bostonbubble.com

[Devlin]

Here is the info:
MLS #: 70952393
Asking $524,900

3 Family
5,200 sq feet
4 bedrooms one bath per unit
kitchen, living, dining, lots of awkward closet space makes all rooms relatively small considering sq footage. Fridges currently setup to be in cubbard because kitchen does not have room.

Front/Rear porches
Two ancient gas furnaces, (coal conversion)
newer 200 amp elec service
wooden/lead windows
30+ yr old kitchens, no dish or garbage, no fridges

Rent on 2nd and 3rd floors $1,000 per month.
first floor vacant

2 car garage and 2 parking spaces.
one of the nicer neighborhoods on dorchester
Susan Menino is next door neighbor
All three units failed lead paint inspection in 1991, no other inspections

Tax $5,500
Water (Estimate) $2,750
Tax (Estimate) $2,750
I assumed rents could be at $1,400 as is
I used 10% Vacancy
Also used $5,000 a year for improvements.
Capital needs (furnaces, roof, kitchens, baths, windows)

Issues I see
Since units appear to be covered in lead paint, renting to families could be a challenge/problem.

To really boost rent up to $1,800 you need to gut several walls and open place up along with 5 appliances, bath updates and cabinets.

Condo Conversion...
Acquisition Costs $500,000
Improvements $200,000
Cost of Capital $42,000
RE Fees $45,000
At sales price of $300,000 per unit which is INSANE in this market
Profit?? $113,000 -

$250,000 is more likely - Now you lost money


As a Rental I see this place penciling out at $450,000, MAX
I don't see an immediate condo conversion (1-3 years) Maybe down the road if you are very optimistic.

My broker verbally inquired about the property and was told not to waste his time or the paper needed to make the offer.

Offer was going to be between 425K and 450K. Is this worth $500,000?

What do you guys think?

[Guest]

Tax (Estimate) $2,750
should be
Water (Estimate) $2,750

[Guest]

I mean Insurance $2,750

too early for me

[Brian C]

Just moved out of my rental unit in Adams Village. Since its a very desirable area, the rent for the new tenants are $1800. It was 3BA/2BA 1700 sq/ft off street parking and completely renovated.

That area you selected might not command that type of price for the property and for rents.

[Devlin]

I think you could get $1,400 for each unit but I have no idea who is buying at $500,000+

Am I unreasonable or are other people nuts?

[john p]

Guest said:

[GenXer]

I just found out that someone I know rented a 3b/2b duplex in Newton for $1500. It appears that the rents are coming down, and there are a lot more rentals out there. We'll be looking to move as soon as possible once we find a cheaper rental. It would help to do a credit check on the owner first though - you never know what may happen if they can't pay the mortgage.

[mpr]

On your own figures,

$1,400 per unit per month is about $50K per year.

So buying for $500K thats about a 10 for
price/rental. Thats a low number.
You're getting a gross return of 10%.
Take out $16K for taxes, etc (your number)
and its down to about 7%, which seems
pretty good historically and especially
with interest rates so low.

How do you "pencil out" $450K but not $500K ?

[GenXer]

And historically, stocks returned 10%, so now we should leverage, borrow $500k at 6% and buy S&P500 index fund? While allocating a small portion of your porfolio may be a smart thing to do, leveraging is the dumbest thing to do. Why is this an acceptable scenario when it comes to houses? Anybody? Lack of liquidity, high risk, high expenses (worst of all, unexpected expenses), none of which (except for high risk) is true for the S&P500 index fund...

The linear deterministic logic is still at work here. Where does it say that returns are anything BUT stochastic? Buying a house in dorchester (of all places) in rising unemployment, a huge rental glut in boston, and a possibility of job losses and further price declines (as well as very stiff competition from all of the other investors buying renovated houses and renting them out) is simply asking for it.

I guess we are entering bubble 2.0, because there is no way anybody is making money long term on this. Not without knowing for sure that economy is going to recover. This particular recovery can take any length of time given the unemployment is still rising. The problem most people have is that they are not aware of the concept of 'gambler's ruin'. The idea is that even though the investment can be profitable if you hold it long enough, the 'long enough' part is never fullfilled, because something happens where you run out of money way before your investment is profitable (and with leverage, the downside can be even worse).

