Cash flow properties within 45 mins to Boston for house-hack

19 Replies

Hi all, my name is Grace and I just joined BiggerPockets. Want to say hi to everyone and get some insights on the Boston real estate market. I recently moved from Houston for a job. I plan to house-hack in an up-and-coming but safe area, on a duplex that is within 45-minute train ride to Boston, and spend up to $400K. It seems like the only areas that would work are Lynn, Lowell, Stoughton, Quincy, Revere, Randolph, and Weymouth. Are these good areas? Also, is it easy to change the zoning? I saw a property in Braintree that is zoned to a single family, but set up as a side-by-side duplex. Do I need to change the zoning before legally leasing the 2 units out when I move onto the next house-hack?

Welcome to BP!

For a $400k budget you'd be looking Lowell, Stoughton, Randoph, and Weymouth. These are all secondary cities outside of Boston with commuter rail stops into the city. 

You will be priced out of Revere and Quincy as an average 2 fam there is closer to 650-700 average condition. 

You need to legalize your property to a legal two or multi use status with the city in accordance to zoning law before renting it out to other individuals. You can, of course, rent out your single family by the room as you're occupying in it but if you're not, it is considered a boarding house and you need a license to operate it as such. If for some reason the authorities catch you renting out the units illegally you will have to evict the tenants, pay fines through the city, and worse case scenario, if anything urgent actually did happen inside your home with your illegal tenants, your insurance will be null and void of all liability. 

With that being said, there are plenty of options for rentals and multi family units, it's just important to respect the zoning codes and the safety of the tenants in your home. 

Welcome @Grace Yuen and congrats on your decision to househack. Househacking in my opinion is the best way to get started in real estate. The greater Boston area is a difficult place to find a duplex that is going to cashflow however you should be able to find many duplexs that will allow you to live much cheaper than renting while building equity. With a budget of about $400k I think your goal of 45 mins from Boston is achievable especially in cities like Lowell which is where we do a lot of business. You could also probably find something decent in Lawrence, Haverhill, Worcester, Brockton, or Taunton all of which would have train stations and bus lines that would get you into Boston.

My guess is that house in Braintree was a condex. Which means someone took a multi-family, condoized it, and then are selling off 1 of the units as a condo or single family. If you send me the address I can look into it but very rarely will we find true duplex's that are zoned incorrectly. If you said a Single Family with an illegal inlaw then yeah we see those all the time and the zoning on them is tough. If you find a property where the zoning comes into question just call the town and ask them. I talk to building and zoning departments all over the state and they are normally very knowledgeable and can answer most questions right over the phone. 

Welcome and best of luck!

Jon

Thanks you all for your comments. I agree house-hacking is a good way to build equity. To Jon's point, I struggle to find duplexes, or anything, where I can live for free. Am I looking in the right places? Lynn,  Lowell, Weymouth, Randolph, or Stoughton seem do far from the city. Which of these towns have better supply and quality of tenants?  

@Grace Yuen I’m a Stoughton resident. If you’re looking to house hack and live here for free, I don’t think you’ll find numbers that will work. Brockton IMO would be the most likely area that you could meet that criteria, if not darn near close. I don’t know how familiar you are with area, but Brockton isn’t the nicest community probably class C rating. Nothing wrong with that of course, but most people will raise their nose at it. I think it’s a great area that will always have a high volume of renters.  

Hi @Grace Yuen what we find is it’s very difficult to find a duplex in MA that will allow you to live for free and cashflow when you move out. However if you move up to a 3 unit you’ll then be able to find properties where the numbers start to work. At 4 units you start to see some significant cashflow depending on the area.


I hope that helps. 

@Grace Yuen

Hi Grace and welcome to BP! You say your budget is $400k. How much are you planning to put down on the property? There may be options where you can put a smaller % down and get yourself into a 3 or 4 family that will allow you to live for free / cash flow upon move out.

Eric

Thank you all for your insights. They are very helpful. I plan to put down no more than 80k (20% down) so I don't have to pay PMI. But I am open to increasing the price range a bit as long as the property cash flows, can attract good tenants, and within commutable distance to Boston. What would be the price range, number of units, and the closest towns that would make the numbers work? I looked at a lot of towns along the T stops, but I struggle to find properties that would work.

The reason I am going with a duplex is that this will be my first house hack, so I am a bit worried about managing tenants and going over my head financially. So I plan to keep my investment small, and use this opportunity to learn real estate and build equity as quickly as possible. And I need a place to stay anyways. On the other hand, I don't want to buy something that doesn't cash flow when I move out. Does this make sense?


Hi @Grace Yuen ,

You've gotten great advise. Don't forget, if you buy a 2-family and wish to house hack, you don't just need to think that Unit 1 is for tenants and Unit 2 is for you.

Depending on your living situation, you can rent out your owner-occupied unit by the room (roommates paying rent), or have short term rentals.

Let's say you are looking at a 2-family, each having 3 bedrooms with existing rents of $2,500.

Unit 1 can be rented for $2,500

You can occupy Unit 2 and you can rent out 2 rooms for possibly close to $2,500 total. A tenant might be thrilled to rent a room for $1,100 a month if there are no studios or 1 bedrooms in the area for under $1,500 a month.

I personally believe this strategy is a good one for people just starting out in a hot market like Boston.

If you want to do even better, in my scenario, you can rent Unit 1 by the room. You need to make sure that you match up potential roommates well so that you aren't having to deal with roommate issues, but you can maximize rent by renting by the room.


** Of course adjust my scenario rents depending on your rents






That's a good idea! I haven't thought about renting out each room separately. How much additional work is needed to rent out each room separately vs. renting out a unit? Once I move out though, I can only rent out by the units, right? But then the property would not cash flow anymore. What would be the appropriate exit strategy for the property? 

