bostonbubble.com

[dantm]

Any thoughts on whether it's a good idea? Currently the rents are very high, mortgage rates relatively low and prices have decreased (slightly) off their highs a few years ago...

Would there be a major risk of a rent-reversal making this type of investment a loser in the long term? Thoughts?

Thanks!

[john p]

It would depend on what percentage of a down payment you had, what condition the place was, its location and your ability to take care of repairs.

Just before the Real Estate Bubble from 2000 to 2006 another important thing happened to the metro Boston area under former Governor Bill Weld, they ended Rent Control in Boston.

Prior to that, you couldn't get a tenant out and you couldn't raise the rent. Boston was an armpit with prostitutes and drug dealers in many neighborhoods. People used to get mugged and there were brawls outside bar rooms and sports centers all the time. People were rowdy, cops were corrupt, racists in South Boston threw rocks at school buses filled with black children during the bussing days. It was ugly. People were leaving the City for the suburbs and areas like Somerville were called Slumerville. Somerville, Charlestown, South Boston had the Mob etc.

People were leaving these areas so property values were plummetting. People left these properties to rot. These gorgeous wooden homes got cladded with cheap aluminum and vinyl siding and the nice front porch community turned insular and the streets were places to dump your garbage, find your local drug dealer. Parents used to say, "We lost another one to the streets" meaning that a kid went bad. Street community turned into a sewer that polluted kids. It was sad. Kids were hardened and demoralized when the found out that their heros, the police were just as corrupt as the gang leaders.

Anyway, community minded people left the city for the suburbs, and the quality of education in the city plummetted with the real estate values. At the end of Rent Control, most of the rental properties were run down and needing a lot of work. Because people could buy them dirt cheap, people made a lot of money first renting them out and then by converting them to condos (2 and 3 families). Even a cheezy vinyl sided rotted out place with cat urine soaked rugs could run a profit. People who lived in these neighborhoods often rented them out to young yuppies and used the cash flow to buy a nice house in the suburbs.

Many of Boston's neighborhoods totally transformed during the stock market and real estate bubbles. The South End, North End, certain areas of Charlestown, and the Back Bay flourished. The unique characteristic to these areas are that they are not really family areas, but more wealthy single or double income no kids. Areas that started to really transform were Chelsea, Somerville, Revere, South Boston. Their corrupt politicians and loyalty to the public sector unions prevented the reforms necessary to upgrade their school systems so they never made it.

People who fought for reform would often say "You can't fight City Hall" and eventually move to a suburb that valued education, performance standards and expected their public servants to actually serve the public instead of extorting them with threats of Union retaliation.

What has provided a stream of revenue to help support many neighborhoods are the tens of Universities and Colleges in the Boston area. During the echo boom (the children of the babyboom), when they started to go to college, colleges increased enrollment but did not provide the adequate amount of housing. This made the surrounding neighborhood's rentals skyrocket. I know someone who bought about 15 years ago in a rough area near NorthEastern. He doesn't have to work now because of rental income.

There is talk about a higher education bubble, who knows?

If I was thinking of investing I wouldn't be thinking Boston.

Areas go through these cycles: Agriarian, Export, Industrialization, Urbanization and Consumption. I wouldn't invest in a consumption market unless the economy looked like it was going to be healthy. Right now we need really sharp leaders because times are tough and all we have are these revolving door self serving politicians or just complete dummies which typically surround a consumption society that has lost its industrious values.

[dantm]

Thanks John, that is a very thoroughly thought out reply; I appreciate it...

Some thoughts/follow-up comments:

(1) the property/properties I was thinking of are those that would rent primarily to the young professionals and/or college students; this would be based on the assumption that no matter how the economy is, there will continue to be this education bubble. If the economy gets worse, the 'make work' programs would encourage additional education, which puts properties in college-towns at a high demand. Am I right with this logic?

(2) with the current drop in some of the multi-family properties, and the respective rent increases (say on a per bedroom normalized value), there are properties out there that bring in close to 1% of the property value per month in rent. For example, $650K 3-family in the city (good condition) that brings almost $6K in rent ($2K/each unit). Even with sensitivity analysis and assuming new construction/rentals would ease some of these rents to maybe 75-80% of current going rates, these properties still turn a profit once all costs are worked into the calculation. Assuming a 20% rent drop is a little extreme given that rents move at most a few percent per year (whether up or down). I think the most recent move down was about 2.6% a few years ago.

(3) the current price-to-rent ratios in the Boston area have dropped to almost all-time lows; this typically encourages buying. I.e. a single family or condo that has lost some value at the same time that rents are increasing will push this value down and at some point you have people that are renting looking into buying. Of course this doesn't take into analysis two things -- (a) it's harder to get credit right now and the fact that there is high unemployment (on average) won't aid those who are looking to buy gather up high downpayment amounts and so on, and (b) this is not really a valid point for students and young professionals as they are more mobile and not in a position to buy (for the most cases).

(4) what locations (if any) would you recommend for investment?

