The Good, The Bad, and The Multis: Hunting for Investment Property Around Boston

This Week’s Property- Three Family in Everett
I thought this week we would check out a new listing of a 3 family in Everett. Everett, oh the things I hear about Everett; I cannot tell you the number of times I’ve heard someone say “buy in Everett because of the casino, you are going to make so much money”. Seriously, that’s a direct quote from many, many, many people.

Look, do I think the casino will help Everett? As an investor, I’m most interested in the fact that the casino is projected to bring in thousands of new jobs. Those people have to live somewhere, so I feel comfortable knowing there will be strong demand for my units for the foreseeable future. Am I going to get rich and retire because values are going to skyrocket? I doubt it.

Grading the Investment Opportunity
If you are new to this blog series, take a quick look at this section to see how I grade the properties.

For the investor, grading begins with NOT overpaying (as is clearly the norm today!). Now, I should say that investment goals can DRASTICALLY differ between one person to another. Some people are going to look for significant cash flow, while others who don’t need that want to park their money in a high quality location.

Now I should tell you guys, I am kind of in between; I look for cash flows and am not a speculator, but I also have an appreciation (pun not intended) for what it means to buy in a market like Boston versus other US markets (like Cleveland, where one million could buy you 15 units). But, because there are different types of investors, I’ve tried to come up with a grading system that works across different investment types. Finally, if you are interested, in the last section of this post I’ll add a section to show you how I analyze rents and numbers.
 
23 Water Avenue Everett MA –Priced at $749K, Three Unit Building
Overall Investment Grade: B

Let’s jump into Everett with a new listing of a three family in Everett with a unit mix on one 3 bedroom unit and two 2 bedroom units.   

Positives:
The location of the property is great! You’re in West Everett, very close to Night Shift Brewing and the major shopping complexes with Target, Costco, and Best Buy etc. In my opinion this is one of the best parts of Everett as you are close to the major developments going on in the city (in fact, I know plenty of millennials starting to buy luxury condos around this area now!). The property is also right off of Main Street, so there is good access to the bus lines, and you are pretty close to Wellington T Stop.

In terms of the actual property, looks like unit 2 has been cosmetically renovated while the other units are probably going to need a cosmetic facelift. I do also like the fact that you have updated electrical.  

Finally, you have off street parking. Even in Everett, I’ve noticed more and more tenants are really on the lookout for convenient off-street parking.

Negatives:
Your roof is a bit older here at nine years old, plus the listing mentions updated electrical but nothing about the plumbing, so I would assume it’s on the more dated side. Also, the listing only has four pictures, and my assumption is those are of the renovated units. If the listing broker did not put up pictures of unit one and three, likely means they are no the prettiest units.

The major negative with this property is that two of the units are tenants at will (not at leases) paying well-below market rents. One of the units is actually paying $1100 for a 2 bedroom, which likely means that tenant has been there for a long time and may me tougher to get out once you own the building.

The Numbers:
If this is your first time reading this blog series, check out the last section to see the assumptions of how I run numbers.

For calculating numbers, we need to evaluate and see how the property performs when we buy it with current tenants versus how it will perform when we “stabilize” the building (i.e. fluff the dates units and bring them to market rents).

If we look at purchasing this with our standard assumptions, then our monthly cash flows (the cash in the wallet)  on day one with current tenants will be: -$350 per month.

With the current tenant mix, we are going to be bleeding a little bit every month. It’s going to be imperative to get to work and try and stabilize the building as quickly as possible. To stabilize the building, I’m going to assume we are going to spend about $20,000 between dealing with the existing tenants and building cosmetics.

Once stabilized, I’m going to assume that our new rent roll will be $2100 for the 3 bedroom unit and $1800 for the two 2 bedroom units. With these numbers, our cashflow number will be:  $600 per month. Not too bad, though nothing to brag about.
 
Overall Thoughts:
I think it’s a decent purchase, but I do think there is potential for quite a bit of headaches without as much reward on the backend. In fact, if you were more concerned for cash flow, I would probably skip this one altogether. The real attraction of this property to me is the location, as you are buying in a great part of Everett. If you’re ok with lower monthly returns to sit in a better location, then this one may be worth considering.
 
Supplement: How I “Run My Numbers”
I don’t want to get all up in the numbers here, but there are a few key things I should point out when talking about these cash flow numbers. Here are my key assumptions:

• Fixed property expenses:
  • All costs associated with the property, including the mortgage payment, taxes, and insurance are all included!
    • For mortgage, I assume you are purchasing with a 20% down loan at a 5% interest rate (this will of course vary, but rather be conservative)
• Operating Expenses:
  • I also account for your daily operating expenses: I cannot tell you guys the number of times I have had to call up my handyman (we are quiet good friends now after so many interactions!) and ask him to fix something up. This also includes a vacancy budget.
  • My numbers are the following:
    • Vacancy: 3% of gross monthly income
    • Maintenance: 5% of gross monthly income
    • Water/Sewer: $180 per month (there can be some variance)
    • Other: 1% of gross monthly income (can cover things such as snow removal, landscaping, or other surprises)
• Capital Repair Budget:
  • Finally, I also like to include a capital budget. This will cover major repairs down the road like furnaces, roof, foundation issues, or siding repairs
  • I budget $250 per month