Lowell, MA; One Investor's Story

[Hector Rodriguez]

PART 1: 

INVESTING IN REAL ESTATE, the Why, the Where, the What, the How, and the How Much:

In mid-2017 my wife and I decided to go back to what had been one of our passions in the mid-90's, the ownership and management of real estate. We had been successful in the past, but our professional careers caused us to relocate multiple times, preventing further investments in real estate. We are at this point rooted in the Boston suburbs; it made sense to go back into real estate one more time.

Why: And why were we interested in real estate? We learned very early on that real estate provides investors with:

• 1. The ability to make money through cash flow, debt satisfaction, capital appreciation, and tax deferment,
• 2. Risk mitigation through use of insurance, inflation hedge, and capital protection, and
• 3. The not insignificant joy derived from business ownership.

The reasons are therefore obvious: there’s money to be made, the investment is relatively safe, and we have control over it.

Where: We started searching for properties in areas in Massachusetts we knew relatively well… Waltham, Watertown, Arlington, Medford, Malden and Everett. What we found was that property prices in these areas were too high, leaving them in a negative cash-flow condition even when using 25% as down payment!  We are conservative investors, and want to see our investments produce positive cash flow, so those towns did not make the cut.

So we fired up the computer and ranked all cities in Massachusetts on average rental revenue as compared to average property costs, and prioritized them based on distance to our home in Waltham. Out of the top 20 cities, the first one was Springfield, which we did not consider due to distance, a 2-hour drive, each way, on a good day! Second on the list was Lowell, a clear possibility at a mere 20 miles or so from home. A cursory review of existing properties for sale confirmed that Lowell was indeed a city with potential for good financial returns. Other potential cities included Worcester, Framingham, Haverhill and Lawrence, but they were lower on the list and farther away… so of to Lowell we went! A little background on Lowell first…

Lowell was incorporated as a city in the early 1800’s as America’s first, large-scale planned industrial community, relying on its rivers and canals to provide cheap and reliable transportation and waterpower to the mills. Lowell’s industrialization was extremely fast… by 1840, Lowell had become the principal manufacturing center of the United States!  That legacy is clearly visible today as one walks downtown, with its many repurposed mills as modern residential units and canals surrounded by restaurants and nightlife.  The University of Massachusetts at Lowell brings vitality and reputation to the town, the National Historical Park brings further connectivity to its past while the Merrimack and Concord Rivers provides sporting opportunities as well.

Now, to be fair, Lowell’s reputation within the state of Massachusetts is not the best. Between the impact of the opioid epidemic in the Northeast, and the perceived decaying economic conditions, few in the state speak well of it. In fact, our own reaction when Lowell bubbled up in our analysis was one of… “Lowell? We don’t want to go there do we?” But, we also know that perceptions are often rooted in old thinking, often times not linked to reality; we wanted to see for ourselves, we were willing to give Lowell a chance!

So we visited Lowell, and we liked what we saw, a lot! Lowell has a strong resemblance to Jersey City and Union City, New Jersey, cities where we invested before… old industry towns, older but solid properties, working class population and a strong immigrant flavor as well. What the city may lack in sophistication, it makes up with character and grit. The presence of commuter trains, and its closeness to major interstate highways means that most of its residents find it acceptable to commute to Boston, where higher paying jobs are plenty, while continuing to benefit from the lowest cost of living Lowell provides. We were convinced… Lowell was in our future.

By the end of the year we had further narrowed our area of interest to that of two specific zip codes, in the Southern part of the city. This area (our “Farm Area”) comprises a number of distinct neighborhoods, no more than 1.5 miles from its center point, all basically surrounded by major highways and with no river crossing delays, a significant advantage to daily commuters. The inventory of properties in the Farm Area is significant, with over 2,000 multi-family properties to choose from.  So out shopping we went!

PART II "The How and the How Much" Next week!

[Hector Rodriguez]

Originally posted by @Gillian Gong:

Great post! We’re also looking into investing in Lowell since it’s relatively more reasonable. Another place we’re thinking about is Salem, wondering if you guys have any thoughts on that town?

 Hi Gillian,

The process we followed to identify where to invest was a very mechanical one.  

1. First thing we did was identify the largest 20 cities in Massachusetts (you can easily find that information in the web, but here is the link to the official 2010 Census).
2. Second we identified average home values and rental prices for each town (there are several sources for this information, Zillow Research is one example)
3. Lastly, we divided average annual rental rates in each town by the average cost of homes in those towns.  Our results from back in 2017 are below...

Note that the idea here wasn't to identify individual property cash flows or Net Operating Income, but strictly to identify what town to invest in.  The use of gross rental revenue divided by asset cost is by the way a version of accounting's Asset Turnover Ratio applied to Real Estate (I am by the way not an accountant, so this may be wrong! :-)).

The map of all of these cities / towns is plotted below.  Note the purple lines are the Metro Routes, the circular area highlighted cities within 35 miles from our home, the yellow and blue markers denote the cities of primary interest for us...

As you can see, Salem didn't make the list, but only because of size.  Out of curiosity, I just ran the numbers for Salem and came up with an annual rental revenue on cost ratio of ~6.7% for Salem, middle of the pack.  That may be acceptable for you, especially considering other variables such as expected appreciation, average age of homes, and how close Salem is to where you live.  It just didn't make our cut.  This highlights the fact that other towns may in fact be better options in the MA Metro Area for the "Conservative, Cash-Flow Oriented" investor, we just chose to focus on the largest 20 cities / towns.

Is this the best or most accurate way to quantitatively rank / prioritize areas of interest?  Maybe, maybe not.  Making decisions on where to invest based on average prices and rents is admittedly an overly simplistic approach.  You would also have to go in and explore the Town (as we did, see above), and assess it for variables such as population and rental trends, demographics, availability of multi-family properties, economic activity, availability of mass transportation, etc... but the approach has worked for us so far.

I'm curious about what the readers may think of this method and / or what other methods are being used out there to select cities / towns to invest in.

Thanks again Gillian for the question.

Hector