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Do you want to be a landlord of a two-family house?

Posted by Rona Fischman September 17, 2010 01:57 PM

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In 2007, I sang the praises of two-family home ownership and lamented the dwindling supply and escalated prices of properties of that type. By the late 1990s, the window of opportunity for two-family ownership had pretty much closed. This was mostly due to condo conversion of this type of property.

In 2007, owning a two-family home for rental investment just didn’t add up in my area.* Sale prices were too high compared to the rental potential:

August 2007:
Sale price $625,000. Two-family house with 5 rooms, 2 bedrooms downstairs and 6 rooms, 3 bedrooms upstairs. Downstairs rent about $1300. Upstairs rent about $2000.
Down payment: 25 percent (that’s what’s needed now) = $157,500
Principal and interest = $2962 at 6.5 percent interest
PITI about $3640
Gross income about $3300
Return on the $157,500 investment is approximately -$340 per month.

(At 20 percent down, your return would be -$540 per month. If you put 10 percent down, your return would be -$930 per month. I used the 25 percent figure so we could compare apples and apples… To finance a two-family house as an investor, you need that 25 percent equity in 2010.)

Three years later, we are past peak. But prices have not come down significantly in the high-demand areas. The big change is the financing picture. In August 2010, I still find properties at the same price, that are not significantly bigger, nicer or in better locations. But at 5 percent interest, the Principal and Interest cost goes down to about $2500, saving the owner about $450 a month. The whopping return on that $157,000 down payment is about $100 a month (before other expenses.)

The investment picture is still pretty grim for a two-family home. To play in this arena you need a huge down payment and the ability to find a good rental property. That’s really hard to do around Boston. The ones I chose were near public transit, which makes them a slam-dunk to stay rented. But, even if you can find one for a lot less, the numbers don’t scream “great investment” when you start adding in all the additional costs of doing this business. This is what the numbers would look like, if you could find one that doesn’t need dollars and dollars worth of work.

Sale price $500,000. Two-family house with downstairs rent about $1300. Upstairs rent about $2000.
Down payment: 25 percent = $125,000
Principal and interest = $2015 at 5 percent interest
PITI about $2650
Gross income about $3300
Return on the $125,000 investment is approximately $650 per month.

Today, I would like to focus on two aspects:
1. The cost of borrowing. I think the down-payment requirement knocks most people out of the game. The lower interest rate helps, but doesn’t cure the problem. Do you agree?

2. Do you think the sale price of two-family homes in high-demand areas will ever come down as long as the properties are allowed to be cut into condos and resold?

Please hold off on all the expenses I failed to mention above. That needs its own entry (planned for September 24th!)


*My area is: Acton, Arlington, Bedford, Belmont, Brookline, Cambridge, Concord, Lexington, Medford, Natick, Needham, Newton, Somerville, Sudbury, Waltham, Watertown, Wayland, Wellesley, Winchester.

This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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About boston real estate now
Scott Van Voorhis is a freelance writer who specializes in real estate and business issues.

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