The cost of becoming a small-time landlord is going through the roof, with prices of two- and three-family homes surging in the Boston area and across the state.
For starter landlords looking to snag a two- or three-family rental property, the effective entry fee is now topping out in the high six figures – and sometimes even in the seven figures – in some of the trendiest urban areas, according to data from The Warren Group, publisher of Banker & Tradesman.
The escalating prices come as would-be mom-and-pop landlords battle it out with international investors and property flippers for a limited supply of two- and three-family homes largely built a century or so ago.
Cambridge once again is leading the way, with the median price for a three-family homing in on an astronomical $1.2 million.
Soaring rents are helping to fuel the frenzy. Boston area rents have risen by at least 25 percent over the past few years, cementing the Hub’s reputation as one of the most expensive places to live in the U.S.
“There are overseas investors who don’t even see the properties – they just want to park their money somewhere,” said Tim Schmidt of REMAX Destiny in Cambridge. “I never thought I would live through a cycle like this. This has been nuts the past couple of years.”
Scott Van Voorhis
Bidding Up
If you are wondering how humble two- and three-families got so expensive, check out this story from Sarah Rosenfeld, a top Somerville broker with Coldwell Banker Residential Brokerage who has also owned rentals in the city for 32 years.
A couple from Bedford recently plunked down nearly $1.1 million a three-family in West Somerville. Why? Because they wanted an urban “get-away” that they could also rent out. No one was “getting away” to Somerville 20 years ago, but times have certainly changed. The couple stays in a one-bedroom on the second floor on the weekend, getting their Somerville fix, while renting out the first and third floors.
But for every part-time landlord like the Bedford couple and their Somerville retreat, there are multiple “investors” looking to either cash in on a hot rental market or convert yet another two- or three-family into high-priced condos.
There are the supposed busloads of Chinese investors who go on tours of Cambridge and Somerville, led by the hand by a local broker and ready to snap up any attractive small rental buildings they can find.
There are lots of homegrown investors as well.
Some are brokers, heating up the phone lines all day long with calls to colleagues, building owners, old college buddies and everyone else they know in search of that elusive below-market deal at a time when prices are headed in the opposite direction. If they are successful enough, they’ll have low-paid underlings to make the calls.
Then there are others, small business people or professionals, who are looking to diversify their investment portfolios by adding in a little local real estate.
That’s the case in Fall River, where a local small businessman in the alarm business is snapping up a three-family for the rental income, said Ronald Rusin, broker/owner of REMAX Right Choice.
Over the past few months, two-family prices in Fall River have pushed past the $200,000 mark and are now in the $230,000s.
“Back in 2010, you could buy stuff for $150,000,” he said. “We have seen some good changes.”
More Than An Investment
Still, when it comes to have the steepest entry fees for would-be landlords or aspiring investors, Cambridge takes the cake. Apparently everyone wants to be a landlord in Cambridge these days. And who can blame them when $3,000 and $4,000 rents suddenly seem like a bargain?
Cambridge has seen the median price of a two-family soar from $735,000 back in the fall of 2005 to an eye-popping $1,035,000 so far in 2015, stats from The Warren Group show. And three-families? The median has already passed the $1.1 million mark and is headed towards $1.2 million.
But buyers see things differently: Instead of getting sticker shock, they are anteing up in the belief they are making a highly secure investment in one of the nation’s blue chip real estate markets.
“This area has weathered most of the financial downfalls,” Schmidt said. “It is always going to be a sure bet.”
Cambridge is not alone; other Boston-area hipster hotspots, like Somerville and Jamaica Plain, have seen similar increases. A Somerville three-family that would have cost you $640,000 a decade ago is now worth $850,000, while Arlington has seen a similar jump, from $662,000 to $815,000.
“You cannot find a quality two-family in parts of Somerville for under $1 million,” Rosenfeld said, noting the prices are even managing to outstrip galloping rents. “Nothing makes sense for rentals.”
Brighton three-families have gone from $690,000 in 2005 to $800,000, while in Jamaica Plain the jump has been from $612,000 to $790,000.
Don’t forget downtown Boston, a market that includes South Boston, Fenway and the South End, as well as Back Bay and Beacon Hill. Condo conversions are the most likely culprit in doubling the price of a three-family over the past decade in downtown Boston, from $885,000 to $1.7 million.
But even much more down-to-earth urban areas, like Worcester, Fall River and Framingham, are seeing prices of two- and three-families move up again, though not yet to peak levels. The median price of a Worcester three-family is now back to $211,000. That’s not bad compared to the 2010 price of $150,000, but Worcester three-family prices have a long way to go before they get back to their 2005 peak of $310,000.
However, too often lost in all the hoopla over the investment potential of rental properties are the responsibilities that come with the position. The harder job begins after the deal ends and the late-night calls start pouring in, as experienced landlords like Rosenfeld, the Somerville broker, know well. It may look like just another investment, but it’s also somebody’s home.
“The bottom line is, do you want to be a landlord?” Rosenfeld said. At times, “it’s a full-time job.”
