Contractor · Boston, MA · Member since 2018 · 38 posts · 16 votes
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?
Real Estate Agent · Princeton, NJ · Member since 2016 · 1k+ posts · 1k+ votes
6y
@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.
In my opinion house hacks follow different rules. Now I know that I was very lucky to buy something in Somerville in 2013 but I think what has worked for us can still work now.
I’d say first off throw out your 50% or 1% rules or anything like that for now. All you should care about is “how close can I get to living here for free”.
Being able to put only 5% down, even if you don’t end up living for free if you come close that’s a huge win! That will change your financial life.
The Boston area goes up every year. Maybe not this year with Covid but we have consistently raised rents every year by 2% with zero push back. I also invest out of state and that is not the case. That section 8 house in Kansas City that rents for $950 will still rent for $950 5 years later. Yes you can’t count on appreciation but you also kinda can? I’d say that even if there is a non appreciating year the market is too hot for it not to continue. I know a friend who is buying and he said even during Covid it was crazy- just 10 offers instead of 12 on a property in Boston.
The people who have posted about property management are 100% correct. You should be self managing both because it’s not hard and also you will live there. It’s important to learn how to do this yourself. Unless you are moving out of state you can also still self manage even from the next town over no problem if you move out and buy another. As someone mentioned most tentants pay via Venmo like clockwork and occasionally you have to walk downstairs and fix a garbage disposal...
You don’t need to search for some off market thing but you do need to be willing to go for the house that needs a bit of work. I’m not handy in the least but anyone can learn how to paint or worst case just calling and managing contractors and subs is it’s own skill set. Fix it up slowly over time as you live in it.
The huge thing for us to create cash flow was a long term value add. So since Boston is always going up you should be looking for where you can squeeze an extra unit in, in the future. This means looking for basements that could be finished, larger lots, knowing what the short term rents laws for the city are. I have a friend who Airbnb’s in Salem and he does amazing (pre Covid and hopefully in the future). My point being if there is a way to create another unit in the future in the current layout you just created the best investment ever.
Also I’ve said this before and still believe it... if you have any vacancy at all in the Boston area you are doing something wrong. People need and want to live here and there isn’t a ton of affordable (I mean non brand new A+ condo building) inventory. If you time your leases to start on sept 1st I just don’t see how you have vacancy. We have never had any ever in 7 years. We were even running an Airbnb when Covid hit- everyone cancelled and the next day we had a traveling nurse in there month to month. You want general reserves and maybe you get a bad non paying tenant but we’ve had zero vacancy.
To sum up my suggestions:
-forget the number rules in appreciating high priced markets they don’t apply
-Self manage
-There shouldn’t be vacancy if you manage and time your leases correctly
- Your repairs should be low too if your living there and at least trying to fix it yourself first. A house hack is all about sweat equity. You will get to know Home Depot well.
- Buy something liveable but that needs work. You should be targeting the props on the MLS that have been sitting for a bit because they do need a bit of work. I'm not talking guy Reno just outdated.
- Try and see how you can create another unit, Airbnb a room in your unit, finish a basement? An additional bedroom you come add is gold down the line. Keep this in mind when buying - this is something I lucked into.
- A house hack that covers your living costs is, in my opinion, the single biggest thing you can do for your finances. My wife and I are starting our retirement and decreasing our days at work at age 41 next year all because of a house hack we bought 7 years ago and through all of the additional investing we were able to do because of not paying any mortgage - essentially using all of that money to invest into other real estate. Don’t let the numbers freak you out but also be ready to put the self managing and basic repair work in yourself to make it cash flow.
Contractor · Boston, MA · Member since 2018 · 38 posts · 16 votes
6y
@Adam Sankowski
All valid points. I've been in the construction industry for many years. From swinging a hammer to managing projects of about $500k a month. The reason I insist on including PM costs is because once I acquire rentals all over (hopefully, right?) I know I am not going to be running around fixing leaky sinks when my time should be spent on larger income producing tasks.
