Evaluating CAP rate and Rent to Price in greater Boston area

[Ashwin N.]

Hello,

Hope 2018 is off to a good start for everyone. I am considering my next rental income property and as I am evaluating supply for CAP rate and rent to price ratios, I have a few questions I wanted to run by MA investors. Thanks in advance for your thoughts.

Background: I am looking to purchase a 2/3/4 unit property that's relative turn key. My primary goal is rental income. Though I wouldn't turn down a long term equity play, that's secondary for this go around. The biggest risk I would like to safeguard against (as much as possible anyway) is tenant eviction etc. as I have a full time job and real estate is just a hobby/supplemental pursuit. I live in Boston so I will most likely get a property manager for this property.

Here are my questions. 

• 2 or 3 family properties in a town like Fitchburg seem to be around $150k, and the rents advertised in the listings seem to put them at close to "2% properties" i.e., monthly gross rental flows are close to 2% of the purchase price. CAP rate and cash on cash rate are both correspondingly very high.
  
  My questions - What are the downsides? Should I expect a lot of tenant turnover in these towns compared to more prosperous/wealthy towns? Should I expect tenants to miss rent payments or be regularly late? Would hiring a property manager lower any of these risks or not really? 
• 2 or 3 family properties in Worcester seem to be about twice that - at around $275-$300k. Rental incomes seem to be the same (~$3k a month gross) which puts the rent to price much lower. 
  
  My questions - Would the lower rent to price ratio be offset by any obvious upsides such as better tenant pool, less likelihood of tenants defaulting, lower turnover, etc.? Or is that not realistic?

Thanks a lot guys, appreciate the input.

[Daniel Consalvo]

Ashwin,

I am a local investor in the Fitchburg area.  I would be wary of the rental amounts put into the listings.  At some point in time,  I noticed in the last few years, real estate agents started putting in projected rents into vacant units instead of putting "0" which would signify a vacant unit.  In almost every case these rents are greatly inflated to make the property more attractive.  Check Craigslist or any other site (zillow) to see what landlords a in the geographical area are "asking" for rent.  If you see an expensive outlier consider them as such.  Just like listing prices for houses, there is no law against over pricing rent for an apartment. Drive through this city as things can change quickly depending on what street you are on.  

Be Great!

Dan