What CAP rates are normal in the Greater Boston market?

[Menina Rascionato]

Hi All,

I have investment property in another state, but I'm looking to get into the Greater Boston real estate market. Granted right now is a crazy time to be buying in this market, but I'm having a hard time wrapping my head around what's out there right now and the CAP rates. Most places in the multifamily market I see are practically breakeven on invest or maybe 1%. I'm used to seeing CAP rates at 8%. I understand that given the sellers market right now, finding a CAP rate that high is not feasible, but how is anyone being profitable purchasing a place that is breakeven as an investment and not an owner occupied multifamily? Also, my agent told me that I have to put minimally a 25% down payment and less is impossible in Massachusetts. Is that true??? I'm feeling lost in this process. TIA

[Jonathan Bombaci]

@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