Boston Investment Properties: Opportunities for Investors
If you were to ask anyone in the know about whether it makes sense to invest in real estate in Boston, you'd undoubtedly be greeted with a resounding "yes." Historically, Boston investment properties have been reliable sources of income for investors of all experience levels. Indeed, even if you are fairly new in terms of real estate investing, you should be able to hit the ground running by investing in condos, apartments, multifamily homes, single-family homes and other investment properties around the city.
With all of that being said, you can't rely solely on the excellent real estate investment market. You're also going to need assistance from professionals who know and understand Boston and the local real estate market, and that's what you'll get by working with Boston City Properties. All too often, people hear glowing things about buying income property in the city and assume they need little more that some capital to get the ball rolling. In reality, a lot more needs to be done to ensure a solid rate of return. We can help you identify investment properties in Boston that suit your needs as an investor and that will help you bring in the income you need.
The Benefits of Owning Investment Properties
For the purposes of this section, we're going to assume that you're a relative newcomer to the property investing scene. Perhaps you're on the fence about investing in property. You've probably heard your fair share of horror stories, but here's something to keep in mind: The real estate crisis is over. The market in Boston is thriving. Furthermore, Boston has always been a safe bet for savvy investors. The city enjoys a steady stream of incoming students and young professionals, and they're always looking for places to rent. More importantly, they're willing to pay steep rents to live in desirable parts of the city.
There's no question that investing in Boston investment properties is a wise move, but what about owning income properties in general? What's so advantageous about that? Consider these compelling points:
- Take Advantage of Leverage Appreciation - This is property investing 101: Most investors use financing to buy properties. In most cases, a down payment of 20 to 30 percent is expected, and the rest is financed. Due to high demand, properties throughout the city of Boston tend to appreciate steadily and reliably from one year to the next. What happens, then, is a situation that's precisely the opposite of being "underwater" on a mortgage. Before too long, the equity in your investment far exceeds what you owe, and that's largely due to appreciation. That's a very secure position to be in, and it's what investors strive for. In Boston, this scenario is very likely to play out for you, so you can count on having a nice safety net within a reasonable period of time.
- Enhance Your Return with Tax Write-Offs - The tax benefits of owning investment property are incredible. Regardless of the type of property you buy, where it's located or whether you pay for it in cash or finance it, you can write off a laundry list of things. Some of the most popular and advantageous write-offs are for things like insurance policies, property taxes, professional and legal fees, the cost of maintenance, the cost of repairs, travel expenses, mortgage interest and even credit card charges pertaining to the upkeep of the property. By reducing your overall tax burden, you'll enhance the profitability of your investment. It's truly the gift that keeps on giving!
- Enjoy the Benefits of Rental Income - As long as you are careful about what you pay for your properties and how much you can collect in rent, you should be able to start enjoying a steady stream of rental income right away. Obviously, the rent needs to be high enough to cover the cost of the mortgage. Additionally, you'll need to set aside about 5 percent of the rent you collect for maintenance and another 5 percent for vacancy costs. Whatever is left over can go right into your savings account. In many parts of Boston, you can get away with charging very considerable monthly rents, so odds are you'll be growing your savings account before you know it.
Why Invest in Property in Boston?
If you're new to property investing, hopefully the preceding section convinced you of its benefits. If you're a seasoned investor, though, you're already well aware of the amazing opportunities that property investing brings to the table. Here's the next question: Why should you focus on Boston investment properties? What makes Boston so great?
There is always strong demand for rental units in the city of Boston. That's true for a number of reasons, but the high percentage of college students and young professionals just starting out in their careers is the most obvious one. At any given moment, thousands of people are out there looking for places to live. Not surprisingly, most of them want to live within the Boston city limits. Some have plenty of money to throw around on rent while others have more limited means. Either way, they're all going to ultimately pay rent to someone. Why shouldn't it be you?
Unlike many metropolitan areas, rental units in Boston tend to be leased quickly. Rental properties just don't tend to sit vacant for very long. Obviously, the area of the city and other factors affect how quickly a property will be leased, but generally speaking, you shouldn't have to wait long to find takers. Boston's rental market is incredibly dynamic. Whether you purchase multifamily housing, single-family homes, condos, apartment buildings or other types of rental properties, you can expect to fill them quickly.
