Is a 2% (or even 1.5%) Rule SMF in Worcester too much to ask for?

22 Replies

My wife and I have been researching and visiting small multi-family properties in the Worcester, MA area. We're finding opportunities in the lower income areas but it seems most, if not all, barely meet the 1% rule... leaving very little wiggle room to reach positive cash flow. Not to mention the majority will require some updating and rehab.

Is that something to be expected in this area or are we not finding the right properties?

We are interested in connecting with multi-family investors in Worcester - coffee is on me. Love to pick your brain about the Worcester market and any advice or suggestions you might have for new investors. Please let me know!

A lot of buyers from Boston and NY have been coming in and driving prices up, some of them paying questionably high prices for places that are in or are adjacent to warzones. The influx of out of town/state buyers has actually created talks of a multifamily rental registry which will of course come with a fee. I may be erring on the pessimistic side but I think the days of above 1% are drawing down until perhaps another market correction or rent increases swing sharply up to compensate. As someone local looking for my first I feel your pain man!

Cameron nailed it. Multi prices went from stupid to insane over the last two years. The only people I know getting the 2% rule are buying off market gut jobs in cash with quick closing then dumping a ton more cash into the rehab before getting their cash back out. All of the MLS listings I see barely break even and are going to have to hope for appreciation. I personally don't think it will be worth touching the city until the next serious down turn unless you have $500k or more in cash that you can tie up for 6-12 months

Just wanted to chime in, I've been looking over a good portion of MA and haven't found many places that hit the 2% rule. 

Feel like in Worcester, you'd maybe see ~1%. However as @Steve Bracero was mentioning, a good number of these properties are under rented so even just seeing 1% is tough. Still feel as if Worcester has a lot going for it in terms of cities in MA. Another option might be south coast where prices are cheaper, but rents follow.

Updated about 1 year ago

Also, the 2% is just a guideline - it doesn't necessarily mean that every deal needs to hit 2%, but you can sure bet that if you're getting 2% in MA, you're doing pretty well for yourself. Underwrite your deals to see what exactly you can squeeze. Be conservative on your numbers regarding expenses. Just because a property might only hit the 1% rule, might not mean it's a terrible deal - just all that is being offered in today's market. Today's market is different than 2008-2010, deals are harder to come by. I'm underwriting my deals to see if I have a comfortable level of cashflow. I know that in today's market it will be damn hard to find a 2%, but that doesn't mean to stop searching for deals!

I figured 2% would be a stretch but I feel a little better knowing it wasn't just me seeing so many >1% listings. Sounds like ~1 and >1% opportunities are what we'll find in the Worcester market - at least on the MLS.

@Cameron D Boyle , Thanks for responding. Yea, we found ourselves in a few of those places right in/off of the warzone areas. Interesting note on the rental registry though. I'll try to be optimistic and keep looking for the diamonds in the rough.

Thanks, @Bryan Devitt . We planned on this first one being FHA and have considered the FHA 203(k) to get in and rehab but with the high monthly debt service, making the numbers tough to swallow. Fair position on the approach.

Thanks, @Steve Bracero . Noticing quite a few "he does some maintenance for me" rationale around some of the low rents. 

@Phil K. Fair! I don't think we are giving up on Worcester yet but we'll keep the South Coast in mind as well. Thanks!

Originally posted by @Andrew Albert :

My wife and I have been researching and visiting small multi-family properties in the Worcester, MA area. We're finding opportunities in the lower income areas but it seems most, if not all, barely meet the 1% rule... leaving very little wiggle room to reach positive cash flow. Not to mention the majority will require some updating and rehab.

Is that something to be expected in this area or are we not finding the right properties?

We are interested in connecting with multi-family investors in Worcester - coffee is on me. Love to pick your brain about the Worcester market and any advice or suggestions you might have for new investors. Please let me know!

Andrew, it sounds to me like you and I are in a very similar place right now - my wife and I live near Boston now, but are looking to FHA a multi in Worcester and I'm finding a lot of properties that barely cashflow at all, never mind meet any kind of "% rule" - unless the .01% rule is a thing now.

I'd love to grab a cup of coffee sometime and chat with you, compare notes about what we're finding.

