A client considering the purchase of rental housing in Federal Way came in with a self-calculated yield table, but it was missing property taxes and insurance fees. Since they only calculated based on rent, the yield appeared higher than it actually was.

The median home price in Federal Way is approximately $615,475 as of March 2026 (Houzeo). The monthly rent is around the median of $1,835 (Zumper, August 2026). Dividing the annual rental income of $20,020 by the purchase price gives a total yield of 3.58%.

Federal Way is part of King County. The effective property tax rate in this county is about 0.85%, and the median annual tax bill is $6,745 (propertytaxalmanac.com). To determine net operating income, landlord insurance, maintenance costs, management fees, and vacancy losses must also be added.

When recalculated with all these factors using the 50% rule, the net operating income is $11,010 annually, and the cap rate drops to 1.79%. This is about half of the initially calculated 3.58%. The calculation excluding property taxes and insurance showed a yield nearly double the actual figure.

What about cases with a mortgage? Assuming a 25% down payment and a 30-year mortgage at an annual rate of around 6.75%, the annual principal and interest payments would significantly exceed the net operating income. In this case, cash-on-cash returns could drop to around -14%. If the loan amount was determined without accounting for property taxes and insurance, the gap between actual cash flow and expectations would have been even larger.

Federal Way has lower price burdens compared to Seattle while still being a commutable area, resulting in steady rental demand. There are school districts with a concentration of Korean families. However, school district boundaries change frequently, so it's advisable to check the assigned school for the specific address before purchasing.

Using the 1% rule, the gap becomes more apparent. 1% of the purchase price is $6,155 per month, but the actual rent is $1,835, which is about 0.30% of the purchase price. Even if property taxes and insurance were excluded from the initial calculation, the figures are not realistic for a pure cash flow investment.

In recent years, there have been frequent discussions in the industry about rising homeowners insurance rates across Washington State. The exact rate of increase varies by insurance company and property condition, so it's safer to obtain estimates in advance and factor them into calculations.

Federal Way is located between Seattle and Tacoma, making it reasonably accessible for commuting in either direction. While the rental demand is diverse, there can be significant variations between listings, so it's advisable to check actual rental cases of similar properties nearby.

The table the client initially brought only listed the purchase price, rent, and loan principal and interest. Since property taxes and insurance were omitted, the monthly surplus appeared much larger than it actually was. It was only after filling in each item that they realized the cash flow was different from their initial expectations.

Rather than vaguely estimating vacancy losses at around 5%, the actual number varies depending on how quickly tenants are found. There are cases where thorough screening leads to longer vacancy periods, and conversely, hasty contracts can lead to problems, so this aspect can vary greatly depending on management style.

Just because the cap rate comes out low after accounting for property taxes and insurance does not mean the investment value in this area is lacking. However, it's essential to include all items from the start to reduce the chances of being surprised later by the gap between actual cash flow and expectations.

Developing a habit of checking the most recent property tax bills for each listing allows for more accurate calculations than the county average. This information is usually not difficult to obtain if requested from agents or sellers.

Calculations that omit property taxes and insurance may seem fine on the surface but can create significant discrepancies in actual investment decisions. It's advisable to calculate total yield, cap rate, and cash-on-cash separately, and also consider potential appreciation for a more realistic approach. This article does not constitute investment or legal advice, and consulting a professional before making contracts is recommended.