When I wrote this original post, what I wasnt calculating was the longer term numbers, what happens between year 2 and 5. Numbers change drastically when considering appreciation and loan paydown, rent increases and a possible refi timeline etc. As well as all the reserves ("expenses") maturing in an account, allowing me at some point to dial them figures down a bit.
Has anyone had any luck buying distressed off market deals in Eastern MA? I've reverse engineered the path to my long term goals and will either be wholesaling properties to investors AND my own flip project(s), or just start with a flip. Pretty sure I'm putting this multi family house hack on ice, for now. Still working it out.
Rental Property Investor · Boston, MA · Member since 2017 · 44 posts · 17 votes
6y
@Rob Ferdinand a year and a half ago or so I started targeting multis in Boston. I’ve bought 4 since then in Dorchester and 3 were off market. If you’re get into wholesaling, let’s connect.
Thanks, Brian. Great info. What is the average annual rent increase you use in these models?
I usually do multiple but simple models using rates between 2% to 5%, so I could see what the return looks like between conservative to aggressive. I think 5% is as high as I would go. 3% is probably a good conservative average. This year is obviously tricky because we could see a little more inventory and coupling with high unemployment. I anticipate we're going to hold steady for the rest of the year at least this is what I'm seeing so far.
I do the same thing for ROI. Even at 3% annual increase, we're looking at around double digit ROI in the long haul. I don't do models for other cities, but I do look at similarities between large international metros with no land to build. Places like NYC, SF, Hong Kong, and London are all in a similar situation and you could see continuous increase without slowing down.
Btw, as much as I like running numbers, I also remind myself not to let myself get into analysis paralysis. The market won't wait for us to redo our models. I think this is why having a RE license helps because it gives us just a little more room to make mistakes.
Hi there, interesting post that I was reading because I always follow Boston trends as grew up there and recently sold a property there.
Just wanted to note that nothing is guaranteed in high cost cities especially year by year. I think Hong Kong has been haemorrhaging value lately and I live in London so can share some numbers I was just running today because we are deciding whether to do more property here or in the US:
This compares our area of London to some super prime areas: N1 / Islington which might be like Cambridge or Somerville and Kensington which is like Beacon Hill or Back Bay or maybe even higher end e.g there are oligarchs and Royalty. Our area is more like JP or Roslindale
I was a bit shocked by my results -- even though I had heard from posh friends who bought in central London around the time of the Brexit referendum that they negotiated discounts of 10% the day after the vote and since then their property fell another 10%.
But I was kind of shocked to see the flat / negative return over 7 years in those 2 posh areas. These are all averages and I know smart people made fortunes in the top areas the whole time but imagine being a flipper and the next year having a drop of 22%. This is why I like to try to diversify cities/countries even if it's not easy on a day to day basis. (Like almost everyone else on BP it seems) I'm looking at southern and mountain areas of the US right now for future opps
Total return of £100
since start 2014
Our area
N1
Kens
+63%
-2.5%
-9%
Year
Our area
N1 (Islington)
Kensington and surrounding
2014
14%
15%
23%
2015
16%
6%
-13%
2016
16%
0%
16%
2017
4%
3%
-14%
2018
3%
1%
10%
2019
-4%
-4%
-1%
2020
3%
-19%
-22%
@Jennifer S, thank you for posting the data! This is super insightful.
I completely agree with you when it comes to no guarantee. For any investment, the more risk we take the more potential return (or losses) we could get. This is definitely one of them. I do feel that RE is a better investment for me personally at the stage of my life and for the current state of the equity market (if you're a believer of Schiller P/E, CAPE).
From my perspective, I do have a few different thoughts on London and HK. Back in 2014 (and years before that), Russian Oligarchs were buying up London left and right and that certainly reflects the sharp increase for 2014. Since then, I am curious if some of that investment are being pulled due to a combination of the political events as well as the sharp decline in oil prices and poor Russian economy as contributing factors to the decline.
Hong Kong is in a similar situation where the city was bought up by Chinese uber rich people. In 2015 the Hong Kong Monetary Authority announced that properties priced at HK$7 million or less required a 40 per cent down payment, up from 30 per cent – another attempt to cool the market. However, what this really did was effectively taken out the locals from buying anything because their wages were not able to afford the high prices then. Right now, I think the market is on a holding pattern from my understanding. People are not selling as the owners don't have a need to sell.
