Evaluating CAP rate and Rent to Price in greater Boston area

7 Replies

Hello,

Hope 2018 is off to a good start for everyone. I am considering my next rental income property and as I am evaluating supply for CAP rate and rent to price ratios, I have a few questions I wanted to run by MA investors. Thanks in advance for your thoughts.

Background: I am looking to purchase a 2/3/4 unit property that's relative turn key. My primary goal is rental income. Though I wouldn't turn down a long term equity play, that's secondary for this go around. The biggest risk I would like to safeguard against (as much as possible anyway) is tenant eviction etc. as I have a full time job and real estate is just a hobby/supplemental pursuit. I live in Boston so I will most likely get a property manager for this property.

Here are my questions. 

  • 2 or 3 family properties in a town like Fitchburg seem to be around $150k, and the rents advertised in the listings seem to put them at close to "2% properties" i.e., monthly gross rental flows are close to 2% of the purchase price. CAP rate and cash on cash rate are both correspondingly very high.

    My questions - What are the downsides? Should I expect a lot of tenant turnover in these towns compared to more prosperous/wealthy towns? Should I expect tenants to miss rent payments or be regularly late? Would hiring a property manager lower any of these risks or not really? 
  • 2 or 3 family properties in Worcester seem to be about twice that - at around $275-$300k. Rental incomes seem to be the same (~$3k a month gross) which puts the rent to price much lower. 

    My questions - Would the lower rent to price ratio be offset by any obvious upsides such as better tenant pool, less likelihood of tenants defaulting, lower turnover, etc.? Or is that not realistic?

Thanks a lot guys, appreciate the input.

@Ashwin Narasimhan

Fitchburg does have lower entry prices... You are smart by looking into the tenant class you will be renting to. It also depends if they are long term tenants or on a lease.... If they are a TAW, you have more flexibility. 

You could look into a property manager. If you are in Boston it is not a terrible drive, and also you may be paying around 8-12%. 

Worcester has very good areas, as well as very not so good areas..... It is very street by street 

Ashwin,

I have some useful insight to your thoughts here. When spring hit in 2017 every lender I spoke to as a mortgage broker would mention that I was in the highest purchase market in the United States. My wife and I would discuss data for the prospects for turns, and the majority of the prospects were moving because their landlords were selling the property. I was coming across many buyers that were the "ideal tenant", however that's why they could buy. 

 Now lets break into your financial situation, the higher the cost of the property and rent equates to higher the cost of vacancy. So if you do not have a lot of money to acquire the property and or have reserves, you would be good heading to a market that fits your financial parameters. If your looking for an affordable priced, relative turn key investment property in our market. Our market is very competitive, so keep in mind that there are many other folks looking for the same investment as well. Also since you work a full time job and sound fairly busy, I suggest reaching out and teaming up with experienced individuals who might have off market deals and help you out. These folks should be able to guide you away from making an emotional decision and also be able to find something sooner to keep that rental property snowball growing.

I could probably write pages on each of your questions but I tried to keep it as simplified and specific as possible. If you have further questions please send me a message. I'll be happy to talk numbers and analyze some properties with you from the investor standpoint and how lenders look at them. If you have questions that are better fit for my wife I'll pass to her, her expertise being 10+ years of property management in MA and is a licensed real estate agent focused on multifamily investments.

Always with my best,

Christopher Richardson

Hi Ashwin,

Wanted to reach out and suggest that regardless of the market, you make sure you have a pretty detailed knowledge of the individual neighborhood you're investing in.  Fitchburg has very attractive prices, and rents may "look" promising, but Fitchburg definitely has quite a few undesireable areas and the tenant class could be quite challenging.  I've never owned anything in Fitchburg and I'm sure there are some great success stories, but the advice I've received is to steer clear.  I think you'd be wise to get hooked up with a good property manager who actively manages properties in Fitchburg if that's a market you're considering.

Happy hunting and feel free to reach out if there's anything I can help with.

Best,

David

I would absolutely look *hard* into why the prices and returns there look so good on paper. Boston in general isn't known to cash flow, and I know of very few decent locations or properties these days that hit the 2% rule [in any market], so if something anywhere near Boston is meeting that 2% rule, I'd immediately be leery. If it were a fixer-upper...mayyyybe (but even then...)...but especially not turnkey.

@Ashwin Narasimhan First thing real quick, I wouldn't overly concern yourself with CAP rates on residential properties. I'm not sure why that seems to be such a big thing right now.

At the end of the day you have to figure out your risk tolerance. Fitchburg is rough..I grew up about 25 mins from there so I know it decently well. You will deal with low income tenants. The city does, however, at least have a college so maybe you look into targeting students. My uncle owns a few properties within close proximity to the college and he does okay.

If you are just looking for a passive turnkey investment, personally, I would look at Worcester. There seems to be some development planned and you will just overall deal with a better tenant class. There is also a few good colleges in the area.

Look for solid neighborhoods, with high renter demand and you won't have to worry all that much about vacancy, especially in our markets. And don't just settle for an average property manager if you go that route.

Hope this helps!

Ashwin,

I am a local investor in the Fitchburg area.  I would be wary of the rental amounts put into the listings.  At some point in time,  I noticed in the last few years, real estate agents started putting in projected rents into vacant units instead of putting "0" which would signify a vacant unit.  In almost every case these rents are greatly inflated to make the property more attractive.  Check Craigslist or any other site (zillow) to see what landlords a in the geographical area are "asking" for rent.  If you see an expensive outlier consider them as such.  Just like listing prices for houses, there is no law against over pricing rent for an apartment. Drive through this city as things can change quickly depending on what street you are on.  

Be Great!

Dan

Thank you all for your thoughts so far. Really appreciate everyone's input. I will be wary of rents posted in listings. What's the general point of view on tenancy at will versus leases, in an area like Worcester? I have leases in my current property in Medford as I was advised that it gives the landlord a bit more protection in case of problem tenants. Is that true or did I get incorrect advice?

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