Finding my First Deal

[Ryan Emrich]

My business partner and I are looking to invest in our first rental investment property. We have analyzed over 100 properties in the Greater Boston area over the last month, including visiting 35+ in person. I am quickly realizing it's difficult to find 1) properties which meet the 1% test, and 2) properties which cash flow positive from year 1 (unless we increase our down payment from 3.5% to something much higher).

I would like to get two pieces of advice from the Bigger Pockets community in Massachusetts. First, I would love to know what areas investors have been finding good deals around Massachusetts. We have started our research in Somerville, Medford, Malden, Everett, Lynn, and Salem, MA. My partner is already giving up and wants to leave the state. While I am not opposed to that, I am confident there are plenty of great deals in our state - we just haven't found them.

Second, I want to ensure my financial analyses are as accurate as possible for each property, mainly my assumptions around estimating expenses. If you could share with me how you estimate many of your operating expenses I would appreciate it.

Happy investing,

Ryan Emrich, CPA

Medford, MA

[Adam Sankowski]

Hey Ryan,

I hope that my response stays focused here but I'll try to address your questions as this is something that I have actually been thinking about a lot. I have first hand experience in the area as I bought a 2 family right outside of Union Sq. in Somerville about 5 years go. We have obviously done rather well. I have since moved to out of state investing (Indianapolis and Kansas City) and am actually considering moving back into the Boston area to invest. Out of state is not all it is cracked up to be! Also, this is going to sound rather controversial but I've been formulating this theory for a while but I don't think that the 1% rule applies to the Boston area and here is why:

That is a rule of thumb to use in a cash flow environment. That also takes into account paying for property management, vacancy, repairs etc. So you see if the property hits the 1% rule and then you know it will cash flow. The thing is I don't think you need property management if you live in the area for one property... and vacancy? We filled our property this past year in 6 hours at above the price we listed it for rent! We had tenants bidding to rent it! You are doing something horribly wrong if you have a vacant property anywhere in the Boston metro area. Also, you don't have to pay for a leasing fee- for example my property management in Indy charges one month rent to lease it up. That's 1/12th of my income for the year on it! You don't pay a leasing fee in Boston, the tenants do. Also there is no reason not to use a quality realtor to lease it, its a free service here! So I don't think you can really apply the 1% rule here.

Also, the new tenants we got in have so far done some of their own repairs ha (fixed the garbage disposal themselves). Again, controversial statement here but I don't think you really need to worry about evictions either? Maybe in Lynn/ Everett/ etc but in Medford? These are young professionals who probably dropped 200k on an MIT education and you think they are suddenly going to destroy their credit and ability to rent in the area where all of the jobs in their related field are because they can't come up with rent? Mom and dad will help. I'm not saying that an eviction can't happen BUT the chances of it are much less. You still need reserves and to have cash on hand but already you aren't paying 10% for management, aren't paying a lease up fee, you don't really have to put aside for vacancy (as long as your leases run Sept to Sept, which might take a year to get going depending on when you close), and eviction chances are really low.

Also, security deposits. In Indianapolis one of my houses rents for $725 a month. So if they trash it I have $725 to fix it up. Not a lot! But in Somerville we have a 1 bed going for $2500, if they trash that 2500 will do a whole lot more in terms of paying for new painting and patching. See what I'm saying? SO... I just don't think that the 1% rule applies as much in this area.

Also, our two family has appreciated 100k A YEAR since we bought it. You can't get that out of state! And rents rise EVERY YEAR HERE, even in the downturn of 2008 my land lord jacked our rent up and we paid it, why? Cause we all still had good jobs in Boston unlike in the rest of the country. So you don't want to buy anything that loses money but wait 2 years and something that barely cash flows is suddenly doing alright.

So my advice if you want to go out of state is that buy here first! Things are slowing down too a bit, I'm def seeing prices dropping in the area. Then you put the sweat into this Boston property and as it appreciates you use this as the bank account to start buying or BRRRR'ing out of state. Instead of using hard money your using a HELCO of your own equity. It take a bit longer but its a way better way to invest out of state- create your own bank here (your property) and then use that money to pay in cash for stuff to BRRRR else where. That's my advice.

So let's say I've convinced you to stay local... how do you make the numbers work? Airbnb! Is one idea. Medford is the land of in-law suites and I'm assuming one of you are living in the property since your trying to put 3.5% down. Look for a single fam that needs work but that has an inlaw. Medford allows Airbnb as long as you live in the property. Malden is a great play too. Try to get into the part of Everett near the casino or just outside of it. Also Boston! Dorchester, explore the lower parts of Mattapan near the Naponsette bike trail. Salem is a great choice. Or research where every single commuter rail stop is and look for multi families or good houses within walking distance. I work in down town Boston and I'm amazed by how many people take the commuter rail from like Newburyport to downtown.

And just my opinion here but you can drive the streets all you want. that's a waste of time. Why in this environment is someone going to sell a property at a huge discount when they can put a total piece of junk up on the MLS and still get a billion offers. And your not paying cash right? So trying to look for off market deals isn't going to help you. Just find a great agent and stick to the MLS. Set your settings on Redfin to only properties that have been on the market for 30 days plus. Something is def. wrong with them then and just target those.

I hope this is all helpful. Also I need a CPA who specializes in real estate! Do you know about all of the new bonus depreciation laws and if you can use an online cost seg site for a small residential property? Can you set up an S corp for an Airbnb business? We should talk!