Buying first property, is 2%, 50% rule applicable in Boston?

Question

Hi everybody,

Newbie here, looking to buy my first property. I'm not totally green to the life of a landlord, as I have managed my dad's 4plex property since I was a teenager. However, he bought in the 90s, in a nice part of Jamaica Plain, so the high rent, no crime, no mortgage payment combination will surely be impossible for me.

I have been looking into 3plexes in Dorchester. There are some properties there in the $700-800k range, mostly turnkey, with about $6k in rent a month. I will be going in at 20%, so looking at $4k a month in mortgage, taxes, and insurance. Initially, I thought of the $2k "profit" a month being cut down to $1k a month with water bills and various repairs here and there. Yet I keep hearing about this 50% rule that half the gross rent will be put towards expenses... is this rule really applicable to Boston? $3k in non-mortgage expenses sounds ridiculous... that's $36k a year. Unless my tenants are burning down their apartments annually, I can't imagine that figure being accurate.

Our expenses in the JP 4plex honestly don't exceed $700 a month, if that.

Does this rule maybe only apply to areas where rent isn't as high as Boston?

Am I naive to think $6k in rent, minus $4k (mortgage, tax, insurance), minus $1k (water and various costs) = $1k profit per month?

Thank you! Looking forward to learning a lot from you all.

Jonathan R McLaughlin · Answer

Hi Adam, just one caution on the property management side: JP is the happy valley of renting right now...valuations and rent are at all time highs, most renters are solvent (half would love to buy there is just too little inventory) and the more transient tenants love the neighborhood too and have an unusual investment in its quality of life with the festivals, green space etc.

All this means you will never have an easier time property managing than you do right now with that triplex. You are quite likely to have a much more intensive experience....not trying to scare, just realistic.

Dorchester is huge, if it was its own city it would be the second biggest in the state, so can’t comment on the particular spot you have.

Good luck!

Kate Ziegler · Answer

@Adam Anderson: You're right, vacancy rates ARE extremely low in Boston (currently hovering just over 3%), but for this very specific target you've mentioned be careful about timing - it's much, much harder to rent a 3bd unit outside the standard 9/1 rental cycle, versus 1-2bd units, in my experience. We learned this the hard way in JP the first time we turned over a 3bd; left it offline for a month to gut bath and kitchen, ended up not renting it until February (only willing to drop rent so low - we were positioned to float it, just would rather have not - but feedback was all "I don't have roommates yet but I love it..." and we didn't want to match-make, either). Obviously not a concern for the unit you'll occupy, but keep it in mind as you're searching, and maybe consider inheriting existing tenants if you'll find yourself off-peak. Also, for this area, be sure to ask your lender about loan products and rates specifically for the neighborhood - since you'll be occupying, there are products available with exceptional terms for state-targeted areas in Suffolk County, and last I checked Dot was on the list.

@Ned Carey: Much of the multi-family housing stock in Boston was built during the city's peak population boom, 1890-1930 (brownstones and wood three-deckers alike), as an upper-middle class response to tenements to increase density. In the 30s, public opinion turned against anything over two units, so finding newer multis is a really binary search - either 1914 or 2014 (since the past decade as Boston approaches peak population again has turned favor back to housing density, and rents warrant the cost to build). Lots of quirky mixes of systems, especially in the parts of Dorchester Adam is referencing where full renos and condo conversions haven't swept through yet, and especially in the price point under $750k.

Russell Brazil · Answer

No. The 2% and 50% rules are applicable to extremely cheap properties such as the $50k price point.

Seth Borman · Answer

The 50% rule does not apply. Between Feb and July of this year I underwrote hundreds of units of MF acquisitions, and I looked at many hundreds more. We closed on 200 in increments of 4-24. What did I find? The vast majority of units that we bought were picked up at around 45% but they stabilized at around 25%. Rents in Los Angeles are high, so the rules of thumb that work in St. Louis just don't apply here.

Christian Nachtrieb · Answer

@Adam Anderson I'd say go for it. I have one property in Dorchester near Ashmont and another I'm closing on next week just down the road. What neighborhood of DOT are you looking at for this deal? @Kate

@Kate Ziegler undefined is spot on with the timing of rent. Even missing the 9/1 frenzy by 2 months can force you to take a little ding either with reducing rent or having to wait for a QUALITY tenant to come around.

Ned Carey · Answer

@Adam Anderson Ignore the 2% rule for now. It is the most crude screening tool and the actual percentage will vary by area and your goals.

The 50% rule is a valid rule. How it will apply specifically to your building is unknown.

You have left out the biggest expenses in your calculation. Turnover cost is your largest cost. You didn't mention property management, vacancy rate, repairs, or capital expenses. How about the cost to maintain an LLC if you have one, accounting costs, or bank service charges?

I was just in Boston last weekend. I would love to own some old multifamily brownstones there. But I did notice many of the buildings area old. What is the effective age of the building you are buying IE. when was the last full renovation? How old are the systems?

If you are going to manage the property yourself then you must remember that any savings from managing yourself is NOT a Return On Investment. It is a return on your time. You can manage someone else' property without investing a dime.

Seth Borman · Answer

The most variable expense is water. High was $208/unit/month, stabilized was $25/unit/month.

Ned Carey · Answer

@Seth Borman the 50% rule was never meant to apply to multi units. I am amazed you can get expenses down to 25%.  You must have made incredible increases in NOI and value.

Adam Anderson · Answer

Hi Ned,

Thank you for your response. I will be owner-occupying. (I'm a young single guy, and don't need a 3 bedroom apt to myself, so I already have two interested roommates)

In this way property management will be on me. However, again managing my father's 4plex has been.... very, very easy compared to what I hear on these forums. Some make it sound like a full time job, I would say I don't spend more than 2-3 hours a week managing his property, even in the harsh winters of Boston.

No LLC costs, etc. This will be a residential property. Vacancy rates are rather low in Boston, from what I've seen, with the ridiculously high demand.

The building isn't new by any means, but it is in great shape and appears pretty turnkey. Renovated, it was bought for $150k cheaper a couple of years ago, so I presume it's a flip.

Not a great part of Dorchester, but I guess that comes with the relative affordability of it...

Buying first property, is 2%, 50% rule applicable in Boston?

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