I made an offer that was accepted on 407 Cambridge in Worcester. It is new construction. I got it for 250k. I have a partner who is investing with me. We are doing 25% down total on a 15 year mortgage. We both live out of state. This is my first property. I was told I can rent it out for $2000 by my realtor. He showed me other units that were completed in this complex that were rented out for $1950 and $2000. A 15 year mortgage with HOA & property taxes gets me to approximately $1780 monthly expense. I live in NJ and was not finding anything like this near me. Would greatly appreciate feedback!
A quick look online I didn't find many new developments at 2000, some were 1700-1800. It appears avg rent in the area falls between 1200-1350. So you may have people expecting lower rents as apposed to higher end units which could in turn increase your vacancy rates as you wait for those tenants to find you that are willing to pay the rent price. It's good that there other units renting out for that price in the area because it means you may be able to match our go higher. I would just check and follow up how long it took them to rent because you'd be paying expenses out of pocket while you wait.
No, it is not, @Amit Aggarwal . This will not cash flow. You're not accounting for insurance, vacancy, repairs and CapEx (low now, but will grow over time), or management. My guess is that you lose ~$400/month on this deal. You might break even if you go for a 30-year note. Either way, I would never do this deal.
Jaysen- Thank you so much for your response. Insurance is included in the HOA. I did not expect much in repairs and CapEx as it is a new construction property. Can you please clarify why you would not do this deal? I was hoping to break even on a 15 year mortgage. I also plan to self manage the property. Without accounting for vacancy and repairs, I am at $1780 monthly expense on a 15 year. If I can get it rented out at 1900-1950, is it a bad deal? Would greatly appreciate your input as I was scheduled to sign Purchase and Agreement tomorrow.
To just give you insight on my goals-
My goal is to buy an asset that will pay for itself on a 15 year mortgage and 25% down. I am currently 27. A 15 year morgage on a property will mean I own it (well half of it) by 42 years old. I wanted to get a partner to split the risk on my first deal. The notion of shelling out 50-60k on 1 property seems overwhelming to me. I am much more comfortable learning the ropes and doing a deal with only 30k invested. I initially was looking at studio condos in Boston, however my realtor advised that this Worcester property would be a much better investment. I want properties that are low maintence and require little effort. I want to buy, hold, and rent out the properties on 15 year mortgage deals. When the houses are fully paid off, I will decide on selling or keeping for cash flow, which I would not have a mortgage on 15 years from now. I am heavily relying on my realtor on suggestions and he insisted that this was the best bang for my buck. I have not signed purchase and agreement yet.
So rent is around 2,000 a month. You're expenses are $1,780.00
$220.00 at the end of the day. Are you and your partner splitting that then? Or how did you structure the deal to benefit your partner? I'm trying to learn more about using a partner for deals, so would like to hear your feedback.
@Amit Aggarwal I think it might be hard to get that kind of rent in Worcester, MA. It looks beautiful but the train tracks is right behind the property. I’m not too sure if this will provide a positive cash flow. Do you know if that townhouse is mostly rented?
Why not secure a 30 year mortgage and make higher payments? If anything ever happens, such as you can't get the higher rent amount, vacancy...whatever, you're just on the hook for the much lower mortgage payment. You can still pay the home off in 15 years by making the extra payments. (Just make be sure there's no prepayment penalty.)
I am getting the partner in case something ever happens. A $1780 payment split two ways is only $890 per month each. The partner is in the deal for the same reasons I am- to minimize risk on the first investment property as we learn. My realtor has sent me rental comps showing units being rented out at $1900 and $2000. Nothing has gone lower than 1900 in those new townhomes that are finished and rented out.
@Amit Aggarwal , to begin with there are a number of comments in this thread suggesting that $1900-$2k is unrealistic in this market. I don't know a thing about the Worcester market, but please take this very seriously. You really need to do your due diligence. Regarding insurance: yes, the HOA carries insurance, but that's just for the common areas, outside damage, etc. You still have to carry insurance on your individual unit. Your lender will require it. Good news, probably won't be more than $50/month. Talk to a local insurance agent to be sure.
Here are my numbers:
$2000: GSR - giving you the benefit of the doubt
($160): Vacancy - 8%, could be a little lower or higher. Very local
($200): Management - always underwrite for management, even if you plan to self-manage at first.
BTW: self-managing from NJ is a nightmare waiting to happen.
($200): CapEx and Repairs - 10%
($1780): Principle, Interest, HOA, & Taxes
($390) monthly cash flow
I understand your interest in a 15-year pay off. May I suggest getting a 30-year loan and paying it like a 15? The higher rate is negligible and you'll have flexibility should something go sideways.
Hi Amit, agree with Gina that the rent estimate seems high, particularly for that area. Could it be that $2000 includes utilities? That would make it slightly more in line with my expectations, but would mean even less cash flow and your margins seem a bit tight as they are (not sure if you were factoring that into your expenses yet or not). Also would echo the first commenter that you might be being a tad too optimistic about what your expenses might be, even despite the fact that it’s new construction (e.g see the BP article on “the 50% rule”).