In both cities, they had a large influx of "foreign" capital and then hit massive political turmoil. Although we certainly have our shares of outside investors in Boston, I do feel that there were a few elements that are supporting this market in the foreseeable future.
Top ranked universities - There are 7 top 50 US News ranked schools within 128. These are all expensive private schools. Not only this provides a healthy based of workers, there will always be a good number of incoming students as well as graduates feeding into the rental market. There are also many wealthy parents buying condos instead of paying for Room and Board because they'd rather take the risk for the potential gain especially they won't need to hire a property manager while their children are living in these units.
Diverse industries with many high paying jobs - In addition to higher education, we have high tech, biotech/pharma, healthcare, finance, consulting, and legal services. Many of them, such as labs and healthcare will continue to require employees to physically commute into the office. We're certainly seeing many local people with a lot of buying power.
Complex local zoning and building regulations - there simply no land to build or convert anything into more units. We will continue to have an inventory problems in the foreseeable future.
I guess I'm conscious with the risk but bullish on the longer term outlook. The biggest concerns I have are the longer term impact from COVID (if it lingers and if we had to deal with additional waves) as well as the potential openness to telecommuting. However, from what I'm seeing now, we're simply seeing even fewer listings because people are holding off from making moves. Rental prices has come down a couple percent points, but we're also not seeing the same level of drops comparing to NYC and SF yet.
Investor · London · Member since 2017 · 160 posts · 82 votes
6y
@Brian Z. thanks those are all great points. I think it's great that you have though deeply about the market and the reasons you are still bullish. I have my own problematic bias of anchoring to the Boston I knew growing up with the Whitey Bulger connected folks, the chain link fences and the rotten 3 deckers. (I lived in one of those in my youth). Boston has changed so much and I have to remember that. I do know that it is a world class city, truly, for medicine and biotech.
However google the relationship of Kendall Sq office space to the poll numbers of Dems who promised to "crack down on drug pricing". How many drugs being developed in Cambridge and environs could tolerate price caps? Could they make money back selling to other markets, that already have price caps? Maybe a lot could, I don't know the number, and I would want to know the number.
I watched the most fascinating video in a long time a couple of weeks ago--I watched it to learn more about what top doctors are saying about Covid. But what stuck with me also was the statistic on cancer meds (where a huge amount of pharma development money is moving). This is from a top UCSF doctor who has written books examining the problems with trials and studies:
"Last 15 years an increase appetite for uncertainty at time of regulatory approval for drugs and drug products. Things would be approved without us know yet if they cause someone to live longer or live better. The promise was “Post market we will learn those 2 facts”. A number of empirical studies have shown post market knowledge is very weak, a broken process. Cancer meds: 1/3 come to the market with no control arm, 2/3 based on a surrogate endpoint. After 5 years on the market we only know that they improve survival in maybe 10% of those drugs. Capital in pharma has flown to cancer and rare diseases"
Again I think Boston /Cambridge metro is world class for biotech and pharma but is this industry anti-fragile from regulatory scrutiny on the efficacy of these meds? I'm not even touching on how much they cost--I'm just saying, do they work?
Onto hospitals. Yes there are world class hospitals and medical schools there and I know there will always be millionaires and billionaires who fly there for treatment and cash pay it. But what % of say MGH revenue is from that, or would be in the future? The thing no politician will talk about is that a big part of the unending rise in medical costs in the US has been driven by hospitals. No politician will touch it because these are often the biggest employers in a district or even a state. But there has to be some upper limit on medical costs in the US especially that outcomes at a broad level are not really improving given the headwinds of obesity etc, even if you can make a tenuous case for better outcomes in a given cancer (I spent hours researching this recently).
Young doctors will get themselves into mega debt to go to medical school if there is the promise of making it back through the high pay specialities. Are these immune from regulation?