I think the problem is that in general this area of MA is highly priced. 3 Family's are average 350+ and really can't rent more than 800-1000 due to a number of factors. I live and own in Worcester, MA area if you need a contact in the area. 2% rule isn't really a thing here at the moment unless you have a way to drive rents up. High class (a-high b) apartments here are renting 1 bedrooms for 1850 + parking fees, pet fees, no utilities. So it really depends on the neighborhood and quality of the building you purchase.

Tip for this area - Don't treat 4 family and below any different than you would a 5 family plus commercial property. CAP rate matters even for small properties here. (even though its not a truly used metric).

@Ryan Severance @Andrew Albert

Do you mind if I ask how much you guys are looking to put down? I've run numbers for 3.5% down, but honestly the number rarely work from the get go. Most properties seem to be somewhat under rented, so have some room to account for with increased rents. I've set my strategy to not utilize the lowest DP possible, I'm most likely going to leverage either a 25% down investment non owner occ, or a 10% down owner occ.

The way I'm looking at an owner occupy, if I were to just go out and rent somewhere else, easily could be $1000+ a month. If you can find a good owner occupy, where you're only out of pocket a few hundred a month, when the year is up and you move out - that property should cashflow some. While I know it would be awesome to have some cashflow while your'e living in the units, I've found that the 3 deckers don't cut it, the 4 units work much better in terms of getting some positive cashflow, while you're living in the property but 4's are hard to come by.

Never hurts to look at the single families either, I've seen a handful of good BRRR candidates. Could owner occ, rent out rooms and get some equity that way as well. I know that it would be an awesome investment to hit a home run on my first deal, however it's important to take action as well.

Originally posted by @Phil K. :

@Ryan Severance @Andrew Albert

Do you mind if I ask how much you guys are looking to put down? I've run numbers for 3.5% down, but honestly the number rarely work from the get go. Most properties seem to be somewhat under rented, so have some room to account for with increased rents. I've set my strategy to not utilize the lowest DP possible, I'm most likely going to leverage either a 25% down investment non owner occ, or a 10% down owner occ.

The way I'm looking at an owner occupy, if I were to just go out and rent somewhere else, easily could be $1000+ a month. If you can find a good owner occupy, where you're only out of pocket a few hundred a month, when the year is up and you move out - that property should cashflow some. While I know it would be awesome to have some cashflow while your'e living in the units, I've found that the 3 deckers don't cut it, the 4 units work much better in terms of getting some positive cashflow, while you're living in the property but 4's are hard to come by.

Never hurts to look at the single families either, I've seen a handful of good BRRR candidates. Could owner occ, rent out rooms and get some equity that way as well. I know that it would be an awesome investment to hit a home run on my first deal, however it's important to take action as well.

 Phil,

My wife and I don't have anything more than 5% down on most of these properties. It is what it is for me.

I want to take action now, before the Worcester market blows itself out of proportion any more to where you can't even get a property that will cashflow period.

Most things I look at barely break even with me in them, but would cashflow at an ok level with me out of them.

As for 4 families, I see very few that are priced at any level that will cashflow - the 4 family owners want the moon for their stuff.

And as far as SFs go and BRRR'ing, I'm not in that market right now as I do not have the time for doing large scale renovations.

I may be later when I have the capital to pay others to do so.

Right now I want a good condition multifamily to hold onto for a long time.

I only plan to live there for a year or two, then move out and either:

A) Depending on the market (and my wallet) in a year or two, I might buy another multi. 
But - this is my dream to own rental property, so that is going to require my wife to be on board with living in another multifamily.

Or

B) buy the single family my wife and I want to live in for a long time and be done with buying multis for at least a little while.

My strategy here is to get a multifamily to buy and hold and have passive income for a long time and yet still get the single family I want later.
I'm not that old (yet), so as long as the multi cashflows at current rental rates, I should be ok.

@Ryan Severance

I commend you on knowing your strategy and sticking to it! There's so many avenues in RE so its good to see that you know what you want, and are chasing for it.

I agree that now is a great time to get in before things start to get even hotter! I feel like the hot multis on MLS get bid quickly on so you have to act fast. You're right in that there aren't many 4 units out there, and the ones currently on market are on the higher side except for Rodney.

