Thoughts on longevity and sustainability of Western MA, Market?

Question

The Western, MA market is absolutely on fire right now. Especially the multi-family market, specifically in Hamden and Hampshire county.

What are everyone's opinions on the longevity and sustainability of this significant surge in activity within this market. Investors are you anticipating a major upside in appreciation further down the line (10-20 years). Where do you see the direction of this market heading? What do your cash flow and cap rate %'s look like? Looking to spark a discussion here. I don't think this forum gets the attention it truly deserves.

So, who wants to jump in and share their insight or perspective on the matter?

Sincerely,

Ryan J

Jonathan R McLaughlin · Answer

Hi Ryan,

Well, we have recently made investments totalling about $1M in Western MA (Berkshire Co.) and Central MA (Franklin Co.), are attempting to expand there and hampshire/hampden and I like contemplating the future of the region(s)...so I'm happy to weigh in. Would love to hear others as well, the more the merrier. I'll start by answering your direct questions then maybe riff a bit.

1) longevity and sustainability--both areas are generally behind the major metro markets so I think they have longer to run on this immediate cycle. Investors pushed out of the creeping--north NY market are finding good quality and decent numbers. Boston investors who used to stop at springfield are starting to look in what was once exclusively a NY backyard and say, "gee, these places are nicer than lawrence, etc. and the numbers aren't bad..." For the long term a number of trends favor the region(s):

Revitalization of the rail routes up from NY, to Vermont and Boston on the 91 corridor and Pittsfield/NY/Albany routes

Increasing diffusion of work life...a few days in Boston and NY, a few days in the countryside is more and more          viable for people now--keep an eye on the wifi infrastructure. Pittsfield (one of our favorite cities as a service town to the berkshires with good restaurants and infrastructure from the GE days) just opened a co-working space, as did North Adams and others

"japanification of america"--quality of middle-class corporate life is eroding just as cities are becoming wealthier, leading to longer 1.5-2 hr commutes as standardf--as a result, these areas are becoming more competitive. For real, you can get a really nice 1500 sf house in a nice neighborhood with 3 beds 1.5 baths and a yard in Greenfield for 160K if you are just a little lucky. Only one person has to do the commute to make it an economic slam dunk, and even two service jobs and or decent freelance gigs can make it work. And its nice out there compared to ANYWHERE you could get closer to a major city

Aging population-the trend of declining population and aging out of the housing stock that was/is killing these areas are starting to bottom out, and there is a growing market for young people with families who can afford a house, rip out the wall paper, old stuff and revitialize some really nice 1900-ish housing stock.

Arts and environment: a major influx of eco-minded young people, outdoor enthusiasts and next gen owners is underway. Many towns are positioning themselves as vibrant communities with most of what you need.

Appreciation (10-20 years)--I think slow and steady or at least not down. Its a nice buy and hold market in a time when thats rare. And unlike all those stories in the midwest where people are getting cash flow out of bottom barrel places, the quality of life and neigborhoods is high. If you think of appreciation in terms of inflation hedge, its a great bet. The smaller houses with more land are a draw not a drawback to smaller families and people don't mind the multis and see them as a way to live more sustainably, so they can be sold to end-use buyers more readily.

Cap rates/cash flow:

I think you can see fair and profitable numbers in 10-30 unit multies because there aren't that many of them , and so even in a boom market its not like people are lining up. Say a true 8-9 CAP(i.e real vacancy, capex, maintenance and management) in a b neighborhood? Broad rule of thumb there.

For the singles/small multies I think lots of forced appreciation is possible given the tired houses mentioned above. You aren't going to make a killing on a flip cause things just aren't worth that much, but the numbers are manageable. You could probably do a true 200-300 a month on a buy and hold, even off of MLS and maybe not have too many crises to manage. Add in the "I found it!" deals on foreclosures, etc. and an ambitious, handy person can do well.

Inefficient markets--you have to pick your spots and things are spread out, sales volume not that high, so as a result you have more of a chance of finding something undervalued/can add value than in a market which is completely saturated. And its harder for the big guys to scale. At the same time this undercuts your returns, so its a trade off.

I'll stop here, but happy to keep it going....

Danielle McKahn · Answer

I agree that it is more of a buy and hold than a flip market. Lots of solid long-term investments to be found. There's lots  of easy value to be added in old housing  stock...space being underutilized....all perfect conditions for the BRRRR strategy.

There will be some localized appreciation driven by people escaping NYC and Boston prices for cheaper and more space... We've seen this in Northampton, but it's a small place, as prices have gone up we've seen people start moving to Easthampton, Florence...and Holyoke to a lesser extent. But Holyoke has greater long-term promise. Given that the big cities seem to be having a hard time controlling their runaway housing prices, and given that Western Mass isn't that far away and will be better connected by rail soon (to NYC), and given that there are many jobs/household configurations that require just one foot in the door in the City, I think if you pick the right spots in Western MA you will see some genuine appreciation....

John-David Herlihy · Answer

I am just getting started investing in Hampden County. So I can’t speak from experience, but I can to my expectations. Springfield is known as, “The City of Homes” and there is a significant distressed market of 1-4 family residences that is prime for forced appreciation. To this point, larger multi-family appear to be limited in number. However, I dream of converting an abandoned mill into a mid-size multi-unit.

Thank you for starting the discussion. Looking forward to following the comments.

