at like 750, but I’m gonna run my numbers at 7 and if it still works, then let’s do the deal. So, uh, Washington is very strong and a lot of stuff is happening. Right now, regarding trends, a lot of people are doing the condo conversion, DADU’s they’re doing value adds to the property. They’re making sure if I’m not just buying this property, hey, can I add an ADU on the back? Can I then condominiumize that? How can I make more profit on one property versus just a single unit? So that’s what I’m seeing. It’s really exciting. That’s fun stuff. So creative. But those are the kind of hot items right now.

ROCKY BUTANI:

Cool. And then condo conversion, meaning they’re taking, let’s say, a six unit property and making a condominium unit.

LESA SAY:

Ooh, you could do it that way too. So I’ve seen a lot, like a triplex or a, triplex or quadplex or whatever, and then they sell, condominiumized, and then they sell those two units. What I’m talking about another way is where they buy a house but the lot’s big. And so then they can actually add an ADU or a DADU in the back, meaning attach or detach, detach dwelling unit. Then they condominiumize the parcel, and then they individually sell it off. So instead of just having one asset, one house and selling it, they’re now having three and they’re able and most of the time I’ve seen when you can add that third unit that’s when you’re really making that money. Like the first house sells when it sells off is the total debt maybe just a little on the second but then you’re making a lot on the second and then all of the third so it’s a really nice value add if you can find that property.

ROCKY BUTANI:

Nice, and just to clarify, DADU is a detached ADU?

LESA SAY:

Yes.

ROCKY BUTANI:

So in Washington State, you have, you know, as far as I can see, there’s you have these two major regions, you’ve got the Puget Sound region, Seattle metropolitan area, and then you’ve got Eastern Washington, which is Spokane. Are there any other areas that you kind of classify as a different region?

LESA SAY:

I actually classified them a little bit more complex, if you don’t mind me diving into that. There’s Snohomish, King, Pierce, Kitsap, and then the West Side. That’s pretty much like you go down the line and then divide it out, and they play much differently in each one of those counties. Kitsap is traditionally a couple years behind what the standard Seattle would go, so that’s a great place to like, oh wait, we’re doing this here, and this is already a big hype let’s go pivot and you can normally buy lower price point properties but then also still make some good you know a good margin on that or if you’re gonna hold them because you know what’s coming and you can do a value add and then I always just say the west side excuse me the east side is the east side those are definitely they each have pros and cons they each have opportunities I always say get involved with the investors in that area have a conversation with them, talk to them. Investors I know are all kind of super nice and they all want to help each other out. It’s a community like no other community. They don’t just hide what they’re doing. They want to share. So like the east side, a lot of condo, conversions of hotels and apartments are happening because rent’s cheaper over there. Properties are cheaper over there. People want to still buy in Washington, but maybe it’s not as expensive. So they’re going over on that side. So we see a lot of growth in that area too.

ROCKY BUTANI:

And when you say east side, you mean east side of the sound, not the state, right?

LESA SAY:

Yes, correct. I mean the sound, yep. So I look kind of like North Bend East, over the mountain is East in my mind. So thanks for clarifying that.

ROCKY BUTANI:

And then have you done a lot of lending in Eastern Washington, like Spokane and the Tri-City area?

LESA SAY:

Tri-City, Yakima, Spokane, yes 100%.

ROCKY BUTANI:

Okay, and then do you consider rural areas in Washington state?

LESA SAY:

Great question. Yes, absolutely, because guess what? I live south and you could say where I live is rural and it is not rural. We have a Target, Walmart, we have Fred Meyers, Costco, but it all depends. So yes, the beautiful thing about working with a local lender is they know the area. Especially like in Pierce County or even King, you can go one street over and it’s a total different environment and comps. We know the area and so we can help you with that. So yes, we do look at the rural zoning.

ROCKY BUTANI:

As far as getting ADUs built or getting permits, are there any areas in Washington where it’s easier or more challenging than others?

