The topic of cash being used to buy real estate mentioned that investment is strong in student areas. Some investors are flocking to multi-family houses near colleges. Today, I take a closer look.
Regarding buying a multi-family house near a college campus, most of what I said two years ago is still true:
The New York Times had an article about our triple-deckers this month. [June 2009] Besides quoting what Dennis Lehane thinks of them, Abby Goodnough quoted these statistics about foreclosure in this kind of housing:
In Boston, three-family homes represent 14 percent of the housing stock, but made up 21 percent of foreclosed property in 2008, according to the city’s Department of Neighborhood Development… Ms. [Evelyn] Friedman, [chief and director of the Boston’s Department of Neighborhood Development] believes the foreclosure rate on triple-deckers is even higher than the data indicate, because many were converted into condominiums in recent years. These are counted in a separate category that made up 48 percent of the city’s foreclosed properties last year.
I am a huge fan of owner-occupied multi-family housing. The Times’ reporter reiterates what I think:
Best of all, three-deckers put homeownership within reach of the working class. Buyers could live in one unit and rent out the others, assuring they could afford payments and upkeep for years to come.For years, two- and three-family ownership has not been a viable option. As purchase prices increased far beyond rental rates, the owners of a two- or three-family home found themselves paying more to live in their properties that their tenants.
Quick math with a 20 percent down payment and a mortgage:
1996: A two-family house costs $200,000. The PITI mortgage cost is about $1550 a month (with 20 percent down payment of $40,000. 7 percent interest rate.) Rent for a two-bedroom unit is about $1200 a month. Owner is out-of-pocket $350 a month, plus expenses and upkeep. A three-family would give the owners a positive cash flow of $850 a month.
2006: If a two-family house sells for $600,000, the PITI mortgage cost is about $3350 a month (with 20 percent down payment of $120,000. 6 percent interest rate.) Rent for a two-bedroom unit is about $1400 a month. Owner is out-of-pocket $1950 a month, plus expenses and upkeep. Even if this was a three-family home, the owners would still be out-of-pocket $550 a month.
In 2011, I add these figures:
2011: If a two-family house sells for $500,000, the PITI mortgage cost is about $2825 a month (with 20 percent down payment of $100,000. 6 percent interest rate.) Rent for a two-bedroom unit is about $1400 a month. Owner is out-of-pocket $50 a month, plus expenses and upkeep. If this was a three-family home, the owners would still be ahead $1350 a month, minus expenses and upkeep.
Today, with cash:
When cash is used, the $500,000 investment in a two-family house will produce a gross income of $2800 a month, $33,600 a year. Expenses include property tax (which was included in the mortgage figures above) and expenses and upkeep. Property tax will run about $6000 a year, so to compare apples and apples, that’s a gross income of $27,600 minus expenses and upkeep. That’s a 5.5 percent return, if the water bills and repair costs stay low and there’s no vacancy.
The three-family house would bring in $50,400 a year, if there’s no vacancy. Even after paying taxes, expenses and upkeep, the return is creeping up now. It seems to be enough to tempt some people who have the cash on hand.
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