[melonrightcoast]

I was on one of the boston.com blogs and discovered yet another reason why it is going to take forever for the housing market to bottom here in MA: MA is a recourse state, which I was told means that if you sell your house for a loss and have other money to pay for the loss, the bank expects you to pay for the loss. So walking away and doing short-sales only really work here if you are broke.

Meanwhile in CA, AZ and FL (and a few others), they are non-recourse states, which means the bank cannot go after the owner if they walk away from the house, or if it is a short-sale, the lender cannot expect the owners to pay for the deficit from other money the owner has.

Is my explanation correct?

If so, this explains the "logic" in renting out one's home for a loss. As well as why homes are essentially on the market for 2+ years. The owners cannot just walk away if they have money (which so many people do here).

This is REALLY going to take forever to play out here in MA. I think I need to start developing a sense of humor about this or I'm going to be to bitchy to live with . Maybe we should start a betting pool! When will prices be down another 10% in immune towns! Or, will the fed gov do another home-buyer credit when the current one expires!
_________________
melonrightcoast ... are you?

[mpr]

Actually the poster's question did not include anything like interest
expense, so for all you know he's buying it with cash as a small part
of his overall portfolio.

Leaving aside whether what you wrote below is relevant to the initial
post. I'd be interested to see some data to support your assertion -
made elsewhere and alluded to here - that house prices are as volatile
as stock prices. I'm sure this is false.

Of course one can discuss whether a 7% return is acceptable given this
kind of property. I would suggest that in the current interest
environment and historically it is. For example go find corporate bonds
paying 7% and see what the company's rating is. It wont be AAA.
A valid point is that you can buy a portfolio of bonds for diversification,
but thats only one of the pros/cons here.

[GenXer]

Consider this as a corrolary to 'gambler's ruin' - you can not accurately guess both the amount and the time when this move happens. Its easy to see that if you say, X will decline by 10%, this may happen someday, but we have not the vaguest idea when. Alternatively if we say, X will move (either up or down) by next year, guessing how much it will move is near imposssible.

to guess both the amount and the timing of price declines in immune towns is most likely a futile task. This is why I caution people that while I believe prices may come down much further, it may take another 5 or 10 years for that to happen. It may never happen, but one thing is for sure. Prices will not be flat for a long time. This is not the nature of the markets. Markets are unstable, and flat prices means equilibrium, which does not exist in reality.

[GenXer]

[mpr]

[GenXer]

I have to make one correction. The volatility numbers I quoted for stocks/bonds are DAILY volatility, while the S&P Case Shiller index (which incidentally can be traced back to 1890, so I have over a 100 years worth of data to analyze), is a MONTHLY index (only recently did it switch to weekly). So in fact, if you analyze S&P500 volatiliy on a MONTHLY basis, you get 10 sigma vs 22 sigma for daily. However, let me assure you that the absolute volatility numbers can be misleading. It is the SLOPE or the SCALING of the data that matters. And the scaling slope for S&P500 and the Case Shiller index is surprisingly close (~3), which leads me to believe that it is POSSIBLE in theory to see higher volatility numbers for the Real Estate. Simply because we haven't observed the numbers does not mean it is not possible. Again, I'm not speculating why it happens. However, even though the DAILY bond volatily may appear higher, the SLOPE of the bond prices is much steeper, at about 5 or 6, leading me to believe that Real Estate is potentially much more volatile (the smaller the slope - the closer you are to 'chaos', or a real possibility of very high deviations from the norm - starting at about 3 and down, the behavior can be downright nasty, with the slope of 1 being total chaos and stocks falling somewhere between 2 and 3).

We can argue whether daily volatility really matters more or less than monthly volatility, but the point remains the same - don't mess with the markets if you
1) Have too much leverage (and not enough cash to cover the leverage several times over, which is almost always the case)
2) Are investing your savings (i.e. you don't have enough to retire on in case you lose a lot of money on your investment)

I want to make an additional point. The S&P500 index volatility does NOT include the volatility of a leveraged S&P500 index (so if your leverage is 5:1, you should see a MONTHLY volatility of 50 sigma, not 10 sigma). So if you include LEVERAGE in your assessment, you will see that any leverage in your investment MULTIPLIES your volatility! So in fact, real estate investment WITH LEVERAGE can be a LOT worse than investing in stocks. Do you see my point now?