All Forum Posts by: Christian Austin

This thread was prompted by the discussion in "To buy or not to buy owner occupied multi-family in Boston suburbs" on continuing to rent in an poor investment home market while owning cash-flowing properties in a good REI market. Although I understood that this strategy could work financially, I was originally not keen on this idea. After feedback from BP members, in particular @Ziv Magen, and becoming frustrated by the Boston market, where investment properties that barely make financial sense at list price are going for $10's of thousands over, I am seriously considering continuing to rent while investing out of area or state, rather than overpaying for a property where I live.

It appears that some people on BP have used this strategy. I'm curious what the experience was/has been like for those that have taken this approach. Where did you invest? Somewhere you were familiar with or completely unfamiliar with? How did you put your team together to purchase and manage the property? I'd be interested in hearing other's stories and recommendations.

Hi John,

Welcome to BP. I'm a new member myself, trying to learn about investing in the Boston area. Bryan K. I agree that the podcasts are loaded with great information; I've listened to all of them. Forum members are also very helpful answering questions. I've learned so much from them in my limited time on BP. I'll take you up on your offer to help. Since you have a background in construction, perhaps you could recommend some good contractors in the Boston region? Hope to see more posts from you in the future.

The feedback on this forum has made me formulate exactly what my investment goals currently are. I say currently, because I may be convinced that another path may be best. In particular, option 3], which was previously unappealing to me is beginning to look better.

Short-term, I would like to purchase a multi-family in an area that I would like to live. This will not be a dream home, and probably not a long-term residence.
The property should cash-flow or be cash-flow neutral if I moved out and rented the whole house. From a strictly financial standpoint, I cannot
argue against the fact that renting in area and buying better cash flowing properties out of area could generate a better cash situation, although out of area equity built through rent might not be as good if the total mortgage is much lower.

However, I would like to have the experience of owning a home and learning how to update and fix problems, and generate equity myself through the process. I may feel much differently in the future; then, I would change my strategy.

Longer term, I would like to buy and hold properties. It would be great to find properties around where I live, but I would not have a problem investing out of area if that makes sense.

@Ziv Magen you make a compelling argument to continue renting and let cash flowing properties pay the rent and generate cash flow. I would contract any major reno work, as I would not have the time/expertise to invest in such endeavors, although I would like to do minor reno work. So, would you recommend to continue renting while investing in cash flow properties, and when I do have enough cash to buy my "dream house," then I would buy it in cash? Do you know of anyone who has followed this strategy that could comment on it?

@Troy Fisher I used the current rate of 3.56% with 20% down for my calculations. My numbers will only validate your conclusions further.
Both houses have a $2,534/month, mortgage for $30,408/year the Yorktown, rent is $60,000/year with the 50% rule we have -$408 CF. Considering
that this house would probably need about $20,000 more to finish it off, the mortgage payment would be even higher and cash flow less. For the
Thurston property, rent is $56,400/year, and with the 50% rule, we have a -$1,800/year CF. These are actually some of the better cash flow properties
in the region. Some of the numbers can work using 40% maintenance assuming not paying for property management. What would your strategy be in this region?

@Steve Babiak I completely agree. What I meant to say was loss over having bought only one house and having only one closing fee instead of one selling and two closing fees. I was assuming that the total value of the house minus this set of costs would still net a capital gain. A 1031 would still be used in such a situation, right?

@George Paiva I fully understand what you mean by being ready to lock it in quick. I'm finding that many of the houses that I am interested in are on the market for less than a week. It feels like I have to make the biggest investment decision of my life with haste when making an offer.

@Kevin Barrett I really appreciate you posting your APOD on Thurston St. The spreadsheet is very helpful. I plugged in 700k selling price and the ROI drops to 4%. It looks like these calculations assume that expenses will only be about 30% of the gross income. I currently evaluate properties using a 40% estimate for expenses (50% rule - 10% for self-administered property maintenance). I would use a more detailed APOD analysis as you have done, but have trouble estimating some costs. I've had trouble locating cost of town water and sewer bills, but the most trouble evaluating routine maintenance and cap-ex. Can you offer any advice on how to calculate these expenses? Do you use some pro forma estimate of maintenance and cap-ex? This house had quite a things that were near end of life. Also, I don't see any amount for legal included. Is this typical? I would think that lawyer consultations and evictions would be accounted for, maybe with a percentage, like vacancies.

A question to all: Do you continue to rent in a region that is poor in cash flow investments and invest where there is cash flow? How is this strategy working out, and what are your long term goals?

@Troy Fisher, thanks for the info. I currently rent. By the 50% rule, I very rarely find a house in my area that is cash flow neutral with 100% occupancy; a 40% rule does work for several though, again with 100% occupancy. I've tried not to consider appreciation, since this is unpredictable, but perhaps I should try to estimate it and factor this in?

