All Forum Posts by: Dan K.

Your NOI is = [(5,812 + 2,800)x12] - 40,000 = $63,344

As the value of the property goes up, the cap rate will go down. So if you think the value of the property is $1.4m, you are correct, the cap rate would be 4.52%

Because of high property valuations and a generally hot market, properties in the Boston area have what we call "compressed cap rates" -- meaning the cape rates are relatively low.

The next thing you need to think about is financing payments. If somebody were to purchase or you were to finance the property, there is a debt service that is due (similar to mortgage payments for a single family). At a 4.52% cap rate, cash flowing while making debt payments is likely difficult. In all likelihood, the interest rate for a commercial property would exceed 4.5%.

There are other factors to consider, like the depreciation of the building. In addition, if you were to sell the property today, what would you do with the proceeds? You may have a significant tax bill due unless you are trying to do a 1031 exchange. Having to pay a big tax bill is a great problem to have, but it's still a bit of a problem.

Congratulations @Cynthia Nina-Soto, sounds like a great project. At the very least, you should absolutely think about leveraging / financing the property so that you can pull capital / equity out.

Cap Rate is very easy to figure out --- Cap Rate = NOI (Net Operating Income) divided by the property value

It's important for you to start figuring out the current value of the building. What are cap rates in the area for mixed used buildings? If we assume your expenses are $40k a year, and the building is valued at $1m, then your cap rate is 6.33%.

Note, a lender might discount the rent that you are paying for the commercial space since it's an inside deal. 

Great suggestions by everyone, just a couple quick thoughts that I have:

1. Guaranteeing a 7% return can get you into serious legal trouble,

2. As @Alina Trigub mentioned, the investors are probably expecting you to continue with your current strategy versus coming up with a new strategy.

Hi @Julie Jarvis, it sounds like through personal experience you've already experienced many real estate headaches.

Many in real estate investing talk about finding your "unfair advantage" -- it sounds like you have at least two: (1) Husband is a licensed contractor, and (2) You have familiarity with another market.

Personally, I wouldn't start buying single family houses outside of the area -- I just don't think there is enough money in it versus the headache. MFs out of state could be interesting, or perhaps an investor that is looking to sell a portfolio of investment single families.

You can certainly start by flipping locally. People are even successfully flipping / BRRR condos in the Boston area (although the process can be painful depending on the association).

I completely understand your frustration @Philip Vidal and I have the same frustrations.

The general argument that the city and many advocates make are this:

1. 1. People who live and work in the community should be able to stay in the community
2. 2. There isn't new land being made
3. 3. When a developer buys a property, the developer will want to make a profit, thus the new units will be priced at a higher point that puts them out of the financial reach of the community's existing residents

Big rental property projects are actually approved, because the developer promises to set aside X% of units as "affordable."

So what you want to do is take a single family house (where a renter could maybe occupy for $3,000-5,000 a month) and turn it into two $1.25m condos (making up numbers) that will be bought by people that wouldn't be renting rundown apartments.

I know what you're saying, you are creating permanent homes for people who want to invest in the city and put down roots as opposed to more transient renters. The problem is that residents (aka voters) don't want to be displaced by people that they see as "yuppies."

If you are going to be an owner occupant after the development is done, you may have better luck with zoning appeals.

In addition, taking an existing single family and dividing it might be easier than taking a three-family that has been used as a rental and converting it to condos (thus displacing three sets of tenants).

You've got some due diligence to do on zoning. I'm a local lawyer, but Somerville and Cambridge both have "go to" lawyers that know the ins and outs of zoning and the zoning board.

Hi @Philip Vidal, as @Lien Vuong mentioned, Somerville along with other communities are starting to restrict condo conversions and are making it more difficult for developers. A single family may have some advantages if you aren't dealing with existing tenants. Waiting periods for a condo conversion can be up to 24-months if you have an elderly tenant in place.

Converting a single family to a 2-family is a condo conversion -- you are taking a single family residence and creating two condos. The only other option would be to try and subdivide the lot, but that is an entirely separate legal and zoning challenge.

Depending on the initial costs and the exact location, there is a market for A+ single family houses in the Cambridge / Somerville area. There are properties in Cambridge that are getting converting from multi-family to single family.

Hi @Tim ODonoghue, congratulations on getting started with real estate investing.

You will want to think about taxes when you sell your current property -- If you owned and lived in the place for two of the five years before the sale, then up to $250,000 of profit is tax-free. That being said, your use of the property wasn't solely for personal use. You or a tax professional can make the determination on how you want to handle potential taxes.

As for renting a property, no, I don't think it's a terrible idea -- there are plenty of landlords who own multiple properties but are renters themselves. That being said, is there any possibility you could float two properties? Perhaps if a property is rented, you could acquire it now with leases expiring in 2020. Then get your property ready to sell in the early spring.

As for your financing plan, you are proposing less than 10% down. Most traditional financing options are going to expect 15-20+% down for a 2-family. Have you talked with lenders and started lining up financing? 

In this area tenant turnover is both a curse and a blessing. If rents are under market, it's nice to raise them substantially. However, of course great tenants are also very important!

I feel the same way you do about pets -- animal lover here who has a dog. And roughly 50% of renters have a pet (although that percentage is much lower within a city). I still remember viewing an apartment as a prospective renter nearly 15 years ago  -- beautiful apartment but the stink from cat urine was awful.

Great writeup and great results @Christian Nachtrieb!

As you know, that 9 month lease is also key in the Boston market so that the unit will be ready for a 9/1 tenant.

Your cat experience begs the question if it's every worth renting to a tenant with pets in a hot market like Boston?

In terms of getting a pre-approval, you should be able to find a bank that will give you a pre-approval letter by showing your income, expenses, debts and taxes. You may not even need to have a hard credit pull for the pre-approval letter.