Boston refuses to cash flow

58 Replies

Hey, everybody,

I'm not quite sure if there are problems with my calcs, or if everything I find on market are simply bad deals. Please let me know if I'm doing anything wrong here? Here's the details...

I plan to use FHA loan on a multi. Initially, I will house hack, but I'm running numbers to see what it will do once I leave and it becomes solely an income property. I'm analyzing North shore homes, 2 & 3 families, on the outskirts of the city. I've worked out some kinks and THINK I am as accurate as I can get.

I'm using list prices from MLS and estimating rents from craigslist. I'm including closing costs into the mortgage ($7,500 generically, is there a good percentage to use?). 5% (each) for vacancies, repairs, and cap-ex. 10% for management. Local utilities have been estimated, and of course, PITI and PMI using a mortgage calculator.

With 2 families -($500k-$525k range)
What I'm finding is that they refuse to cash flow with 5% down. At 20% down they will cash flow but the COC ROI is under 4%, and also falls shy of the 1% rule. (I've also included a 1% "clean-up" cost for minor repairs/paint as a one-time cash expense, into the COC ROI)

With 3 families -($600k range)
At 5% down payment, they seem to cash flow nicely, over $200/door, although the 50% rule is pretty negative and I just meet the 1% rule. In this scenario, the COC ROI is suspiciously inflated at over 20%. (Also included the 1% clean-up fee).

3 fam- ($650k range)
The numbers are much more realistic. Cashflow just over $100/door. COC ROI 11%, but 50% rule is WAY negative (About $1k) and falls under 1% rule.

I'm aware the 20% vs. 5% down payment makes a world of difference, plus saving the PMI. I can't afford 20% on a 3 family, and the 20% on 2-family scenario just seems off to me at 4% COC ROI.

So...Is anything glaringly off with my numbers, or is this expected for the current market?

Thanks for reading!


 


Originally posted by @Rob Ferdinand :

Hey, everybody,

I'm not quite sure if there are problems with my calcs, or if everything I find on market are simply bad deals. Please let me know if I'm doing anything wrong here? Here's the details...

I plan to use FHA loan on a multi. Initially, I will house hack, but I'm running numbers to see what it will do once I leave and it becomes solely an income property. I'm analyzing North shore homes, 2 & 3 families, on the outskirts of the city. I've worked out some kinks and THINK I am as accurate as I can get.

I'm using list prices from MLS and estimating rents from craigslist. I'm including closing costs into the mortgage ($7,500 generically, is there a good percentage to use?). 5% (each) for vacancies, repairs, and cap-ex. 10% for management. Local utilities have been estimated, and of course, PITI and PMI using a mortgage calculator.

With 2 families -($500k-$525k range)
What I'm finding is that they refuse to cash flow with 5% down. At 20% down they will cash flow but the COC ROI is under 4%, and also falls shy of the 1% rule. (I've also included a 1% "clean-up" cost for minor repairs/paint as a one-time cash expense, into the COC ROI)

With 3 families -($600k range)
At 5% down payment, they seem to cash flow nicely, over $200/door, although the 50% rule is pretty negative and I just meet the 1% rule. In this scenario, the COC ROI is suspiciously inflated at over 20%. (Also included the 1% clean-up fee).

3 fam- ($650k range)
The numbers are much more realistic. Cashflow just over $100/door. COC ROI 11%, but 50% rule is WAY negative (About $1k) and falls under 1% rule.

I'm aware the 20% vs. 5% down payment makes a world of difference, plus saving the PMI. I can't afford 20% on a 3 family, and the 20% on 2-family scenario just seems off to me at 4% COC ROI.

So...Is anything glaringly off with my numbers, or is this expected for the current market?

Thanks for reading!


 

 The way you pose your numbers are very hard to see the calculations and give you realistic feedback. 

There are markets that don't cash flow at the current prices vs market rent. 

So if 1% and 50% rule aren't covered you could cashflow but the property is underperforming or is an unhealthy investment. 

A low ROI (4%) is based on your initial investment divided by cashflow. I bet if you lower the price or calculate a higher rent in the calculations your ROI will go up.

Thanks for the reply. And yes, lower liquid investment and higher rent yields will increase the ROI. I'm using real MLS list prices and comparable market rents, so these are "real world" figures I'm modeling. It's possible my local market just isn't ripe for rental properties within my budget. If that's not the case, something must be wrong with my numbers and that's what I'd like to figure out.