Moving onto finance. I personally believe active equity/fixed income management is very challenged on a 10 year view (top consulting firms like BCG agree). Private equity may be in better shape but there are pension consultants who are now calling into question the Endowment model of investing as well. What % of jobs are there. Fidelity may be fine because they have essentially become a fin tech and make a good amount of money on trading and low cost access to the market. What % of Fidelity's revenue relies on active management anymore? This is a slower moving trend because it takes ages for pension capital to change their asset allocations and they have their own serious underfunding problems that might cause them to keep hoping for outperformance. Look at the number of attempts at M&A in large scale asset management in the past 10 years--they try to merge to solve the PnL issues but mergers are hard to execute in this area. When the market goes up, it kicks the can down the road for a while because revenue is % of asset values. So there will be so many rich people from these areas that made money in recent years that spend cash on properties--but I'm wondering about the pipeline of young people entering these areas. New job creation.
Then look at how many of the top lawyers are making their big fees working for bio tech and finance, so it's a bit of the same bet.
BCG / Bain probably ok although there has been a lot of scrutiny on them too.
Onto universities. The top tier ones especially with healthy endowments will indeed be fine but middle or lower tier private schools that don't offer value for money are in trouble. I think the university argument is probably one of the stronger ones over the long run. There might even be short term opportunities coming up this autumn from the fact that many foreign students can't even enter the country (right?-I think?).
There are so many spin offs from these universities that are awesome, but what % are biotech. For example how much money is MIT making in terms of spin offs in other areas eg Mars space project.
The next thing is that Boston needs to compete with other markets who have similar types of jobs (tech, biotech) but offer a lower cost of living. I think Colorado is probably still slightly less, and N.Carolina seems less still.
Don't get me wrong there is nothing in the world better than autumn in New England, my friend just posted photos of her at the beach on Cape Ann, it's awesome, but I just wonder how long the explosive prices can continue.
I think the suburbs especially ones with walkable downtowns and cute restaurants may have become relatively underpriced compared to the 3 decker play.
None of this is sour grapes: I benefited from the biotech, medical, university play in Boston for some years. I just want to probe the depth of the strength of the market.
Lastly - I would check the FEMA flood map for properties there too--no downside to looking at this to see for example if you are 1 block over from an existing flood area now that might become one in 10 years. I am conscious too that many areas that flood are not even classed as flood zones (though I think that was more of an issue in Houston)
I might look at opportunities to do a SFH with ADU that is not far from a good commuter rail station. You may not get the explosive growth like you'd get from condo conversions but it might be more risk adjusted.
Cool map that estimates commute time (not sure what station they choose). It shows how poor the wider transport network is to an extent--even widening out to 45 min doesn't expand the map as much as I thought. But it's still cool to play around to see areas popping up which I assume is a good commuter rail option. Hopefully they can keep improving the commuter rail. (I personally love the ferry as an option but I know that's not for all)
Investor · London · Member since 2017 · 160 posts · 82 votes
6y
Hi all, appreciate this is an old post but I recently caught up with an old friend from Boston and they walked me through some bull case points that I hadn't considered. I wanted to share these.
I had been concerned about Boston’s reliance on biotech and old style “active management” financial services, but the friend noted there is significant growth as well in Silicon Valley type tech. For example Facebook and Amazon’s growing presence in the Seaport. I had the impression that tech engineers mainly headed for Silicon Valley but the friend said that increasingly some tech talent is happy to stay on the East Coast. He made the point that the number of universities that produce tech talent on the East Coast is higher than on the West Coast. I have no idea about that, but something interesting to scout out as you make your Boston investment decisions. This person is very “long” on Boston in terms of personal real estate so take it with a grain of salt, but it did sound compelling.
Hi all, appreciate this is an old post but I recently caught up with an old friend from Boston and they walked me through some bull case points that I hadn't considered. I wanted to share these.
I had been concerned about Boston’s reliance on biotech and old style “active management” financial services, but the friend noted there is significant growth as well in Silicon Valley type tech. For example Facebook and Amazon’s growing presence in the Seaport. I had the impression that tech engineers mainly headed for Silicon Valley but the friend said that increasingly some tech talent is happy to stay on the East Coast. He made the point that the number of universities that produce tech talent on the East Coast is higher than on the West Coast. I have no idea about that, but something interesting to scout out as you make your Boston investment decisions. This person is very “long” on Boston in terms of personal real estate so take it with a grain of salt, but it did sound compelling.