You can't really "change" zoning, but you can get variances etc. Lots of older multi's are grandfathered into single family zoning areas. Couldn't build them today, but they are perfectly legal to own/operate.

@Grace Yuen we see the rent by the room play work well in Lowell in the areas surrounding UMASS.

For example if you buy a 6 bedroom duplex (3beds in each unit) you can rent a 3 bed unit for $1900 or you can rent it by the room to students for about $600 per room. So while you’re living there you can collect $1900 for unit 1 and another $1200 for the 2 bedrooms in unit 2 that you’re not using. Then when you move out you can rent both units for the full $1900. 

As long as you’re renting to less than 4 unrelated individuals there is no need to get zoning or building involved. If you rent to 4 unrelated individuals then you’re supposed to register as a rooming house with the city of Lowell and conform to those building code requirements. Zoning may also come into question under that scenario. 

Originally posted by @Grace Yuen :

Thank you all for your insights. They are very helpful. I plan to put down no more than 80k (20% down) so I don't have to pay PMI. But I am open to increasing the price range a bit as long as the property cash flows, can attract good tenants, and within commutable distance to Boston. What would be the price range, number of units, and the closest towns that would make the numbers work? I looked at a lot of towns along the T stops, but I struggle to find properties that would work.

The reason I am going with a duplex is that this will be my first house hack, so I am a bit worried about managing tenants and going over my head financially. So I plan to keep my investment small, and use this opportunity to learn real estate and build equity as quickly as possible. And I need a place to stay anyways. On the other hand, I don't want to buy something that doesn't cash flow when I move out. Does this make sense?

@Grace Yuen

You don't want to do something you are uncomfortable with but, if you are open to it, I would suggest looking for something a little bigger (3 or 4 units) even though you have to pay PMI.

I suggest this is because using a low money down product to buy a larger first property will allow you to scale your business much much faster than putting 20% down on a smaller property.

... But putting less down increases your mortgage payment, and on top of that you have PMI.

True, but triplexes pretty much always cash flow better than duplexes, all things being equal. This is because you can spread maintenance and some capex costs across more units, and the per unit cost for a triplex is generally lower than the per unit cost for a duplex.

So, even though you have a much larger mortgage payment and PMI, you actually end up with similar cash flow. Your percentage return is wayyyy better because you've invested less. On top of that, once you have 20% equity in the property you can refinance and rid yourself of the PMI, making your cash flow even better.

Lastly and most importantly, you've kept a ton of cash on the sideline that you can use for your next deal or for renovation/rehab to force appreciation in your current deal.

For a $400k duplex at 20% down, your cash investment will be roughly $87k after closing costs.

A comparable triplex would cost you around $550k. At 3.5% down, your cash investment will be roughly $30k after closing costs.

So if you buy the triplex, you will have 1 more unit and $57k left over for your next investment.



Scenario 1:

You put 20% down on a duplex that costs $400k, and get a 30 year fixed mortgage at 3.75%.

Down payment: $80k

Closing costs: $7k

Total cash investment: $87k

You have a loan for $320k. Your payment and expenses are:


Mortgage: $1,480

PMI: $0

Taxes: $330

Insurance: $120

Vacancy, Repairs, Capex, Management: $1,100 (flat $500 + $300 per unit)

Total: $3,030

Income:

Rent: $3,800 ($1,900 per unit)

Total Income: $3,800

Monthly Cash Flow:

$770

Annualized Cash-on-Cash return:

11%

Leftover cash:

$0


Scenario 2:

You put 3.5% down on a triplex that costs $550k.

Down payment: $19k

Closing costs: $11k

Total cash investment: $30k

You have a loan for $531k. Your payment and expenses are:


Mortgage: $2,460

PMI: $375

Taxes: $460

Insurance: $160

Vacancy, Repairs, Capex, Management: $1,400 (flat $500 + $300 per unit)

Total Expenses: $4,855

Income:

Rent: $5,700 ($1,900 per unit)

Total Income: $5,700

Monthly Cash Flow:

$845

Annualized Cash-on-Cash return:

34%

Leftover cash:

$57,000



 

Thanks, Eric. This is gold!! Now that I see the numbers, triplex looks better, as long as the units are rented out. I guess the key is to find a property/town with a good supply of tenants to minimize vacancy and capex, right? And I don't have to worry about splitting utilities with tenants with triplex.

@Grace Yuen

Yes, you definitely want to choose an area where rental demand is high! Really what you want look for is the intersection of lower property values and higher rents. Hard to find, but you will do the best you can.

So capex is for things like a new roof, siding, electrical. Big ticket items.

I’m saying that these items generally cost the same whether you own a 3 or 4 family or a duplex.

So if your rent roll is 5700 with a 3 family and you allocate 300 per month to capex, this cost is 5% of your income.

For a 2 family, your rent is 3800 and let’s say you allocate 250 to capex. That’s 6.5% of your income.

Same goes for some maintenance items like snow removal, landscaping, common area maintenance, etc.

Hi Grace,

Look it the Worcester area, it is closer to an hour with traffic but I house hacked there when I was living in Worcester and working in Boston. There is a ton of development along the mass pike going west and the state is pouring money into Worcester. Most of the buildings are triplexes, allowing for a bigger opportunity if you can find a good deal. I purchased in March of 2016 for 213k, spent 28k over the course of a year house hacking between the three units, and once rented it out was cash flowing $950 after reserves. I sold in early January for 374k.

In the Worcester market, there are plenty of deals to be found as there has been a huge uptick in rents as well as demand. Finding a triplex with good bones and below market rent is not difficult. It gets more expensive the closer you get to Boston, but I would start there. Other areas to look at would include Lowell and Leominster, but I do not think the upside for appreciation is as great in those areas.