Originally posted by @David Shapira :

Have you checked out places like Everett, Revere, Lynn? I believe those areas have decent multi stock. 

Yes, Revere and Saugus are actually my top picks. Since I'd be house hacking for at least the first 2 years I don't want to move too far away from the city. I've been searching (Malden, Medford, Everett, Winthrop, Chelsea, Revere, Lynn, Swampscott, Stoneham, Saugus, Lynnfield, Danvers, Peabody) but I'm not finding a ton of stock, especially within my price range. Lynn seems to have the most listings, but most of them are in need of major rehabs and I'm just not positioned for that at the moment.


I've been reading a lot of articles trying to gauge what the experts predict will happen to the housing market as a result of the pandemic. I've concluded that nobody knows and it would be foolish to try to hold out for a dip in prices. However, I do believe that in the near future (Next year?) there will be a spike in foreclosures, even if the overall market isn't noticeably tilted. I think a better strategy would be to get my first deal out of the way so I can then strategize to snatch a forclosure(s). For me, that may even mean seeking investors and trying my luck at wholesaling to build some capital...BUT, first things first.

 

@Rob Ferdinand - if you're living in it, 40-50% expense ratio is too high. Out of of $48,000/year of gross income I maybe spend $2000 on repairs and capex combined. So 5% vs 10%. I also don't spend anything on a property manager and everyone pays on time with zelle with less than 2 hours a month of checking in with people, so that's 10% off. In high high demand areas you'll see very low vacancy akin to 2 weeks every 2 years, but that depends on how good you are at marketing and maintenance. Ideally pass through all water and sewage with prorata or rubs and you only have left insurance, property taxes, and minor common area maintenance like landscaping.

- My favorite strategy to build wealth is to buy a huge house 5+ bedrooms 2400+ sf and have professional roommates- the busier/ more workaholic, the better- you barely see these ones. People spend money for bedrooms, especially near jobs. The extra space wasted on extra living rooms and kitchens doesn’t really pay off. Some places have rules about rooming houses and how many unrelated people can live together. Often you have exceptions for owner occupied housing. Example numbers - $4000/mo rent on a $400k asset in Washington dc suburbs close to many office buildings. Mortgage is 2400ish. Cash flow is approx $1000/mo because highly occupied (98%+) and BTW you live for FREE. Neighbors rent their homes for 2400ish. There arent any duplexes to buy and professionals grouping up is very common. STRs only recently got a bad rap because of excessive use of police resources (kicking out smokers, parties, etc.) and now require fees and a license.

- Back to your 2-3-4 unit dilemma. Investigate appreciation in various areas you are considering. Appreciation is highest in good school districts near high paying jobs where additional housing isn't being built due to restrictive zoning. Where do you or would you rent and can you find somewhere nearby there? The purpose of the house hack is to live cheaper than you would just renting and you get a cheap loan and appreciation.

- You could try to buy a foreclosure fixer upper with a Fannie home style or fha 203k rehab loan where they build the construction $$ into the cost. Unknown if they will give you income credit for the other units though so you can buy a bigger asset. Often with normal fha you will pay top of market prices or you won't get your offer accepted.

- In addition to being on a real estate agent's auto-email list for multifamily, consider sending direct mail or driving for dollars to try to buy something off market from a motivated seller. You can still get normal loans on off market properties.

- Lastly — good luck and go do it!

Prices you have are more north shore or further south shore and you will not likely land in the Boston metro area in that range. 

Boston Metro

2 fams: 650-800

3 fams: 725-900

4 fams: 800-$1mm+

Secondary Boston market (10/15 miles out)

2 fams: 500-650

3 fams: 625-750

4 fams: 700-850

Two families rarely cash flow because you're occupying most of it and is not usually an investment product as it's often used for long term owner occupied properties. You can mitigate that by renting out each bedroom and maximizing returns that way but certainly sacrificing your lifestyle. It makes much more sense with a 3 fam if you're able to swing it bc of the economies of sale with larger amounts of units and increased bedrooms. 

From your math it looks like you have a good range of where things need to fall except for PM costs - you should budget around 7% and it would unlikely hit that with smaller # of units such as these, I've seen PMs charge flat fees. 

Lots of great feedback!

