Washington has some of the best tax rules for real estate investors. So long as you aren't a corporation, you don't have to pay state income tax on rental income.
This will help boost your property's cash flow, opening up even more investment opportunities in residential rental property. By raising your DSCR, you also open yourself to better DSCR loan terms, like better interest rates.
You don't have to live in Washington to take advantage of the tax breaks, but you do need to consider your local laws. Out-of-state investors may still need to pay local state tax.
Every veteran real estate investor knows that the first step to expanding your portfolio is research. You want to be able to estimate a property's ability to generate sufficient income and cover debt obligations. Commercial property values will be higher in some areas, whereas others are better for investing in condominiums or family residences. DSCR loans are a greater risk for lenders, so the estimates need to be in your favor.
Washington is full of investment opportunities, with several large cities and metro areas. The current top three areas to invest in would be Seattle, Spokane, and Tacoma.
Seattle certainly doesn't have the lowest property prices, with a median property value of around $834,501. Despite the larger numbers, this is a 6.7% drop. But this value drop isn't indicative of a housing crash— the market is balancing out after a value rise in 2022.
Your property's income potential can be as high as the Space Needle: rental income here for a one-bedroom property is $500 more than the national average; across all residential property types, rents average $2,242. A commercial property's cash flow is an amazing $43.15 per square foot, while retail space nets around $27.52 per square foot.
Vacation properties are where it's at in this city! Tourists pass through Spokane to visit the gorgeous falls; in fact, vacation properties in Spokane are currently booked for 78% of September. Average short-term rental income comes to about $148, promising a steady income that will certainly cover your mortgage payment.
If you're interested in long-term rentals, know that the income potential is lower than in Seattle, but property value is much lower as well at $386,490. Your property's income potential is approximately $1,578 across all residential properties, while commercial property makes $21.90 per square foot for office space and $17.91 per square foot for retail space.
An investment property in Tacoma leverages the presence of many young families, as the town is Tacoma, home to 54,000 employees at Joint Base Lewis-McChord alone.
While nowhere near approaching the incredible cost of Seattle, Tacoma is pricier than Spokane, with home values of $474,616. Accordingly, your property's income potential is higher at $1,654 for single-family residences. If you'd like to add to your commercial real estate portfolio, you're best off with retail, which nets $33.23 per square foot. Office space trails at $23.59 per square foot.
Investors often have complex tax returns, which can make filing for conventional mortgages even more of a hassle. Traditional mortgage loans have a long approval process due to more stringent underwriting, and they often require higher down payments.
Unlike traditional loans, DSCR loans evaluate the property's net operating income, known as the debt service coverage ratio, in order to ascertain a borrower's ability to cover their payments. Lenders will calculate DSCR by looking at things like property value and operating expenses in the area to determine a borrower's loan eligibility and maximum loan amount.
Most DSCR lenders look for a ratio of 1.25 or higher to ensure your properties generate enough rental income to cover loan payments easily, a minimum credit score of 620, and proof of income stability— though they won't look at your borrower's personal income or debt-to-income ratio.
DSCR loans require a down payment and closing costs, so expect to have similar cash reserves as traditional loans. Also like traditional loans, you can choose between fixed-rate and adjustable rate loans.
Washington's annual Economic Impacts of Visitors in Washington State report was released in May 2023. Washington has seen continued recovery since the pandemic, reaching 93% of 2019's visitor levels. Inflation led to a boost in spending levels, just shy of pre-pandemic benchmarks.
These numbers should continue to grow as travel increases across the US and Washington's many travel attractions. With inflation, tourism industries do generate income sufficient to maintain a positive debt-service coverage ratio.
When it comes to residential rental properties in Washington, demand is high. Homeownership is 88% more expensive than renting, according to Redfin analysis. Vacancy rates in Seattle alone are down to 3.3%, so demand (and investment potential) is growing.
Washington DSCR loans work for short-term and long-term rental properties, including commercial properties like restaurants, so borrowers have plenty of options to make the most of their investment.
Check out some of Visio Lending's recently closed DSCR loans in the state of Washington.
Seattle, WA
Spokane, WA
Tacoma, WA
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Visio Lending is the nation's premier lender for buy and hold investors offering, long-term loans for SFR rental properties, including vacation rentals.