Choosing the Right Investment Property
We're making this all sound so easy, right? It certainly can be, but it all hinges on one crucial thing: Choosing the right investment property. As with any city, there are great opportunities and not-so-great ones. What works for one investor may not work for the next. There are many variables to consider. Without being careful, you could end up owning a property that drains your bank account instead of growing it. Boston City Properties can help you identify Boston investment properties that suit your needs and that align with your overall goals. Also, be sure to request a list of recently sold properties in the Boston area to help you understand and price the market better.
Things to consider when scoping out properties include:
- Annual Rent - What kind of annual rent can you expect to collect from your target property? If it's currently being leased, you can find out pretty easily. If not, you'll need to look at comparable properties in the area to arrive at a reasonable and realistic estimate.
- Annual Expenses - Next, you need to estimate and total up the kinds of expenses you'll incur by owning the property in question. These expenses typically include repair and maintenance costs, real estate taxes, homeowner's and landlord's insurance policies and vacancy costs, which typically equal around 5 to 10 percent of the annual rent. Also, if you'll be covering utilities at all, you'll need to add them to the list of expenses too.
- Annual Net Income - Subtract the annual expenses from the annual rent to arrive at this figure.
- Capitalization Rate - The capitalization rate is the rate of return you can expect from owning an investment property. To arrive at this number, you need to divide the net income by the cost of the property. The higher the cap rate, the better your annual return will be. At Boston City Properties, we advise clients to come up with a target cap rate before looking at a single property. You can then divide the calculate net income of a property you like by your target cap rate to figure out how much you should be reasonably willing to pay for it. Ideal cap rates vary based on many factors, but they typically fall somewhere in the 5 to 10 percent range.
Get Started with Investing
People from all over the world invest in Boston real estate. Clearly, the city is a great place for investors of all stripes. Whether you're new to investing and want to start with a safe investment that will start bringing in income right away or if you're an experienced investor who wants to enhance your overall success and generate even more income, you can't go wrong with Boston.
Boston City Properties is Boston's 1031 Exchange experts. Visit our guide to 1031 exchanges for more information.
Success in real estate investing hinges on having the right help and guidance. It all starts with choosing the right property. Even if you were born and raised in Boston, you may not know the fundamentals of what makes an investment property a good bet. The professionals at Boston City Properties do, and we can help you identify investment properties that will help you meet and exceed your goals. We help clients find first-rate Boston investment properties every day, including condos, single-family homes, apartment buildings, multifamily homes and more, so give us a call today!
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Why Buying a Multifamily Property is a Great Investment
Venturing into real estate makes an excellent alternative for investors looking for tangible assets. It is also a better investment for investors who want to have an active role in growing their capital instead of passive management of their estates. Rental properties are the most preferred investment strategy for investors looking for additional sources of income while growing their portfolio.
Residential real estate is classified into two; single family units and multi-family units. Single-family units are properties that have one unit available for rent while multi-family properties have more than one rental space. The latter requires a considerable capital investment but presents lots of advantages to investors. The discussion gives a detailed overview of investing in multi-family units.
What is a Multi-family Property?
It is a classification of housing with more than one unit where the residential inhabitants live with their separate living rooms, kitchens, electrical bills, and other utilities. Also known as multi-dwelling units, they are common in densely populated areas like cities where space is at a premium. Multi-family homes can be owned, rented and also serve as an investment property for landlords to collect rent from tenants.
Types of Multi-family Properties
It is also known as a two-flat building and often confused with a twin home. Twin houses are two separate homes that share a wall with the lot line running through the shared wall. As such, each home is located on an individual lot despite being connected. A duplex, on the other hand, features a building constructed on a house lot, which comprises of a story taking up the first floor and another the second floor with a shared basement and front entrance, stairs, foyer and a similar back entrance.
In old buildings, the hall, stairs and back entrance may have been added later. Properties of this kind should have an external opening for each unit. Otherwise, it may be considered a single unit. There are local building codes and regulations that should be followed when constructing multi-family units in the form of a duplex.