I have a very similar strategy as yours, you're right in that you have to make sure the wife is on board! Hopefully she's as eager as you are for the dream of rental properties.

I'm sure you will find a property that hits all the checkmarks! Good luck in your journey!

Originally posted by @Phil K. :

@Ryan Severance

I commend you on knowing your strategy and sticking to it! There's so many avenues in RE so its good to see that you know what you want, and are chasing for it.

I agree that now is a great time to get in before things start to get even hotter! I feel like the hot multis on MLS get bid quickly on so you have to act fast. You're right in that there aren't many 4 units out there, and the ones currently on market are on the higher side except for Rodney.

I have a very similar strategy as yours, you're right in that you have to make sure the wife is on board! Hopefully she's as eager as you are for the dream of rental properties.

I'm sure you will find a property that hits all the checkmarks! Good luck in your journey!

 Thanks Phil!

Good luck with your own search!

I’ve been looking for triplex and quads in the Worcester area for about a year now, and I have seen some that would cash flow with an increase of rents to market rate. I haven’t pulled the trigger on any yet because I didn’t know the area well enough and anything good enough to cash flow gets snatched up quickly by cash buyers. I’m currently looking for some multi’s that need some rehab that way I can force the appreciation and keep them long term.

Thanks everyone. Likewise, @Ryan Severance . We are looking for a solid Multi to hold onto for a long time as well. I've seen a couple 4-unit properties but they were in the roughest of areas. 

I'm seeing around 1.1-1.4% 3-unit properties with around $90-120 per door monthly cash flow, but that is only with the assumption rents are brought up to market and it is not owner occ. Currently looking to leverage a 95% LTV first home buyer's mortgage as I've gathered FHA rarely wins in the Worcester market... with the additional hoops to jump through sellers are more likely to reach for a conventional or of course cash.

Good point, @David Markey . It is ALL about the area. I'm not sure I've seen a single property listed showing current market rents - even in areas that could pull $200+ more per unit a month. Thanks for the tip on Cap Rates. 

Agreed @Phil K. . And I don't presume to find any property in Worcester that will cash flow with owner occupied. I'm running numbers as though we will not be living in the property since that will be the long term status quo. While occupying the property for the first year, we'll likely have the mortgage paid for with the other two rents and have to shell out for expenses and whatever is left - saving one way or another when you factor in the equity gain & tax deductions.

Hi @Daniel Lopez - good luck on your search. I've seen a few triplexes that could definitely be candidates for some rehab... but "some" was looking more like $150k in rehab costs or more :-). 

I am just beginning to learn about investing. I was looking last night and my town (about 30 minutes west from Worcester) have a ton of multi family properties that look to be at least the 1% rule if not more. I just found out a small SF house 2 houses down on my street just sold for $67k, I am bummed I missed that opportunity, that would have been perfect for me to rent out. It sold for 200K+ two years ago. It isn't as cityish as Worcester, but is more of a city vibe than all the surrounding towns because of the demographic. There is going to be an auction in 2 weeks for 9 homes that I am going to check out to learn about how the foreclosure market works.

I agree with the above posters that Worcester seems extremely inflated at the moment, and only getting worse. I had been looking in the Worcester market for the last few years but I gave up for now because I don't think this bubble will last. Worcester isn't Cambridge and I don't really see the economic evidence to support the continued growth at this rate. That is just my opinion, though, and I could be wrong. If anyone has numbers that support this boom, I would love to see them. I think you can still get good deals in surrounding areas, as Heather mentioned, and I am partial to areas just over the Rhode Island border where the courts seem to be more landlord friendly anyway.

@Lisa Kattenhorn yes, generally in this area of the country the laws are tenant friendly, but from what I understand Rhode Island is generally more balanced/fair than Massachusetts.

Re: Worcester, I've only been there a few times over the last few years, mainly for Black Diamond REI group meetings (on April 16th they actually spent the entire night talking about Worcester).

I mentally put it in the same camp as Woonsocket RI. Mainly, it's a tough area that doesn't have a ton going for it inherently. And that you really only see a lot of interest in it when the market is getting hot / toward the top.

So, if properties in Worcester and Woonsocket are starting to sell for crazy prices, personally I'm taking that as a sign to be cautious. It's not always a good time to buy.