Boston is very much the center of the east coast "silicon valley" and has been for years. There is plenty of research to support it. Facebook, Amazon, Apple, Google and Microsoft all have a huge presence here as does a ton of other tech firms. Seaport? Maybe, but look at Kendall Square and downtown (office-wise) and you will see plenty of big names and big footprints. There is also the advantage of not being beholden to one mega company as well.
Thanks Jarrod! Yes I agree that Boston was already well positioned as a Silicon Valley of the East (along with NY and Washington DC), but what I'm trying to figure out is what is "already in the price" and the marginal future growth. Some posters in the past had pointed to financial services as a future growth engine for Boston and this I am not so sure about, unless they mean low cost fin tech and insurance company disruption / innovation. Then I have my big worries on biotech which I outlined in a (overly) long prior post. Yes it's awesome that companies like Moderna may save the world but I think there is a regulatory shadow coming on any kind of expensive medical product or service in the coming years, whichever party is in power. See that it was Trump who put the eviction ban on until the end of the year perhaps surprising some older style Country Club type GOP folks--he and Republicans have also mentioned more price caps on pharma. When both parties agree on something it's more likely to happen, and nothing much even happens these days in Congress.
I think the anti science, anti elite, populist wave that is all over the US, could really be a risk factor for all pharma. I could certainly be wrong but I am not sure I want to spend >$1m+ on a 3 family property in the Boston area that is plugged into the pharma theme. Hence why I'm looking out for sources of growth in Boston that are not old style finance and not pharma/biotech. There are a bunch of stories about tech expansion in the Seaport, as opposed to Kendall Sq only, that may throw up some interesting opportunities in for example Savin Hill. It's already expensive but I imagine it's cheaper than Cambridge/Somerville and one could cycle/scooter to the Seaport. Maybe they will even develop a small ferry.
So to sum up I am not bearish on Boston, I just have lingering fears about reliance on biotech for future growth
Developer · Salem, MA · Member since 2018 · 83 posts · 68 votes
6y
Just to pile on and comment on a few things that were said in the thread. First off you should work with @Lien Vuong. I have done deals with her and she's a great investor focused agent if you are trying to find off market opportunities.
Second is 2 families are hard to make work at this current stage in the market. Both as a hold and even as a condo project. That third unit really can make the difference. More units in most cases can mean lower price per door which obviously can be to your benefit.
The challenge with the Northshore is most sellers are not sophisticated investors. They don't underwrite their own deals and pull magic numbers out of a hat that leave you with a negative ROI a lot of times. This is also the fault of a lot of agents around here who don't do their clients any justice by trying to show them comps and they can't underwrite the deals themselves either so it's the blind leading the blind which means no deal for you sadly. You will se a lot of this. But there are deals out there and patience is key.
@Philip Ganz to talk about the 203k loan in theory is great but in practice is a real challenge. Now I have never used one of these personally but talking with a lot of contractor friends they won't touch them. Mainly because the paperwork and process around them is a huge pain. Secondly there is a ton of work out there so why take on the extra headaches?
Also be careful as a new investor when investing on appreciation. I personally would agree with what you said about it being icing on the cake. I wouldn't use it as a metric to make smart financial decisions upon. But again that is my personal opinion and I know experienced investors who will buy based on that. Being at the potential end of a cycle think about the hold time to achieve that appreciation you maybe looking for.
I only invest in Salem Ma right now so if you want to chat more about the Northshore I am happy to have a conversation. Feel free to connect on here.
Rental Property Investor · Boston, MA · Member since 2020 · 4 posts · 0 votes
5y
What vacancy rates are you all using for Boston rentals? Repairs as a % of rental income? Have a solid model but am looking to validate some of my assumptions. Feel like properties in Boston/Brookline could be CF+ but it looks more like the value is in assumed property appreciation