Was talking with an investor in the area about a similar deal who made the point that, even if you could get someone to fill the space for $2k, filling vacancies in the future might be a problem. There’s just a lot of supply in Worcester for cheaper currently. For example: the three-family that just sold at 27 Shamrock (3br units) were being rented at $1.4k-$1.7k each. Granted those aren’t brand new units, but it was in the much more sought after Shrewsbury St area of Worcester. Also, if you have a family, you could also probably find a 3br in some of the Worcester suburbs that have much better school districts for ~$2k a month.
Just some thoughts! I’m also looking in Worcester and would love to chat more.
@Jaysen Medhurst thank you so much for your response! I have confirmed that the new units in that complex all have been rented out for a miniumum of $1900 each. Some up to $2100. From people I have spoken with, a realistic is two weeks, maximum to be conservative is 30 days (which is in line with the 8% you put up.) I guess the main thing I am not accounting for is repairs and CAPex. The appliances are new and have warranties. Since it is new construction- I don't see any CAPex in the near future. Am I being naive?
I will definitely have to look into home insurance. You might very well be correct.
@Brian LeBlanc - thank you for your message! I confirmed that the rent estimates are correct. I am going to find out if they include utitltiies. I just asked my realtor. Good point on it being harder to rent in the future. I thought that having a 2 car garage would entice renters as many of the multifamilties don't have garages. This would be especially useful in MA area when it snows. Would love to chat more. Please DM me and we can exchange numbers.
You could potentially get 2000 for that place right now because Worcester is really hot at the moment..for whatever reason..but it's not in the best of neighborhoods. I would be more conservative and say 1800. Personally, I would want more of a margin for cash flow but I am pretty picky about my purchases. This place would make a better house hack or something similar, I think. Are you going to pay for things like snow removal or utilities? If so, that could quickly deplete your profit. What about if you have to evict someone because they aren't actually going to pay that 2000 a month that they said they would. MA is a tough state for evictions and you may need money for legal fees. If you are just looking to break even every month and end up with a paid for property in 15 years, I have to ask...why there? It's not the nicest of areas and unless you have some reason to want to move there eventually, I am not sure I see the point in owning half of a duplex in a giant complex in a not so amazing part of Worcester....but that's just me. Also, while I understand that the property is new so you may not have as much cap ex/repairs upfront, sometimes those big complexes are put up quite quickly without a lot of concern for quality. So, I would always budget SOMETHING for those expenses. You will also need money for paint, carpeting, etc when you turn the apartment over...and that may happen more frequently if you are charging 2000 in that neighborhood. If you are managing from out of state, I am curious why you picked Worcester, and especially that part of Worcester? I don't mean to be negative, but I am just trying to help you consider all possibilities.
Yes, @Amit Aggarwal , you're being naive. Maybe nothing breaks or needs fixing for several years...maybe. Eventually, though they will and if you're not putting money away each month, that comes out of your pocket and wipes out months, or years, of cash flow.
The other thing to consider is the HOA. That could mean:
- Your fees could go up at anytime.
- You could get hit with a special assessment.
- They could implement a rule about how many rentals can be in the complex / how long they can be rentals. What then?
You've had 8 responses to this post and not one has said, "Yeah, this is a good idea." I completely understand the desire to get a deal under your belt, but this ain't it. Move on, brother.
Amit, so to summarize NOBODY thinks this is a good investment
@Amit Aggarwal i know the feeling of wanting to get a deal especially a nice new shiny one like this. I am sure the place is awesome. the numbers do not work. receiving 2000 in rent on a 250k purchase is terrible. that is below the 1% rule. you will not make anything on that buy. if nothing ever went wrong, ever, you may be splitting 200 in cash flow. would you spend 25% of 250k to possibly have the opportunity to make 100 per month.
Also, I have been helping a lot of investors from NYC and NJ find deals. I am investing in CT and there are some deals to be had. not trying to sell you though. best of luck!
@Jaysen Medhurst thank you so much for your advice. I went ahead and pulled out of the deal. Very happy I downloaded this app and was able to connect with you. Will be reading everything on this app to learn as much as possible before setting up another move.
YW, @Amit Aggarwal . Feel free to reach out with any questions.
Have you considered buying a multi family (3 or 4 units) and living in one of the units? You can get an FHA loan for 3.5% down if you live in one of the units. You will have additional costs for PMI (mortgage insurance) that you will need to factor into your numbers, however. I'd be happy to explain PMI in more detail if you would like.
This investment strategy is incredibly powerful. Since the down payment % is so low, you can afford to buy a multi family with 3 or 4 units. Multi family will almost always cash flow better than a single unit, so this is a huge advantage.
After 1 year, you can move out and rent out the unit you were living in. So with this strategy you will have 3 or 4 units after 1 year. With your strategy you would only have 1. All for the same down payment amount. Much better, right?
You also said you are planning to self manage. Management is a skill that takes time and experience to learn. Self managing from a far distance is not a good idea for your first investment, in my opinion. Managing a property that you live in is a great way to learn the ropes.
@Eric Rosiello thank you so much. I definitely agree that a multi family makes much more sense. I appreciate your offer of explaining PMI insurance to me. I will add & DM you!
@Amit Aggarwal Hey Amit, I know those new construction units well. I own a neighboring duplex on Cambridge St. Small world. Lets connect. My $200k duplex rents for $2600 / Mo and the tenants pay all of their own utilities.