Worcester, MA Multi Market CAP Rates and quality of Properties

[Brian J Allen]

Investors are always asking the same question. Why is there such a wide range of CAP RATES for Multis in Worcester? Some Properties are selling for as much as a 12 CAP and others are listed at prices that are close to a 6 CAP. First of all, Worcester is a city of Neighborhoods and in Real Estate, the key is LOCATION X3. Depending on neighborhood your rents can vary greatly. WPI, Holy Cross, Shrewsbury Street, East Side, West Side, Green Island probably get you higher rents than other sections of the city and you will pay for that. Parking is also a HUGE determining factor for most tenants other than the College Rentals. Another big determining factor is condition of the property. Most Multis in Worcester were built from 1890-1930. If they have had periodic updates to the electrical, plumbing and heating systems, and they were taken care of, they have much higher values than if they did not. Knob and Tube wiring is prevalent in Worcester in a couple of the neighborhoods, but not so much in others. Some properties still have the original Slate Roofs which are costly to replace. The most difficult task related to placing a CAP rate on a property is you need the TRUE CAP RATE so you can compare apples to apples. The best way to do this is to use MARKET RENTS as the determining factor. Rents may be low for a number of reasons, but that does not change the TRUE value of the property. If the current rents are $1200 per floor and market rent is $1500 per floor, there will be some pain and suffering raising the rents, but LONG TERM the house has more value. The buyers in the Worcester Market are savvy. Pricing on 3 deckers are hovering around 100 X market monthly rents which is close to a 10 CAP. If the house has market rate tenants at $1500, $1500, $1500 and the property is in solid condition, it will sell for close to $450k, if it is in poor condition (needs a roof, siding, windows, has poor electrical, terrible bathrooms) there will be a discount say 90 X monthly rents $405k. If it is in Superior Condition it will go over that price (has new Roof, all new plumbing, all new electrical, super nice bathrooms) it may cost as much as 130 X Monthly rents $585k. The problem typically is that rents are not at market and they can be WAY off market. Sometimes there are tenants paying $900 in units that should rent for $1500, these present opportunities for buyers who are willing to take the risk they can turn over the tenants and get the rents to market. This does not mean that the house is worth $900 X 3 X 100 = $270k, but maybe you can get that same house for $400k. I hope this begins to answer the complex question on CAP RATES and values in Worcester. Feel Free to Chime in.