2. Triplex and Quadplex
It is a building similar to duplex only that it has three stories. Two-flat and three-flat buildings are common in old neighborhoods in particular cities. A quadplex is a four-flat structure that is identical to a three-flat, except that it has four flats. The arrangement of the apartments is different, and the lot size is larger than that of a regular house.
It is a private residence owned by a family or an individual in a building with multiple units. Condos have common areas like gyms, garages, and yards, making maintenance easy. Owners pay a fee to a condo board that consists of elected condo owners who can handle the hiring of maintenance specialists, pool cleaners, and landscapers, among other service people. Additionally, the board enforces rules and regulations that the owners abide by when purchasing the condos. It also controls the number of pets allowed in the building, as well as the age and number of people living in a unit. A retirement condo community, for example, legally requires their residents to be over the age of 55.
It is a house attached to many other townhouses, each with multiple floors located side by side. The apartments have separate entrances, and each home has an owner.
5. Apartment building
It is a building with multiple apartments; one every floor. Apartment buildings are constructed in different sizes some with a few flats and others with lots of them on every floor. They also have inside hallways and entrances to each apartment. The apartment building may be owned by one party with each apartment rented out to tenants, or separate parties can own each apartment as a condominium.
Benefits of Investing in Multi-family Properties
A 2015 article in the New York Times reported that nearly 770,000 new rental households emerge every year since the year 2004, explaining the increased demand for these units in upscale towns. Though there are only four million multi-family dwellings compared to a surging 90 million single-family units, multi-family homes present several advantages to residents. Several benefits accrue to real estate investors who buy multi-family units:
Easier to Finance
The cost of buying an apartment building is significantly higher compared to purchasing a single-family home. However, banks are likely to approve a million dollar loan for the acquisition of a multi-family property than for a single-family unit. The premise is that the vacancy rate of a ten-unit property is lower than that of a single unit. If a tenant vacates a single-family house, the property becomes 100% vacant. As such, the likelihood of foreclosing an apartment building is lower.
People investing in multi-family units are tasked with less home maintenance responsibilities. It is because the management company is responsible for rent collection, tenant problems, handling evictions, and maintaining the property, among other duties. Investors who own single-family units, however, may not enjoy the luxury of engaging a property management company because it may be too expensive. It may significantly reduce their monthly margins.
Fast Portfolio Growth
Multi-family units also make economic sense for investors who want to build large portfolios of rental units within a short time. Buying a ten-unit condo is more time-efficient than building or purchasing ten different single-family homes. You avoid dealing with ten different sellers and making ten inspections on houses located in different towns.
Single-family units are purchased based on a sales approach in that, if a three-bedroom house is on sale, it is compared to other similar homes in the market to determine the price. In contrast, investors have much more control over multi-family properties as they don't need to wait for market forces to increase or reduce their values.
How to Buy a Multi-Family Property
The benefits of investing in a multi-family property outweigh any costs that come with the investment. This section highlights the different steps of buying a multifamily property:
Analyze Important Aspects of the Property
It is a short analysis of the location, the number of units, monthly rent, the cash flow, and the expenses based on the 50% rule. Most multifamily units are located in cities and big towns often classified as C+ areas. Simply put, it should be close to the local transport and learning facilities, among other social amenities. You also want to determine if you wish to buy one, two, or three-bedroomed properties. The rents should outweigh the total monthly expenses. A 50% rule is applied in this case; 50% of the income should leave you with enough money to pay your mortgage. If it leaves a little amount for a mortgage payment, then you should consider venturing into another property that generates more rental income. The property should finance the mortgage without you looking for additional sources of income.
This short analysis should help you to determine whether you will buy the property or not quickly. Note that for every property, there are two prices- the list price and price. The list price is often overstated while the perfect price is the more reasonable and makes the investment worthwhile. Most investors offer the second price on the property.
Visit the Property
It allows you to obtain an overview of the amount of you should charge monthly and spot urgent repairs and their estimates. Note that four-plex properties are considered residential estates by banks and are easier to finance compared to five-plexes. It is because banks classify five-plex properties as commercial units that require a unique set of standards and approval processes.
