Real Estate in Boston. Buy and hold?

[Sam]

I just had a phone conversation with a friend of mine in Boston.  He's been doing Real Estate flippings in the past 4 years.

He told me that RE inventory is up 60%, and price is down 4% compared to 6 mths ago.  Then, he told me that  now is a great time to buy and hold.

No, he is not trying to get me to buy anything.  He's only telling me what he's going to do.  I was never a business man, but I find his logic quite flawed.  What say you?

 

[brewer12345]

Run screaming in the opposite direction unless you can find desparate sellers willing to take a bath.

 

[Arif]

A 4% drop is not the kind of bargain I go running after even if it was a buy and hold strategy. I don't start salivating until that number gets to 30%.

 

[retire@40]

Yes, I live in Boston.

 

[Nords]

He told me that RE inventory is up 60%, and price is down 4% compared to 6 mths ago.  Then, he told me that  now is a great time to buy and hold.

... and hold and hold and hold and hold...

No problem. Kiyosaki's personal jet should landing at Logan any time now.

 

[Bimmerbill]

My good friends are trying to sell their home in Woburn MA, just outside of Boston. Slowest market in 14 years, according to their agent.

Real estate prices are falling fast and I expect prices to continue to fall.

 

[retire@40]

My good friends are trying to sell their home in Woburn MA, just outside of Boston.  Slowest market in 14 years, according to their agent.

And Woburn isn't as overpriced as some surrounding towns like Winchester, Lexington, Concord, Arlington, and Belmont.

I like that left turn on red sign in Woburn center too.  There's always some dumb shmuck that doesn't see it and just sits there waiting for the green light.

 

[Sam]

I don't know.  Maybe I'm wrong and he's right.  Today's article:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aTJAuLwXxcpw&refer=home

Purchases fell in all regions of the country. They dropped 5.4 percent in the Northeast, 5.9 percent in the Midwest, 1.2 percent in the South and 6.4 percent in the West.

``We're more likely nationally to see a soft landing rather than a bubble bursting,'' said Nicolas Retsinas, director of Harvard University's Joint Center for Housing Studies in Cambridge, Massachusetts. ``People are finding it more difficult, with higher mortgage rates, to buy a home. Rents are starting to go up again.''

 

[brewer12345]

More than just mortgage rates going up, lenders are starting to back away from the most "innovatve" (read: riskiest) loans that helped a lot of marginal buyers come into the market. As these buyers get shut out of the market due to lack of credit access, we will see thing continue to cascade downwards even if rates don't rise any more.

 

[d]

What say you?

it might be a bit late, but rather than "buy and hold" i'd suggest "sell and run"

 

[spideyrdpd]

I am sure D's crystal ball has all the answers..


Your friend will probaly take some of the money he made and use that to either offset his negative cashflow or use it as a down payment to get a lower mortgage. Not a strategy I would recommend but I am not sure running is a strategty either .

Now Arifs post made some sense. Lots of people are being squeezed. The 4% discount is just showing you what the fair market value really is. Although you might still be overpaying a some.
You have to look for either a distressed property, a distessed seller or a property where you can add value. I look for distressed sellers and look for a real discount to value.
The fortune tellers are also predicting that rents will go up. I am not sure whats going on in the Boston market. I dont think rents have risen too much in the markets I am in. Hopefully they are right, but even with an increase I doubt you find too many properties that cashflow in Boston....
Rob

 

[macdaddy]

I have some rental condos in Boston in an area popular with professionals. I loved them from 2001-2004 as prices rose. Prices sort of halted here at the end of 2004 while a lot of other US markets steamed ahead. Now I REALLY love them, because rents have been up 10% in each of the last two years, and from what I can tell of the rental market, I think we will see another 10% increase next year. My yield on them is about 5%. This compares to 3%-3.5% which is the norm in California and Arizona now. Does this mean someone would cash flow with 10% or even 20% down? Probably not. But 5% + inflation is attractive if you think inflation will pick up (I do).

I don't have the exact numbers but Boston has around 150k students out of a total population of 600k. This is lots of perpetual fresh meat. Students love to spend because they either have parents who throw money at them or they haven't discovered how much debt sucks yet (or both). The universities provide a lot of stability. Harvard, MIT, and the other places won't ever leave. You can't relocate Harvard Yard or the MIT Dome to a cheaper place in Tennessee. Harvard has an endowment of 30 billion. MIT has 8 billion. BU and BC have a few billion each I think. This money filters into the Boston economy. Cops and teachers make 80k-120k a year and the city is still in far better fiscal shape than most others. Public education here is some of the best in the United States. Plus due to the universities Boston has become the east coast capital of startups and venture capital firms. And there are more law firms here than I can count.

Keep in mind there is a difference between Boston and Massachusetts. People point out that Massachusetts has lost population. Western Massachusetts is a black hole as far as I know. I don't know what happens on the state level but Boston is fine. I would not want to invest money in Lowell or Worcester or Woburn or any of those places.