LESA SAY:

I don’t want to call out a city, but there is definitely some cities that are a little bit more challenging than others. I do know Everett tends to be a harder, it’s a harder obstacle to get things permitted. But really for the DADU play and the condominiumize it’s just knowing how, who to talk to, how to get it done, and what kind of good questions to ask and be persistent. It is definitely a longer deal, It’s not an in and out where you’re out in like three months. You gotta make sure you know what you’re doing. So I would definitely suggest if that’s a path someone wants to go, go have coffee or go talk to a mentor on that because there’s definitely elements that you need to know about.

ROCKY BUTANI:

And the whole prospect of adding ADUs, is this an initiative coming from the state or is it more on a local basis that they’re really encouraging investors to do this?

LESA SAY:

The state. Yes, so the codes change and they have so definitely anytime you are going to invest you need to look at the municipality in the codes of that area. So the state says that you can put you can condominiumize but each county is interpreting and aggressively actively doing it yet or not. They’re like holding off and waiting I think I believe it’s 2025 is when they all have to be a level two I’m not quite sure on that. So I’d hate to be quoted but every jurisdiction area is adapting that code a little bit differently and a little bit faster. Like Seattle, they’re on it. Like you’re, yes, let’s do it. Smaller towns are kind of pushing because that means more growth. So I would check that 100%.

ROCKY BUTANI:

Okay, nice. And are there any particular areas that are hot at this time in early 2024? Or let’s say even neighborhoods within Seattle or different cities around the area.

LESA SAY:

That’s an excellent question. And I honestly would truly say Washington in general is hot. You can find success in pretty much almost every area if you know what that area demand is. Like you can go down to, you know, Roy or, you know, Southern Pierce. And if you’re buying a condo, that’s not gonna sell as much as a condo in Seattle. They want land, they wanna have a barn like there’s different things what that area market wants. So I would say do your research, make sure you’re talking to a local agent, talk to an investor, and know what that specific area needs and what is selling. Because yeah, you can find deals anywhere. Washington’s a good state to lend in. Yeah, lend and do deals in.

ROCKY BUTANI:

How about just focusing on the city of Seattle? Any particular areas there that stand out as being really active with rehabbing or flipping properties?

LESA SAY:

Yeah, of course like Ballard all of those areas anywhere that you can see a sound or the water absolutely all Seattle is hot like that’s just if you can get a commute to you know 25 minutes to downtown all that region that that’s a very popular Beacon Hill like things of that area those are very good places to find DADU’s and ADUs because Seattle’s very welcoming to that process.

ROCKY BUTANI:

Do you lend on a lot of larger rehab projects for luxury homes?

LESA SAY:

Yeah, absolutely. Oh yeah, it’s Seattle. Like, if I, we live in London, other states, you know, a million dollars here, not so much, but if I was going to Tennessee or other states, million dollars would be a lot different, right? So, of course, we know the market, right? You’re not gonna really get anything with a gorgeous view in downtown Seattle without a couple million dollars. So yes, that’s, it’s more of the deal. Does the deal make sense? and can the borrower be profitable and make it a win-win for everybody.

ROCKY BUTANI:

How about a rental strategy? Is that typically feasible in Washington state?

LESA SAY:

Washington is more of a challenge for rental. I’m just being very honest. I know it’s very frustrating for investors and I too have properties in different states and there is a big comparison. It definitely is frustrating that landlords are kind of held, I’m trying to make sure I’m saying this right. It is hard to make numbers work in Washington like they do in other states. They also allow the tenants to stay and it’s harder to evict, and there’s a lot more challenges that come with owning a property in Washington state as a landlord than other states. So I have noticed. A lot of people are moving out of Washington to own properties as rental and it’s really sad because those are the people that take care of the tenants. I’m more inclined to work with a tenant than a multi-million dollar company that has hundreds rentals. Guess who’s going to pick up the phone and make sure that they’re taking care of me? But I individually get pushed out more because it’s just harder to have a tenant in Washington than it does in other states and that’s a bummer. It’s a big bummer.