Making the Offer and Negotiation
While the estate agent already has an ideal figure from the seller's point of view, it does not limit you to the amount stated. You can make a counter offer based on your research and finding out the reasons behind the sale. Look for other comparable properties and the amount they have sold for regarding price per square foot.
A new building does not leave much leeway for negotiation especially if the developer thinks other buyers are looking for such a property. It is important to find out how long the property has been in the market, the number of views it has had in the past and if there is a seller chain. A property may be in the market for a long time if the asking price is rather high or there are legal or other issues with the property. All such factors indicate how serious the seller is about selling the property while providing a reasonable ground for you to negotiate the price.
Most sellers know that buyers don't accept the asking price from the outset hence allow room for negotiation. You don't want to offer a price that is too low as it may annoy the seller, especially if you are competing with other buyers. If the property is popular, you want to avoid making high offers as buyers are often pushed into sealed bids. It is because buyers make confidential bids on the property. You also don't want to get carried away and overstretch with an offer that exceeds what you can afford. So, have a budget and stick to it.
If you are buying an incredibly competitive property, you should consider selling yourself as a buyer. In this case, a seller will be attracted to your offer if you do not have chains. A first-time buyer, for example, is likely to make a more attractive offer as there are no complications regarding selling his property. If you are not a first-time buyer, you may show the seller other properties you have on the market or those in the process of being sold. Sellers look for reassurance that once the offer is accepted, you will purchase the property fast.
Inspect the Property
An inspection helps examine and identify problems. Be sure to engage an expert. The money you spend on an inspection may save you thousands by providing a basis for negotiating a lower price and sometimes not buying the property at all. Note that a mortgage lender's valuation report is used to confirm the value of the property from the seller's perspective, hence may not show any faults with the building. Additionally, surveys vary as they depend on the location and type of property you are buying.
Determine the Method of Financing
By now you know the purchase price of the property, repair and closing costs and any other contingency costs that come with buying a property. There are various methods of financing a multifamily property as highlighted later in the discussion. The methods have different qualification criteria and maybe a little restrictive to some buyers. It explains the need to have various exit strategies:
- Refinancing the property using a bank; the property has to be seasoned for at least six months to qualify for property refinancing.
- Finding a long-term private lender; the strategy comes in handy when you cannot obtain a loan from a bank.
- Finding a reliable partner; a partner who has a better credit score, good cash flow, and a large capital base increase your chances of obtaining a loan.
- Sell the property; it is the last resort, especially if it makes a good sale.
Closing the Deal
You may engage a title company or an attorney during this process. Your real estate agent sends the signed purchase and sale agreement to the title company. The process lasts a week or more. It involves a title search and the preparation of other documents like the deed of trust and promissory note between the lender and borrower.
Before signing the papers, it is important to read the document carefully as it will have a major impact on your finances for the next decade or so. Ensure the interest rate is correct and there is no prepayment penalty.
How to Finance the Investment
Financing options depend on whether the buyer intends to occupy one of the multi-family units or not. A multifamily financing mortgage is specially designed to help first-time real estate developers and seasoned professionals purchase or refinance small multi-family units (usually 2-4 units), as well as large apartment buildings with many units. There are four types of multi-family financing options available to developers looking to buy or renovate 2-20 units:
- Conventional mortgage
- Government-backed loans
- Short-term multifamily financing
- Portfolio loans
The loans are offered by traditional lending institutions and banks. They are long-term, ranging between 15 and 30 years and are used to finance properties that range from 2 to 4 units. As such, buyers looking to finance over five units should consider other financing options like multi-family portfolio loans and government-backed loans. Banks and other lending institutions require borrowers to put up a down payment of 20% of the purchase price, a relatively fair standard compared to residential property loans. Other qualification criteria include a credit score of over 680 and cash reserves for 6-12 months.
Most conventional mortgages for MFUs charge interest rates ranging from 4%-6% on a fixed or variable basis. Fixed rates are amortized fully throughout a loan's term while variable rates may change after 7-10 years. Variable rates are also based on a six-month LIBOR rate with a cap equal to the starting interest rate plus 5-6%. Additionally, fees associated with conventional mortgages include; the loan origination fees and closing costs. You may also be charged appraisal and application fees.
