Boston area: A landlord investor's no-man's-land?

Question

Let me explain the thought process...

I've spent the better part of 6 months pouring over the market in an area near my current residence. The typical family 4b/2ba ranges from ~$400 to $550k AVR in the area I've been researching.

2b/1ba rents in these multis fall mostly between $1100 and $1500

So let me walk myself through the math and someone can tell me where I've gone wrong:

Assume best case scenario:
$400k ARV
$0 repairs needed

People here seem to think that anything above 75% ARV is a non-starter. Well I've never seen a $300k multi anywhere near the area I'm talking about, but lets assume one exists...

So I'm in for $300k
$60k dp
$240k financed @ 30yr fixed
Payments = $1600/mth

$2400/mth rents
50% rule = $1200/mth

Cash flow = -$400/mth on $60000 invested

Now remember, this is best case scenario that I can even imagine for this area. This isn't conservative at all.

By the 2% rule, I should never pay more than $120k for a house that rents for this little. Yet these places regularly sell for 4x that amount. I understand that the 2% rule doesn't really hold true for the Northeast, but still... this best case scenario isn't even close to any deal i've seen discussed on BP.

Am I simply barking up the wrong neighborhood/town/region if I want to be landlord? Should I consider a completely different strategy for this area? Should I consider a completely different area altogether?

What am I missing?

Robert Granara · Answer

Tom Im originally from next door in Medford...I own and manage 20 rental units on the North Shore and i watch the multi family market north of Boston very closely... our market is a lot different than most of the rest of the country with the exception of the NY/NJ and Cali as well as a few other markets...so you can forget about singe family rentals around here in Ma unless your willing to travel at least an hour West or even down to RI... Now on to Multi Families...If you want to find cash flowing properties around our area you will need to focus on areas other than Arlington or Medford...Its even hard in areas like Malden or Everet which are great rental areas its just the good multi's are still selling for high $300K's and well into the $400K's... id be looking at areas like Chelsea, Revere, East Boston or Dorchester which if you look can find a 3 family for $300K with 3 bedroom units...now, if you rent to section 8 tenants you can take in $1500 per unit...i believe the #'s work well in that type of scenerio and will provide good cash flow, cash flow like we havent seen in awhile here...now if you not ready to deal with section 8 type tenants than i have no other advice for you in our area...good luck

Shanti S. · Answer

Hi Tom I hear ya I'm in MA myself - and I'd also lean you to option 2. There are still a lot of great deals out there though it seems to me the bottom for MA was last year and investment properties have come a long way back up. If you don't have the time or inclination to start marketing to motivated sellers and sifting through the results and negotiating, you may still be able to get a great deal on an REO or a wholesale deal - buy from someone who has done that work to get a property under contract at a great price, then just pay them for that piece of the work. I'd also vote to stay away from Condos - I personally don't like the control you give up over your property, especially in terms of the condo fee Best bet may be to pick up an 'ugly' SFR for yourself, keep for at least a year, preferably two, and fix it up pretty for a flip. In the meantime you can continue to search for income properties in working class areas Best of luck to you and welcome to BP

Account Closed · Answer

tom, you know your part of the country better than i do, but i would imagine that within a 20 minute to half hour drive from your location, there are lower income rentals...there is a blue collar work force under your area, and they must live somewhere nearby for cheap rent every month...i would try to find these areas if you want to buy and hold as rentals..good luck and keep us posted-bryan

Tom Wilhelm · Answer

Wow. Thanks for the experienced advice. This is in fact the exact direction I've been moving in my research, namely Malden and (more likely) Everett. Some (not all, but definitely some) of the (MLS listed, usually SS or REO) 2 and 3 family houses in those towns are priced in a sane spot relative to the 50% and 2% rules. Which is definitely not the case further west! I'll have to take a deeper look at Chesea, particularly given how many properties were heavily improved there during the bubble. Maybe even Revere, though that's getting to be farther than I'd like in order to fix a leaky faucet or collect a rent check. Thanks again for the input.

Tom Wilhelm · Answer

Pete, My goals are long-term and straightforward. I'd like to own 4 to 6 income producing properties free and clear by the time I retire, in ~25 years. This is in addition to a primary residence, which I also wish to acquire, though in an area quite different from what creates positive cash flow, as discussed above. So my short term options seem to be: 1. Continue to rent, while focusing on getting into the landlord business in a less expensive area. 2. Focus on finding a primary residence (i.e. condo) in the area I am willing to live, possibly integrated into a fix/flip/upgrade strategy. Right now, I would lean toward 2, with an eye toward capital accumulation, before turning to 1. Unless of course 2 just works out as a much better strategy...

Jon Holdman · Answer

Strategy 2 can be very profitable, if you're willing to do it. Buy a junky but livable property in a good location. Move in. Spend two years fixing it up to the standards of the area. By doing that, you're forcing value into the property. Sell at a nice profit. Since it was your primary residence for two of the last five years, your profits are tax free. No 1031 or anything required. Use that to buy another junker. Repeat every two years. You make a nice, tax-free profit each time, and have a place to live. Now, you're limited by the two year time constraint, so you can only do so many of these. And who knows if tax laws will stay this way or change. But once you have some experience and cash, then you can get seriously into the fix and flip business. Rental property is a different business. You have to have properties that are cheap enough relative to the rent to make a profit. Lots of people made lots of money during the boom speculating. Buy a property, put a tenant in for a few years. Suffer the negative cash flow. Sell at a huge profit because of the appreciation. Unfortunately, that appreciation was driven by the very loose lending environment. I don't expect that strategy to every work again. So, rentals become a different business than speculation.

Peter Giardini · Answer

Tom, many of the responses have alluded to "it depends" on your desired outcome. With that in mind, I believe your decision making process would be much easier if you knew exactly what you were trying to accomplish and why... and then once you are clear on that... develop a set of criteria that would allow you evaluate deals against. Best of luck! Pete

Brian Levredge · Answer

As others have said, you'll want to branch out and extend your search to the surrounding areas. When you do a buy and hold in a high priced market, you are basically waiting for the appreciation to kick in like crazy so you can sell. Short of you putting a huge down payment on a property or rolling a 1031 into it, you aren't going to cash flow much, if at all.

Jon Holdman · Answer

The biggest downside to living in one half of a duplex, IMHO, is you have your tenant right next door. Hopefully, you will have a good experience. But check out the Drug Dealing Tenant thread for a bad experience. At beset, the rental income will reduce your cost of living in this location. That assumes you don't have bad tenants and a bad experience. Better, in my opinion, to separate your residence situation from your investments. If you want to be a landlord, buy rentals that make sense. Live somewhere you like and can afford.

Mike D. · Answer

Living in 1 unit and renting the other seems like a good way to leave yourself with a low/no mortgage payment. I don't see it providing cashflow though. So if your not planning on living off of your investments and just want help paying the mortgage(like that show on HGTV "income property") that's a route you could take. Long term it could pay off because it is like the tenant paid for half your house, but in the short term it won't produce income at those numbers. If you really want to be a landlord and own properties that generate profit each month you will have to look in lower priced areas.