ROCKY BUTANI:

And is it also a matter of qualifying for a long-term rental loan based on DSCR just because properties don’t cash flow as much?

LESA SAY:

Oh yeah, absolutely. It’s a higher price point but the rents are higher. So in my opinion, that’s not the deciding factor. It’s more of how are we treating landlords in the state of Washington versus others? Are we inviting them to be landlords and help provide a safe and comfortable environment for someone to rent or are they just getting, we’re just getting pushed out? Because it’s kind of hard. So I would say that’s the only drawback to Washington and investing is owning a rental in Washington.

ROCKY BUTANI:

What about the lending landscape in Washington state? Are there a ton of lenders that are based in Washington? And are you seeing a lot of competition? Do you get a lot of national lenders that you’re competing with?

LESA SAY:

Right. I would say investors actually truly understand the value of a relationship. Yeah, there’s always national lenders that we’re competing against. There are a couple of big hitter hard money lenders too and we’re one of them. It only takes an investor to go to a national lender once and something happens with the draw that they can’t just pick up the phone and not be treated as an individual and an investor and take care of them and not just like a number. So in my personal opinion, it’s always competition, but I make sure I treat my borrowers with respect and get them the best that they can and I will fight for any deal that I can for them and have a relationship with them and that tends to not be a problem because you might not get that with a national big lender.

ROCKY BUTANI:

Nice. And how long has Rain City been in business?

LESA SAY:

2009.

ROCKY BUTANI:

Wow. That was a great year to start.

Lesa Say:

Yes. It was a very good year to start. Actually, if anybody has an opportunity to watch one of the videos on our website of how it got started, but it branched out of that area of making sure our founder wanted to make sure that people are taken care of and long lasting mutual success for everybody. So yeah, 2009. Let’s go. I would honestly say if you’ve never worked with a hard money lender before, definitely call around. We’re all pretty much the same but we’re not, if that makes sense. We all have little niches that are different but we are part of your team just like your agent, your escrow and your lender. Your lender is what can make it or break it. It truly can. You need to know, do I have to pay monthly on my draws before I draw it out, it’s fully dispersed or is it when it’s dispersed like all that little stuff adds up to your bottom line. And like, are you selling my loan to somewhere? Are you going to be my draw team? Like, are you my point of contact? So like, I would say really ask questions because you should feel very comfortable with who you’re speaking with and knowing that they got your back and they’re gonna take care of you because it is a short loan.

It’s 12 months. I would never do anything shorter. Just, that’s my own little like nugget if you walk away, don’t do a hard money loan less than 12 months because stuff can happen. And then the other thing really is, if you don’t start investing, you’re missing out. Like just do it. You can take all the classes you want. You can be around everybody that is doing it, but until you actually just jump and do one, calculated risk is what I always say. Calculated risk, then you’re just on the sidelines and you don’t wanna be in the sidelines five years from now when the interest rate is different and the value is different and you’re wishing you would have. So just do it, absolutely.

ROCKY BUTANI:

Okay, so Washington State doesn’t have any State income tax, right? So I’m assuming your property taxes are higher and does that cause any problems when you’re when you’re trying to figure out if you get a rental loan?

LESA SAY:

Absolutely. Yes, you said taxes right after April 15th, right? So I’m like, taxes. Yeah, our taxes are higher than other states and that’s sometimes what deters people for the rental. But if you’re also getting higher rents, so as long as the rent coverage ratio is good and the numbers make sense, why not? But that is something to consider. You always wanna look at their taxes, your insurance, and your mortgage payment, and make sure your rent has a good debt to service ratio, that you’re making a profit, because things happen, siding breaks, windows break, AC breaks, you know, you gotta make sure you’re making money.