What CAP rates are normal in the Greater Boston market?
Member since 2021 · 1 post · 0 votes
What CAP rates are normal in the Greater Boston market?
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Jonathan BombaciBusiness Member
Real Estate Agent · Lowell, MA · Member since 2019 · 1k+ posts · 1k+ votes@Menina Rascionato CAP rates in Boston are definitely compressed but you can find decent CAP rates about 45 mins outside of the city. I actually just got an appraisal back for a 6 unit we're buying in Worcester County and it appraised at a 8.3 CAP rate which came in about $15,000 over our contracted purchase price. In places like Lawrence and Lowell we're looking at a 6-7 CAP rate. The closer to the city you get the lower the CAP rate, but I can't justify buying 4 CAPs it just makes no sense to me.
In greater boston proper you can definitely find break even and, dare I say, even slightly cashflow properties but you'll want to be looking in the 5+ property category or trying to find something with a value add play. In some of the markets like Waltham and Everett that could be adding bedrooms in the basement or attic or utilizing dead space but you need to get a little creative. My favorite play in those markets is finding the 2 family with 3 units and making it a legal ADU or allowing one of the residents to carry a sublease and legally monatizing that additional unit. Many agents and buyers see that as an "illegal unit" but with the right lease structure and a little creativity it can legally be monetized and then you're essentially buying 3 units for the price of a 2 family. One of the better deals we had in Greater Boston was a 4 unit with 5 apartments. It just took filing a building permit with the city asking them to make it a legal 5th unit, we thought they were going to throw up a bunch of red tape but to our buyers surprise the town granted the 5th unit as a legal unit with no additional asks. I think the permit cost less than $1000 and they added a legal 1 bedroom unit to the building. Plus it was purchased at appraised value and it was appraised as a 4 unit. We just analyzed a off-market 6 unit in Roxbury for $1.9M that could easily bring in $3500 per month per unit with some value add. That one will definitely cashflow with some updates... Buying "turnkey properties" will cost you a pretty penny and the cashflow will be less than desirable but find something with a little hair on it or something others don't fully understand and you can make it a deal.
Whoever told you need 25% down doesn't keep up with the market. Covid caused a lot of the banks to adopt a 25% - 30% down requirement on non-owner occupied properties but we are now seeing things loosen up again and 20% down has become pretty normal again you just have to ask for it. Maybe 1/3rd of the banks are doing 20% down again on a 1.2+ DSCR assuming you have good credit and some experience to back it up. If you want to go private money at a higher interest (5.5%ish) you might be able to find 15% down under 4 units with the right lender. We closed or are closing 6 deals in MA this month. 1 is a SF Flip with 10% down, 1 MF flip at 15% down, 2 MF buy and hold with 20% down, and 2 are MF flips (that we need to buy "CASH" with a private "guy") at 25% down. Those loans end up being across 4 different lenders and I'm a bit of a finance nerd so you can take that as first hand local knowledge.
I hope this helps.
Best,
Jon
4 Replies
- 4yJonathan BombaciBusiness MemberReal Estate Agent · Lowell, MA · Member since 2019 · 1k+ posts · 1k+ votes
@Menina Rascionato CAP rates in Boston are definitely compressed but you can find decent CAP rates about 45 mins outside of the city. I actually just got an appraisal back for a 6 unit we're buying in Worcester County and it appraised at a 8.3 CAP rate which came in about $15,000 over our contracted purchase price. In places like Lawrence and Lowell we're looking at a 6-7 CAP rate. The closer to the city you get the lower the CAP rate, but I can't justify buying 4 CAPs it just makes no sense to me.
In greater boston proper you can definitely find break even and, dare I say, even slightly cashflow properties but you'll want to be looking in the 5+ property category or trying to find something with a value add play. In some of the markets like Waltham and Everett that could be adding bedrooms in the basement or attic or utilizing dead space but you need to get a little creative. My favorite play in those markets is finding the 2 family with 3 units and making it a legal ADU or allowing one of the residents to carry a sublease and legally monatizing that additional unit. Many agents and buyers see that as an "illegal unit" but with the right lease structure and a little creativity it can legally be monetized and then you're essentially buying 3 units for the price of a 2 family. One of the better deals we had in Greater Boston was a 4 unit with 5 apartments. It just took filing a building permit with the city asking them to make it a legal 5th unit, we thought they were going to throw up a bunch of red tape but to our buyers surprise the town granted the 5th unit as a legal unit with no additional asks. I think the permit cost less than $1000 and they added a legal 1 bedroom unit to the building. Plus it was purchased at appraised value and it was appraised as a 4 unit. We just analyzed a off-market 6 unit in Roxbury for $1.9M that could easily bring in $3500 per month per unit with some value add. That one will definitely cashflow with some updates... Buying "turnkey properties" will cost you a pretty penny and the cashflow will be less than desirable but find something with a little hair on it or something others don't fully understand and you can make it a deal.
Whoever told you need 25% down doesn't keep up with the market. Covid caused a lot of the banks to adopt a 25% - 30% down requirement on non-owner occupied properties but we are now seeing things loosen up again and 20% down has become pretty normal again you just have to ask for it. Maybe 1/3rd of the banks are doing 20% down again on a 1.2+ DSCR assuming you have good credit and some experience to back it up. If you want to go private money at a higher interest (5.5%ish) you might be able to find 15% down under 4 units with the right lender. We closed or are closing 6 deals in MA this month. 1 is a SF Flip with 10% down, 1 MF flip at 15% down, 2 MF buy and hold with 20% down, and 2 are MF flips (that we need to buy "CASH" with a private "guy") at 25% down. Those loans end up being across 4 different lenders and I'm a bit of a finance nerd so you can take that as first hand local knowledge.I hope this helps.
Best,
Jon
- Real Estate Agent · Minneapolis · Member since 2019 · 338 posts · 219 votes4y
There are some deals to be had but they are definitely few and far between, particularly now given the recent rise in interest rates. To give some context on what I'm seeing on the MLS it looks like most 1-4 unit stuff in Boston comes in between a 4.5 - 5.5 cap, and that (as Jonathan mentioned) you can find some better value as you push further into the suburbs.
- Rental Property Investor · Manchester, NH · Member since 2019 · 186 posts · 156 votes4y
You might want to look into the eviction process in MA prior to investing.
- 4yGabriel GraumannPro MemberReal Estate Broker · Phoenix, AZ · Member since 2019 · 165 posts · 100 votes
@Menina Rascionato Greetings. While it may be helpful to know what average cap rates are in various markets, a better question would be "what factors are influencing investments in ___________ market". Too often I consult with potential clients and they start with stating a minimum cap rate they want to achieve. However, this rules out many ideal properties that have other factors causing an acquisition cap rate lower than desired, but the property valuation could easily improve with proper management of the asset after acquisition. Increase rents, fill vacancies, address deferred maintenance that increases efficiencies and reduces operating expenses to name a few. Don't be afraid of looking at properties that hit a lot of your criteria but may have an acquisition cap rate below your desired threshold, you may be able to achieve or exceed the desired value within 12-24 months or sooner depending how much upside potential there is.
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