Here are some example Somerville properties I lost bids on, along with total rents. I can post more if helpful

http://www.newenglandmoves.com/property/details/632614/MLS-71509355/43-Thurston-St-Somerville-Winter-Hill-MA-02145.aspx

List: $599,000
Sold: >$700,000
Rent: $4,700/ month

http://www.newenglandmoves.com/property/details/648036/MLS-71517829/78-Yorktown-St-Somerville-MA-02144.aspx

List: $629,000 (with kitchen and 2 rooms to be finished )
Sold: >$700,000 (kitchen and rooms unfinished, no contingencies)
Rent: estimated at $5,000/month

Thanks.

Thanks for all of the feeback. @Ann Bellamy, option 3 is the least desirable to me as well. I am considering it since it MAY work better financially than option 1] or 2]. The condo option suggested by you and @Thomas Quinn is an interesting one. I suspected this was why multifamilies were going for such large amounts over asking values. The sale prices just don't make sense from an apartment rental standpoint. If I were to undertake such a condo conversion project, I would probably need substantial additional funds after the down payment to do the conversion. From Ann's statement, I'm guessing that hard money lenders would not want to fund such a project. Any suggestions on costs and funding sources for this route if I occupied one of the condos?

As far as 2], my search has remained inside of the I95 belt. I would consider Worcester as suggested, for a pure investment, but I need to remain closer to the Boston area. I haven't really looked at regions just outside of the I95 belt. Are there towns in this area that have strong rental markets? Possibly along the commuter rail?

It sounds like @Rob M. would like to take make a purchase similar to what I am considering. Has anyone purchased a multifamily in the NW Boston suburbs to rent as a multifamily property, either owner occupied or not? If so, how did you justify the property as an investment? Was there a personal intangible value of wanting to live in a certain area built into the property to justify the cost if the property was owner occupied?

Thanks for inquiring Joel. I'm starting with around $100,000 cash.

Let me begin by briefly describing my scenario. I've been looking for a multi-family property in the NW Boston suburbs (i.e. Somerville, Watertown, Watertown, Medford, etc.) since the end of last summer. This will be my first investment and I will live in one unit. To my dismay, the spring market in this area has been an extremely strong seller's market, with low inventory and selling prices usually well over list. There is no possibility that these properties will meet the 50% or even come close to the 2% rule; I can get some numbers to work with a 40% rule (assuming no property management of 10%). These facts have forced me to look hard at investment strategies and formulate possible alternatives. Here are the three alternatives that I am considering. Any suggestions would be greatly appreciated.

1] Stick to my original plan an purchase a property in my desired area; use the 40% rule to evaluate a property's price and accept zero or possibly a small negative cashflow using this calculation. In this case, I would value the property based on the equity generated by the tenants and being in an area that I desire to live. There is also the possibility of appreciation, being in a high demand area, but I don't think I should bank on this. I would like to hang onto this property if I move out in the future, and I foresee a disadvantage of this strategy is the possibility having a negative cash flow property that I do not live in.

2] Try to get a better deal in a more remote region outside of Boston and achieve favorable cash flow numbers. The two main disadvantages I see with this strategy are that I will be living outside of my preferred region, and the rental market may not be as strong, making vacancies more difficult to fill. Again I would like to hold this property as a rental after moving out, but suppose I could also use this as a short term place to live and do a 1031 exchange in the future, but would take a loss on selling and closing fees.

3] This is the more extreme, but possibly financially best, strategy in my mind. Invest in turnkey properties in areas with more favorable cash flow and continue to rent in a region that I prefer to live. It seems like this has worked for some people on biggerpockets that live in unfavorable investment areas. The disadvantage I see with this method are that I would not actually own the house I live in, and I would like to own my residence sooner than later; by waiting, my local market prices may become even more inflated than they are now, but of course there is no telling, or I could bank on appreciation in 1].

I've also considered the REO route of buying cheap and investing a large amount in renovations, but I feel that this may be a risky strategy for a novice such as myself. If you feel otherwise, I'd like to hear your thoughts.

Thanks for reading through this long post, and thanks to the community for all of the valuable information you provide. If not for what I have learned here, I would not have had metrics to evaluate a property by, and may have overpaid for one by now.

Hello, I am new at BP and have been avidly reading the very informative threads here. I can understand why this thread is a sticky. I wouldn't have thought that 50% of the monthly rent would be a safe operating budget.

I have two questions:

1] Do you cap your operating reserves, or continue adding to them even if there have been not significant expenditures in a long time?

2] Where would you typically place these funds: a savings account, or in another investment? Obviously (most) of these funds need to be liquid.

Thanks.

Thanks George. It looks like the Somerville area I am looking in is very expensive from a GRM perspective. A GRM of 10 appears to be pretty good for this area.

Thanks Raymond. Will do.