Underwriting a $1.1M 3-Unit in Dorchester

[Jay Taylor]

I see a lot of posts asking "how do I analyze a deal?"  I want to walk through an actual acquisition I closed recently, including one detail that made this deal unusual: I already own a nearly identical building on the same street.

The property: 3-unit brick multifamily in Dorchester, MA. Pre-1978 construction (lead paint compliance is a big deal in Massachusetts). Section 8 tenants in place.

Purchase price: $1.125M

Gross monthly rent (in place): $6,300 across 3 units

Gross annual rent: $75,600

Here is how I ran the numbers:

Operating expenses (annual estimates):

Property tax: ~$12,000

Insurance: ~$4,800

Water/sewer: ~$3,600

Repairs/maintenance reserve (10% of gross): ~$7,560

Vacancy reserve (5%): ~$3,780

Management (self-managed, but I budget 8% anyway): ~$6,048

Total operating expenses: ~$37,788

NOI: $75,600 - $37,788 = ~$37,812

Cap rate: $37,812 / $1,125,000 = 3.4%

That cap rate is low by national standards. In the Boston market for a stabilized brick 3-unit in a decent Dorchester location, it is in line with comps. But I was not buying this property for the day-one cap rate. I was buying it for what the rent roll will look like in 12 to 18 months.

Why I had high confidence in the rent growth:

Here is the part that made this deal different from a typical "rents are below market" speculation: I already own a nearly identical 3-unit brick building on the same street. Same construction, same unit layouts, same neighborhood. That building has a current rent roll of $9,000/month ($108,000/year) with Section 8 tenants.

So the rent growth thesis was not theoretical. I was not looking at Zillow estimates or hoping the market would move. I had a real building, a few doors down, proving that $9,000/month is achievable on this exact property type in this exact location. The $6,300 in-place rents were simply below where the Section 8 payment standards and market rates already are.

But here is what most people miss: the cost of getting from $6,300 to $9,000.

You do not just raise rents overnight. On units with below-market leases, you are likely turning over tenants, and turnover has a real cost that most underwriting glosses over.

The turnover cost I budgeted per unit:

Vacancy during turnover (2 to 3 months finding, placing, and onboarding a new tenant): $4,200 to $6,300 in lost rent per unit

Unit prep (cleaning, paint, minor repairs, lead compliance): $2,000 to $5,000 per unit

Screening and admin: ~$200 per unit

If I am turning over all 3 units over the first 12 to 18 months, that is $18,600 to $33,900 in total turnover cost. That is real money and it belongs in the startup cost column right next to down payment and closing costs.

Total cash required (the REAL number):

Down payment (25%): $281,250

Closing costs: ~$18,000

Immediate repairs (lead remediation, unit prep): ~$35,000

Turnover vacancy cost (lost rent during stabilization): ~$15,000 to $19,000

Total cash in: ~$349,000 to $353,000

Most people would have said $334,000. That missing $15K to $19K in turnover cost is the difference between a plan that has reserves and a plan that runs out of cash in month 6.

Now the debt service:

Mortgage: ~$844,000 at 5.75% on a 30-year fixed

Monthly P&I: ~$4,925

Annual debt service: ~$59,100

Year-one cash flow: $37,812 NOI - $59,100 debt service = -$21,288

Negative cash flow in year one. But here is where the full picture matters:

1. The rent growth is not a hope, it is a fact pattern. My other building on the same street proves $9,000/month is achievable. At $9,000/month stabilized, the NOI jumps to roughly $63,000, and cash flow after debt service flips to roughly +$3,600/year. Not huge, but positive, and the equity buildup and appreciation are on top of that.

2. Tax strategy changes the math dramatically. We are pursuing Real Estate Professional status. Combined with a cost segregation study, the first-year depreciation on this property is projected at $200K+. That offsets W-2 income dollar for dollar if we qualify. At a 35 to 40% marginal rate, the tax savings are $70K to $82K in year one. That is not cash flow, but it is real money that stays in our pocket instead of going to the IRS.

3. Factoring turnover into the startup cost reframes the decision. Instead of thinking "I am losing $1,800/month in year one," I think of it as: I am investing $350K total (including turnover costs) to acquire a stabilized asset that will produce $63K NOI and $70K+ in tax savings annually once the rent roll catches up to where my other building already is. The payback on the extra $15K to $19K in turnover cost is about 3 to 4 months of the additional rent once stabilized.

I modeled three scenarios: worst case (rents stay at $6,300, no REP qualification, turnover takes 18+ months), expected case (rents grow to $8,500 to $9,000 within 12 to 18 months, REP + cost seg), and best case (rents hit $9,000 within 12 months, REP + cost seg + refi in year 3). The deal worked in the expected and best cases. Owning the identical building next door gave me confidence that the expected case was more likely than not.

The lesson: when you underwrite a deal with below-market rents, do not just model the stabilized rent roll. Model the cost and timeline of getting there. The turnover vacancy, the unit prep, the lead compliance (in Massachusetts this can be $3,000 to $15,000 per unit), and the time it takes to place new tenants all belong in your total investment calculation. If you do not account for that, your actual returns will underperform your model by a wide margin.

What is your framework for evaluating deals where the thesis depends on rent growth? Do you factor turnover cost into your acquisition analysis, or do you treat it as an operating expense?

[Alex Morales]

This is the type of transparent analysis more people need to see. Most posts about rent growth plays show the upside without budgeting the real cost of getting there. You nailed it by treating turnover as a startup cost rather than hoping it sorts itself out.

My framework for rent growth deals comes down to three things. First is proof of concept, exactly what you have with your other building on the same street. Nothing beats actual rent comps from a property you own versus hoping Zillow estimates pan out. Second is cushion math. I want to see the deal survive for 18 months at current rents even if my timeline slips. If the negative cash flow in year one would eat through reserves before stabilization, I pass or negotiate harder. Third is time value of my headspace. Deals with aggressive value-add assumptions require more active management than stabilized properties, so I factor that into whether the risk adjusted return is worth it.

For tools I typically pull rent comps from Zillow, Rentometer, and sometimes PropLab to get a baseline range. Then I cross reference with actual lease data from similar deals I've done or investors I know in the market. The tools get you 80 percent there but the last 20 percent comes from local knowledge like what you have from owning next door.

One question on the MA lead compliance side. You mentioned $3k to $15k per unit for deleading. Are you doing full abatement or interim controls? I've seen investors in older Northeast stock burn through budgets on full abatement when interim controls would have worked for their hold period.