@Natalie Schanne - Really informative, thanks for the detailed reply!! You're totally right about the numbers changing dramatically if I live there! I've played with that math a little. I would only plan to stay a year or 2, and I want to make sure it will produce once I leave. Roommates are out of the question for me and my 8 year old boy :). 

What I HAVEN'T been considering much is appreciation! I've viewed it as a "freebie" or "future emergency fund" :). I'm more concerned with cash flow within the first year. Just for kicks, I'm going to play around and project appreciation into some models that forecast 5-7 years out and see what that does. First, I'll definitely have to research how to better analyze overall ROI when it starts to get denser, including appreciation etc.

LASTLY, Off-market properties. I'm guessing all the good off-market bargains are instantly canalized by those with much deeper pockets, and stronger contacts in the biz. Aside from networking with agents, what are some ways to stumble into the off-market beauties?

Thanks again!

Originally posted by @Lien Vuong :

Prices you have are more north shore or further south shore and you will not likely land in the Boston metro area in that range. 

Thanks for the tip on PM. I tend to be more conservative, but with such small margins here in the N. Shore, a couple of overly conservative metrics will skunk the whole analysis! I'm starting to learn there is no "napkin math" in this arena. Which is why I was posting at 2 am about water & sewer costs! Thanks again for that one HAHA. I'm sure you'll run across more posts from me as I fall deeper into the rabbit hole.

Thanks

RF

 

@Rob Ferdinand There are still deals to be had. I have a duplex in Everett that I currently househack and am about to househack a 3 family in Everett as well (closing Friday).

With a roommate in my 2 bedroom of my duplex I clear the mortgage $750/month. After I move out the units rent is going up 400/month because it is section 8 and was able to talk to the housing authority about this increase. The property will cash flow around $1100/month once I move out.

The 3 family will cash flow around $600 when I move out. Once I am able to refinance and rid of a majority of PMI (this is what I did with the duplex) It would go up a lot higher in terms of cash flow.

My duplex was purchased March 2019 and the triplex May 2020. Both of these were done at 3.5% down

@Avery Heilbron Congrats on the new deal! You clock the duplex at $1,100 once you move out. Is that rental income minus mortgage, or does it reflect general expenses such as vacancies, repairs, capex, and management?

Do you feel that the casino is affecting Everett's prices at all? good or bad?

Originally posted by @Philip Ganz :

@David Shapira @Lien Vuong @Rob Ferdinand A great House Hack is the FHA 203k (Renovation loan) because you can qualify off the projected rent versus the current rent.

Self Sufficiency is a deal killer - FHA 203k helps!

Hey Phillip, I've read a little about 203k in the past, but not much. My understanding is that whatever amount is allocated for repairs is utilized "as you go", as it's distributed to contractors etc. My question is, how are mortgage payments typically structured throughout the rehab process? 


For instance, If the repair portion of the loan is up to $100k. The rehab has a downtime of 4 months to complete. The repair costs have been about equally divided at $25k/month, what would the mortgage payments look like across those 4 months?

 

If you're in an area that students/young professionals are renting you might be able to furnish the common areas nicely and rent out bedrooms individually. I have a few friends that do that near Seattle with singles and duplexes. They cash flow really well in an area that otherwise wouldn't cash flow. The more bedrooms the better.

@Avery Heilbron $2,800 for one of the units... how many beds? I've been focusing on 2-3 bd units. I feel 4bd+ would be more difficult to fill than 2-3, but maybe I'm wrong?

My logic is 1 bds may have high turnover rate as singles may leave to move in with a spouse, or couples need to upsize when growing a family.

Anyone have thoughts on what size units are the most stable, in terms if turnover and vacancies?

@Rob Ferdinand not surprised. Boston’s a market that wins on appreciation, less so cash flow on retail buys < 20% down.

The solution as others have said is either develop a system for finding deals off market, run a hostel of roomies, or buy your retail house cash like many international buyers have done in the last 5-10 years. For the latter, be sure up have another $50k down for the inevitable bidding war that will result on an property priced even remotely well.

The better question is what the future of large urban areas will hold when WFH is *finally* showing itself as a thing worth pursuing. No, the exodus is not coming, but I would absolutely imagine less absurd pricing as we've seen in the market over the last 10+ years. You can only 2x your equity without doing anything so many years in a row before the market self corrects.

For the rest of us, renting in the city and investing elsewhere is not such a terrible thing either.

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