How Best To Invest In Real Estate In The Northwest

The Northwest is one of the fastest-growing parts of the country, with home prices soaring as the supply of housing hasn’t kept up with demand.

Investing in such a rapidly changing environment is a challenge because we know from experience that such surges in growth never last. At some point demand will ebb, supply will increase, and prices (and rents) will level off—or even fall.

The area around Seattle has seen the most spectacular growth because of the expansion of the information technology sector—Amazon, Microsoft and many others. This sector now provides 6% of all local jobs, grew 7% in the past year, and provides 23% of local wages because of the high average annual pay, over $250,000.

Oregon and Idaho have had growth on a scale that’s only smaller in comparison, but that leads to similar problems for investors.

The best way to assess these markets is to first see where they are in the price cycle—that is, are they already over-priced? Is there a greater risk that prices will at some point actually come down? If so, your investment will need to be defensive as much as an opportunity for good returns. The table shows that in Seattle, Salem, Bend and Boise, prices are already more than 25% higher than the ‘income’ price. This means they’re over-priced. Another half dozen markets are in the 15% to 25% range, and at the rate prices increased in the past year they’ll soon be there as well.

Local Market Monitor, Inc. Local Market Monitor Inc.
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Over-Priced Markets

If you plan to buy and hold a rental property for the next 10 or 20 years, you don’t care too much what will happen with home prices in the next five years—even if they do go down. Eventually they recover, though the recession showed that it can take a long time. Your greater concern is to have renters in your property if the local economy does go downhill. This means you need to invest in a price range where there are lots of renters right now, what we can call the "sweet spot." This varies from market to market and from zip code to zip code, so you must do some homework with Census data.

You want to avoid high-end rentals in over-priced markets, because they’re most vulnerable in a down economy; don’t just buy a single-family home and rent it out at a high rate unless you also plan to flip it in the next few years. Instead, split a single-family into several rental units, which will take time and money but will give you better returns in the long run; or you can invest in apartments.

The table shows that the job situation in Seattle is very strong—jobs up 3.5% in the past year—so if you invest now it’s probably not yet the peak of the market. In Boise, on the other hand, job growth is now slower than six months ago and the very sharp increase in prices points toward a riskier situation.

Moderate Markets

Portland is a former high-growth market that may come to a soft landing. Three years ago home prices were rising 12% a year, last year just 5%. With jobs still increasing over 2% a year, which means demand continues to grow, it’s most likely that prices will stabilize but will not fall. In these conditions, investors must be very careful about the price they’re willing to pay for a property and shouldn’t count on appreciation to add to their return. Rents, on the other hand, can be expected to rise slowly, along with income.

Kennewick is a good bet for investors, even though it’s a smaller market and therefore more volatile. Job growth has been good, home prices are close to the "income" price, demand is strong, and home prices are low enough compared to rents that single-family homes can be rented out directly.

Low-Growth Markets

Spokane, Idaho Falls, Billings, Cheyenne—despite the occasional surge in home prices, demand in these markets is driven by job growth, which has been low. This means that the location of your rental property is even more important than usual. You’ll want to be near medical centers, colleges, government offices, revived downtown areas. And because there probably hasn’t been much recent construction of attractive properties, it makes sense to buy inexpensive homes to upgrade into a higher rental/sales bracket.

Wrap-Up

You can successfully invest in any market, but your strategy may be different in each one. The Northwest has a lot of markets that are tricky right now because of a surge in prices; that just means you need to prepare more for the downside. Dynamic markets are a challenge, but that’s often where the best opportunities can be found.

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