@Anthony Thompson   I live in MA and own in RI but because I live close to Worcester, I follow the Worcester area.   Parts of Worcester and Woonsocket, RI are similar but  from a market standpoint Worcester seems to be selling more and renting a bit higher then Woonsocket, RI.  It has quite a few universities and  UMASS hospitals that sustain the area economically. It also has some good resturaunts and some late night venues. It would be good if manufacturing returned stronger because there is a workforce.  I don't see that with Woonsocket. 

@Andrew Albert Regarding the 1/2 % "rule"  I would listen to what @David Markey is saying the rents he cites will apply in some areas you are looking.  Not every property will rise to 4 digits. Triple deckers are a different housing product then some of the high end rentals.  You can't just average out local rents and say my property will rent for that.  You need to find out what are the rents in that specific neighborhood. And for owner occupancies it isn't just about numbers it is one of those places that you need to pay attention to the street you buy on.  It is still a city with city issues but prices are rising. It may be that the companies west of Boston are seeing workers move farther out  especially the lower paid ones.

It is a good plan to look at an area and narrow it down but frankly I think  these rules are really about identifying opportunities.  The real home runs are going to insiders, for lack of a better word. 

@Heather Fuller . Interesting note on areas west of Worcester. I haven't researched down 90 past Worcester but will take a look. Thanks for the tip!

Fair points, @Lisa Kattenhorn & @Anthony Thompson . We were researching the RI area at first since we have a decent network having lived there in the past. Woonsocket seemed to have plenty of properties coming onto the market. 

However, I see Worcester as a bit more established with better pockets of neighborhoods and more upside than Woonsocket. I was at the Black Diamond REI group meeting on 4/16 as well and learned/confirmed of a LOT of investment being pumped into Worcester over the next decade. With universities, hospitals, Biotech R&D park (potentially some Biotech mfg), the Woosox and investment going into the central part of the city... there's upside if we can get into right area before prices get even higher.

I agree @Colleen F. . And completely understand when looking at comparable rents. I try to be diligent about only comparing to similar buildings, similar size units and condition, and of course neighborhood. Using Zillow and Craigslist to review rental listings. Curious if there are better tools out there. I've heard of rentometer but am not sold...

Something I've noticed... almost all the properties I've reviewed currently have below market rents; sometimes well below. Conservatively bringing estimated potential rents to within range of nearby rentals has yielded a lot more opportunities in the 1-1.25% proforma range and between $50-$115 in per door cash flow with Repair & Maint. at 10% + prop. mngmt. etc. 

Sounds like I would be going against the grain based on this discussion if I take that lower cash flow upfront... even knowing I'll be holding for the long term. On the flip side, if we were committed to Worcester, is it worth waiting 1,2,3 (maybe?) years until the market corrects?

Thanks everyone for contributing!

Hi everyone,

I've been buying in Worcester for the last year, and I've seen prices going up ~10%/year for 2-4 unit multis, at least for last 5 years. I don't think it will grow as fast going forward, but will probably keep rising slower. Biggest problem is historic population growth, as most people seem to be relocating to the south part of the country. On the other hand I do see warehouses being built near my properties, so maybe there is some economic growth. And as you mentioned, all the 3B$ investments they are making in downtown area. Worcester did get a lot nicer in the last 3 years. As many of the coastal areas, its not the best place for cashflow, sadly. Deals are still there and you can make a living investing in a few multis, just getting harder now, but people are still buying and still making the deals work. Best of luck everyone!

@Heather Fuller if you look for rentals  commutable to jobs in the area Worcester has some of the most affordable. So now you have a low wage semi-skilled job and commute to west of Boston that is where you can live. This worker pushes out the walkers and barely have a car crowd that may work in and around Worcester. I see the issue but the answer to me is better work opportunities.  This is because where the jobs are going don't have low end housing.  Try to find affordable apartments in Acton, Medway or Franklin. A $580 studio would be a dream.  I ask myself why aren't those businesses in Worcester?   

Anyway the price rise may be an indicator of an upswing in Worcester desirability and I have noticed some maintenance improvements in the last couple of years. not as many run down places.  People seem to keep things nicer. 

On the other hand as a landlord I prefer a higher price per tenant I have to deal with which is why 

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