For some reason Boston is lumped in with the super speculative places like Phoenix and Boise. I don't think that's fair. I am happy to have money invested here and I'm not sure if I would sell even if there was no 20% tax (15% federal + 5% state) on capital gains. FWIW if prices decline 10% or more I will pick up a few more condos for sure, but I know if that happened, I probably wouldn't be the only one looking.

Feel free to PM me or post questions - I am familiar with the different areas around the city - and happy to share advice or market observations.

 

[Sam]

macdaddy,

My family lived in Brighton from 78 to 82.  Then we moved to Dorchester and lived there for 5 years.

I bought my first house in Lowell in 89, and was burned badly when I sold it in 91.  I had to bring a 25K check to pay the bank at closing.

I don't really understand real estate.  My friend sounds knowledgeable about it.  But I'm still worried.  I think he's making a mistake.

Anyway, I hope you're right for my friend's sake.

 

[macdaddy]

Just look at the rents. If you can find a condo that is low maintenance, rents to quality tenants 24 hours after it's put on the market, and clears 1250 a month in rent, what is that worth? That's like a true inflation-adjusted income stream of 15k per year. Depending on what other investments you have available to you and your risk tolerance, price accordingly.

But the people who see 25%+ price declines - do they not see inflation at 5%+ a year? I don't understand that.

 

[retire@40]

Just look at the rents.  If you can find a condo that is low maintenance, rents to quality tenants 24 hours after it's put on the market, and clears 1250 a month in rent, what is that worth?  That's like a true inflation-adjusted income stream of 15k per year.  Depending on what other investments you have available to you and your risk tolerance, price accordingly.

Ok, let's look at the rents. How much would you value a property that brings in $1250 a month in rent?

 

[macdaddy]

$280k-$290k max - for a super low maintenance place in a strong rental market

 

[brewer12345]

But the people who see 25%+ price declines - do they not see inflation at 5%+ a year?  I don't understand that.

If you can buy a property and hold it and it is cash flow positive, then perhaps you can just pay attention to the rising rent stream. The problem is that in many, many markets RE is not even close to cash flow positive even after a couple of solid rent bumps. So investor demand (from rational people, not idiot flippers) will be weak until prices really crash. The herd is beginning to get the idea that RE can indeed go down, and we will see banks increasing tghtening up their mortgage lending standards and reducing credit availability. Reduced credit creation has never been good for asset prices.

 

[retire@40]

$280k-$290k max - for a super low maintenance place in a strong rental market

OK, let's take your $280K number.

20% down = $56,000 (opportunity loss of 5% in a money market = $233/month)

$224,000 30-year mortgage at 6.5% = $1,416 per month


Monthly

Rental Income                         $1250

Mortgage pmt       $1416

Real Estate Tax     $ 150

Insurance             $   50

Total Cash Outflow                  $1616     

Negative Cash Flow                 <$366>

And that's not even counting things like condo fees, management fees, repairs, water, utilities, allocation for vacancies, etc.  And I know I'm estimating low on the real estate tax.

So the break-even point on rental income of $1250 is closer to the $200K mark which is difficult if not impossible to find right now in the Boston area.

 

[Sam]

Thanks for the simple, logical calculation.  It makes sense to me.

Add condo fees, management fees, repairs, water, utilities, allocation for vacancies, etc, and this looks like the worst investment ever.

Even with an assumed annual 5% rental increase, it still look BAD.

Holy cow, I was right after all?  Or was I?

 

[brewer12345]

Thanks for the simple, logical calculation.  It makes sense to me.

Add condo fees, management fees, repairs, water, utilities, allocation for vacancies, etc, and this looks like the worst investment ever.

Even with an assumed annual 5% rental increase, it still look BAD.

Holy cow, I was right after all?  Or was I?

Now you understand why I have not been able to fathom why people have wanted to buy investment real estate in the last couple of years.

 

[Sam]

Now you understand why I have not been able to fathom why people have wanted to buy investment real estate in the last couple of years.

What is your definition of "investment real estate"? Flipping? Or buy and rent?

 

[Sam]

And I know I'm estimating low on the real estate tax.

What is the current property tax in the Boston area?

 

[retire@40]

What is the current property tax in the Boston area?

The median property tax bill for single-family homes in most of Massachusetts will be $3,262 in 2006.

Source: http://www.boston.com/news/local/articles/2005/12/18/property_taxes_still_on_rise_in_mass?mode=PF

 

[Sam]

Thanks.  Don't they use a percentage value?

Here's in Houston, it's around 3% of the appraised value, which is very close to the market value.

 

[eridanus]

Boston isn't as overpriced as other markets, at least based on the Schiller index.

There's a new derivative based on housing numbers. One could hedge their exposure to real estate by shorting the futures contract. The expected national sales price decline is 5% by May 07.