The option provides real estate investors with more than five financing alternatives. The loans have terms ranging from 5-35 years and buyers can finance 2-4 units, as well as properties with over five units. Just like conventional mortgages, investors are required to raise 20% of the purchase price as down payment.
However, borrowers taking an FHA (Federal Housing Administration) loan for the acquisition of an apartment require buyers to raise 13% or more of the purchase price. The minimum loan amount is $1M without restrictions as to the maximum amount.
The interest rates for government-backed loans range from 3%-6% which can be fixed or variable. Variable rates are adjusted after 3-10 years based on a six-month LIBOR rate but with a maximum cap rate of 5%. Fees associated with these loans include loan origination fees, prepayment penalty, and closing costs. The institution issuing credit may also charge legal fees, FHA inspection fee, and a mortgage insurance premium. The qualification criterion for a government-backed loan comprises:
- Finance more than five units
- Have a credit score of over 650-680
- A minimum occupancy rate of 85-90%
- Occupancy of over three months
- Liquidity of more than nine months
Short-term Multi-family Financing
It is a non-permanent multi-family loan alternative that lasts for six months to three years and is used to finance properties with two to over five units. The loans comprise bridge loans and hard money loans with monthly payments (usually interest-only). Note that short-term multi-family loans are used to purchase MFU properties before refinancing using a permanent loan.
Investors pick out these loans to renovate or improve the occupancy rate of an MFU to meet the strict requirements of a permanent multifamily loan. Other investors use the credits to purchase a property in a bid to meet the personal qualification criteria before refinancing. Short-term MFU financing loan amounts start at $100,000 and do not have a maximum value. However, both loans have a property (LTV) loan-to-value ratio of 90% and (LTC) loan to cost ratio of 75%. It means investors should expect to raise 10% or 25% of the purchase price, including renovation costs.
Interest rates for the loans vary greatly. For example, hard money loans have their interest rates ranging between 7-12% while bridge loans have rates ranging from 4-12%, depending on the lender. Fees associated with the loans include; loan origination costs, extension, and exit charges, as well as a prepayment penalty. The approval time is also short, making it advantageous for investors to know who is competing with all-cash financing buyers.
- Criterion for hard money loans
- Financing two to more than five units
- Have a credit score of over 550
- Have experience in managing a multi-family property or 2-3 past rehab projects
- Does not have another debt
Criterion for bridge loans
- All the requirements for a hard loan
- A credit score of 640 and above
- An interest reserve for properties less than 1.05 DSCR
It is a non-conforming loan used for an MFU property with 2-5 units. The mortgages have terms that last 3-30 years and tend to be more flexible compared to conforming loan options as they can finance four to ten properties at once. Additionally, investors are only required to raise 3% of the property's purchase price as the portfolio loan finances up to 97% of the value.
Portfolio loans charge interest rates, ranging from 4-6% or higher, which can be variable or fixed. Variable interest rates are adjusted within 5-10 years before based on the six-month LIBOR rate. Fees associated with a portfolio loan include the closing costs, loan origination fees, and prepayment penalties, which are charged on loan. To qualify for a portfolio loan, you must meet the following criteria:
- Intend to buy two to over five units
- Have personal credit score of more than 600
- A liquidity of over nine months
- A minimum occupancy rate of 90%
Other Financing Alternatives
Some investors may find the financing options discussed a little restrictive hence might explore other alternatives:
While private lending is the most common form of financing for single-family unit investment, it is also useful in multi-family investing. It comes in handy for investors looking to fund a down payment for a property. Private lenders can be people in existing social networks like colleagues, friends, doctors, and family. The prospects of better returns than what most of them are getting from their retirement or other plans make a compelling reason for them to lend money.
This method of financing is somewhat different from working with a private lender. Here, the equity investor lends you money in exchange for a portion of the equity of the property. It is a more attractive way to woo investors to give or invest their funds as they have the opportunity to generate long and short-term cash flow.