Any thoughts?

[john p]

The rich are getting richer so people are willing to pay for prestige. The rich herd together around "immune" schools and towns so they can tend to maintain a premium unless the correction focuses on them.

I grew up in an "immune town" and saw house prices drop by 40% during the Recession of the early 90's. The key was very, very high unemployment in white collar and technology. I would say get your finger on the pulse to what the unemployment is in different market segments within the Boston area.

If we get a higher education bubble pop and new financial regulations deplete the earnings of the financial industry, that is two really big segments of our economy.

Given what happened to Solyndra (the green company that got $1/2 Billion in crony capitalism with a feel good cover), I think people are less likely wanting to prop up something that isn't going to yield results or to keep inflated college tuitions that are already outrageous. I think people would rather see college tuitions come down to reality. I think infrastructure will be more necessary because much of it was built prior to 1950 and is on borrowed time. Why bother "make work" on stuff that is b.s. when there are real things on the "To Do" list? Just to get a sense of things, the new Terminal A, the Delta Terminal at Logan Airport cost less than the losses of Solyndra. Solyndra pissed through more money in one year than it took to design and build Terminal A by more than 20%.

I think that you need to look at your alternative investment opportunities. Real estate was booming when the stock market was plummetting.

I would be curious to hear what your thoughts are about alternative investment vehicles and what you think of inflation and how that might affect your decision to buy an investment property.

[dantm]

[john p]

I meant to say that when the stock market was correcting around 2000, real estate was a sanctuary investment, kind of like how Gold seems to be that port in the storm (although it seems like it may be a bubble because everyone is at the port...)

You certainly are a lot more knowledgeable than the average buyer back during the Bubble years... sign of the times.

I would say the same thing to you as what I think when I read many posters here which is having a categorical or global perspective helps you see the big picture, but when you strike, have a very deep and clear view of the specifics of your investment. Your broad perspective seems to be arguably sound.

When we look broadly at the "Stock Market", unless we're talking Index Funds, even in a down market one can get a huge return on a stock or have a dud in an exploding market.

In real estate, in many towns around Boston, prices have actually gone up since the Bubble years.

The most successful people I know actually focus more locally on opportunites and many of my friends who think too broadly are almost paralyzed with the overwhelming amount of information, and throw in the foul tasting political sources that are major contributing factors to our economic context, you end up being demoralized and fatigued.

I guess this is why recently I have been suggesting focusing locally on opportunities and giving oneself a sense of being Master of their own Destiny.

My last thought for you would be to think about the flexibility of a real estate investment. If you have a knack for picking winners and finding good opportunities will a real estate investment keep you too financially bonded or will it help provide the collateral to help leverage the next opportunity. The specifics of your down payment and cash flows will answer that. Talking to a financial advisor who has experience with people in your shoes might make sense...

Also, make sure you get a good home inspection because a leaky roof might throw off your entire financial game plan...

Hope that helps...

[FreedomCM]

Other considerations:

RE is an active investment. Are you willing to put in the time? If you hire a management company, that reduces the time, but also return substantially. Getting market rates means more vacancy and lower quality tenants than being willing to accept lower returns to attract or retain good tenants.

If the Edububle deflates, will your tenants be more likely to double up, driving down demand and increase wear and tear?

[dude1040EZ]

let's talk numbers.
for $650000, you put down 20%, which is $130000. You get jumbo loan for $520000 for 30 years fix at about 5%, the monthly mortgage would be $2800. tax would be around 5000 to 6000 thousands, make it 5500 in average, about 460 per month . insurance would be about 1200 per year, so 100 per month. Maintance would be about $250 per month, since it is a trible decker.

Total expense: 2800 + 460 + 100 + 250 = 3610
Total income : 2000 x3 =6000 (
surplus: 6000 - 3610 = 2390 (looking good from accounting perspective!)

If you have the down payment, If an postive cashflow of 2390 can offset your headache of serving 3 rental units, then I think you should go for it.

[dantm]

[mpr]

I dont think you should consider the entire mortgage payment an expense.
What you computed is cashflow, but your return on investment is higher because the principle part of your mortgage payment is building equity.
It isn't lost as an expense would be.

[dantm]

[Guest]

[JCK]

[Boston ITer]

For those, who want to treat RE, as a business opportunity, have you thought about room-for-rent vs just renting out a place?

http://www.airbnb.com

Typically, a tourist will pay from $60 to $120 per night, to be near a T/frequent bus line, to visit the Boston area. Thus, if you have 2-3 rooms, w/ let's say ~50% bookings per month, that'll most likely cover your mortgage, maintenance, with perhaps a left for income.

[CND]

is the insurance number based an actual quote, or did you estimate that as a percentage of the house value?

I think there is also management cost, especially if you have multiple multifamily units or if you are not going to be around to take care of everything.

I hear that agents charge 10% to manage, do you know if that takes care of everything like law mowing, snow removal, etc.. or just for keeping the place rented. [/quote]