Moshe H. · Answer

Hi @Ryan Jopson, they are incredible numbers, and thank you, but I was also in the right place at the right time, and it's also because I made mistakes along the way. The first rental property I ever bought (March 30, 2017) was right next door to that one, also a 4-unit. Well, I paid $160k for that one and I thought I was getting a great deal. I'll never regret buying it as it got me into the game and into the North Adams market, which I think still has lots of opportunity. But... it wasn't a home run. The great selling point was it had separated utilities and 4 quite new high-efficiency furnaces. It had also undergone some renovations, but needed quite a bit more, especially in the largest apartment, which was occupied by a section 8 family that trashed it and then moved out a year later. I'm still renovating that one, hopefully it will be done soon. I also had in that building a tenant who skipped out and owed me $1000, a small apartment that has seen a lot of months of vacancy, another where married tenants moved in, got divorced the next month, the husband (who stayed) lost his job and he's still doing his best to pay but he is currently in the hole for $1500. So it's partly due to screening mistakes and partly just a function of the tenant class I'm renting to. I picked up 2 more properties on that same street, which is in an excellent, central location in town, hoping that my management will kind of lift up the neighborhood. The second building I bought was for $40,000, also a 4-unit, but this one had been completely neglected for decades. I knew I was buying a major project, and had enough cash off the bat to restore the slate roof, which was the most urgent fix. Problem is I inherited some nightmare tenants with that property. I'm actually going to court tomorrow morning to try and get a judgment and eviction on the inhabitants of one unit, I have a 14-day notice out to another tenant. However, after this rough period is done, I'm still going to have a four-unit property for an investment of hopefully $70-80k after further required maintenance and renovations.

The third property was in a different part of town. It was a SFH built in 1960 that from the outside looked to be in quite good condition, up for auction. Because it was listed as occupied, no one wanted to bid on it. But at $25,000 (plus buyer's premium and closing costs of course), I knew it would be worth it even if I had to pay the former homeowner to leave. Thank God, the owner left of her own accord after I won the auction. I did about $1500 worth of cosmetic repairs, and the half-finished basement still needs paint and carpet, but my realtor thinks the house is worth between $109k-119k. We started renting it out on Airbnb and are doing ok! It's conveniently located, close to Mass MoCA and on the way to art museums in Williamstown. Hoping business picks up even more as we get more good reviews.

So when that 4-unit, in GOOD condition, with PAYING tenants, listed at $89k came up right next door to my first building, I knew it was a golden opportunity. I knew the neighborhood, I knew the market, and I knew it was a deal. The owner is a business owner who was opening up a new package store and wanted to sell his two income properties to generate some capital. He priced it to sell quickly, and he did - I signed a contract for $85k in under a month from when it was listed. (North Adams is a slow market so if you want to get the best market price you have to be willing to let a property sit for 3-6 months potentially.)

Moshe H. · Answer

I love to see Western MA getting some coverage in the forums. @Jonathan R McLaughlin, nice to "see" you here in the forums again. I've been largely absent, mostly because I bought a crazy amount of properties in my first year (13 doors in North Adams) and I'm insanely busy managing them remotely. I chose a tough strategy - C class buildings. I'm getting really burned on some of these tenants, especially ones I "inherited," but I have an optimistic view for the long term and we're trying to get things stabilized. You can find crazy deals on auctions. I bought a cute house built in 1960 for like 25 cents on the dollar. Very little work needed. There was some luck involved too as it was not attractive to bid on since it was marked owner occupied, but after I won the auction and before I even closed on the property, the former homeowner left on her own.

Ryan Jopson · Answer

@Jonathan R McLaughlin this was absolutely on point. Thank you for such a strong, well-thought out, and informative response. There is a whole book of knowledge within this one post and I very much appreciate you sharing.

I've read this 3 times in the past 10 minutes trying to take everything in. I will let this marinate for a while before offering my thoughts. I can relate to everything you have stated.

"For the singles/small multies I think lots of forced appreciation is possible given the tired houses mentioned above. You aren't going to make a killing on a flip cause things just aren't worth that much, but the numbers are manageable. You could probably do a true 200-300 a month on a buy and hold, even off of MLS and maybe not have too many crises to manage"

I couldn't agree with you more about the comment you mentioned above. I have seen frequent evidence of this within my market and even have experienced it myself. A couple of my business associates would whole-heartedly agree as well.

If time allows and you wish to continue this, I would sincerely  enjoy reading more

Ryan J

Ryan Jopson · Answer

@Moshe H. Thank you for the detailed account of your RE Investing history and associated stories! This is really great stuff and thank you again for sharing. I wish you the very best in court tomorrow and truly hope the outcome is in your favor.

Best,

Ryan J

Ryan Jopson · Answer

@John-David Herlihy great question and I have this debate more often than not with my business associates. Throughout a majority of our acquisitions we have found that most tenants in place are paying under market for units. Typically we see as-is rents in the 700-850 range and we are confident in our ability to go in rehab, refresh, and jack up those rents north of 1000/month. Based on this practice, we typically find it most convenient and most beneficial to purchase property with vacant units.

Now I understand when analyzing larger complexes of 8+ units this will not always be the case. As most lenders will require the property to generate and produce income that meet their standards. In this case, I would believe a proven rental history is an absolute must. Long term tenants paying at or near market rate rent with low vacancy rates is what I would need to consider a purchase of that magnitude.

Again, our business model revolves around 2-4 unit properties, so our standards are vastly different. Great point and great topic.

Have you begun to look for property within the western MA market?

Ryan J

John-David Herlihy · Answer

I believe there is a lack of apartment buildings of any size in the greater Springfield area, therefore in my eyes, creating a potential opportunuty in this market.

In light of this, I have a question for this select and targeted audience...

In an idealized world, if you were to buy a newly renovated small apartment building 8-16 Units in Holyoke, MA, would you want to buy without tenants so you can conduct your own due diligence, or with tenants and a proven rental history?

Christopher James · Answer

Send me a message to discuss this further. Lets meet for coffee and talk more about this

CJ

Thoughts on longevity and sustainability of Western MA, Market?

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