Market Update: October 2023
Hi All!
We have an exciting announcement - due to popular demand, we have decided to expand The Sage Report to monthly instead of quarterly. Our goal is to continue to provide you with local market updates for multi-families and rentals in the Cambridge/Somerville/Medford area coupled with my on-the-ground experience. Let’s get into it!
Multi-Families
Days on Market Up in Somerville
Average days on market (DOM) for existing multi-families (meaning current, active multi-family inventory as of 9/30/23) is up significantly year over year in Somerville in particular, jumping from 41 DOM on 9/30/22 to 78 DOM 9/30/23. We saw much smaller upticks in Cambridge and Medford - see below:
This falls in line with what I am seeing on the ground - buyers are more tentative and conservative with offers, unless the multis check most or all of their investment requirements.
The multi-family properties that continue to sell quickly are located in prime areas (Cambridgeport, Harvard Square, Davis Square, Porter Square) or up and coming locations (Ball Square, Union Square, Ten Hills, Gilman Station, Magoun Square).
On the flip side, areas that are more so-so like East Somerville, North Medford or East Cambridge are seeing longer days on market, low ball offers and worse terms overall.
Months Supply of Inventory is Way Up!
The months supply of inventory for existing inventory has gone up 50-100% across the board in Cambridge, Somerville and Medford. More multis are sitting for longer periods of time, mostly due to sellers not budging on price or readjusting to the new realities of higher interest rates and buyer hesitancy.
Of course, some properties are still selling quickly and for top dollar, but they tend to be in great locations, with A+ layouts and in very good condition.
Closed Transactions Way Down
Closed multi-family transactions are down big time across the board, from 33-45% in Somerville/Cambridge/Medford, as sellers pull back and wait for better times and buyers hold onto their cash waiting for better prices.
Rentals Stabilizing
Rental prices across the board have gone up about $200/mo in Cambridge/Somerville/Medford compared to a year ago. The number of rental transactions are down significantly, which I attribute to the market stabilizing post-COVID. Renewals are way up, as both sides are looking to stay in place.
Owners are tired of tenant turnover, property headaches, and many months of lost rent from the past few years. Tenants are tired of signing leases only to have owners jack up rent $500+ when the market recovered post-COVID, after which many were forced to relocate.
My Thoughts
So what does this all mean? For buyers, conditions are certainly better than they were a year ago. Properties are sitting longer and inventory is growing, but sellers aren’t coming down as much as buyers would hope for. If you’re a buyer, you are playing a game of chicken - do you keep waiting and hope for conditions to get even better? Or do you take the opportunities given to you now, recognizing that prices may not drop much more than they already have.
For sellers - it’s the exact inverse. Do you wait it out and hope that rates drop and prices come back up? Or if you’re thinking about selling, do you put your property up for sale now, recognizing you’ll likely get less now than you did a year ago, but potentially avoid further price drops if a recession comes or rates don’t come down soon.
My feeling is if you’re a buyer now, it’s a great time to purchase. You have less competition, more leverage, and overall more buying opportunities than you did a year ago. We are in a resilient market with a well diversified tenant pool and it’s hard to see a world with significant price drop-offs in the Cambridge/Somerville/Medford multi market.
And if you’re a seller, I think you need to first look at your property location. If you are in a mature solid market or an in-demand up and coming market, you might get a lot more than you expect right now due to low inventory. If you are in a so-so market that isn’t “there” yet, I would recommend holding out for at least the next 2-3+ years and waiting for conditions to improve.
For sellers I also think it’s critical you do all the little things right now - that means making the right updates to your home, getting rents to market value and improving relationships with tenants.
A Change to Fannie Mae
We will end on one really exciting piece of news for investors looking to owner-occupy multi-families. Fannie Mae recently changed their guidelines for down payment requirements for multi-family homes - this is for owner-occupants ONLY.
Previously, if you wanted to buy a 2-family under Fannie Mae you were required to put down at least 15% and for 3-4-families, at least 25%. With the new guidelines you can put down as little as 5%. This opens the door for many people on a tighter budget to purchase a multi-family for the first time.
I have met dozens and dozens of people who have changed their financial lives through real estate and I think this change will open doors for many clients, particularly those making around $100k - $150k per year as a household.
Let me give you a side-by-side comparison of purchasing a Somerville condo vs a Somerville 2-family home. Let's assume a 5% purchase price, and that you have $90,000 in cash. Below is a quick breakdown:
$60,000 for a down payment
$12,000 for closing costs
$18,000 cash reserves
An average 2-bed/1-bath condo sold for $720k over the last 3 months in Somerville. Assuming 5% down payment, 7% interest rate, and 30-yr fixed rate mortgage, your monthly payment would be $4,550/mo.
Now let’s look at a 2-family in Somerville. An average 2-family sold for $1,180,000 over the last 3 months in Somerville. If we stay within Fannie Mae’s loan limitation guidelines, we would target a 2-family for around $1,090,000 - a bit challenging but doable in this market right now.
If you were to buy a Somerville 2-family for $1,090,000, assuming 5% down payment, 7% interest rate, and 30-year fixed rate mortgage, your monthly payment would be $6,890/mo. But if that 2-family has a 2-bed/1-bath unit that you live in and a 3-bed/1-bath that you rent for $3,500/mo, your effective monthly payment is now $3,390/mo. Add an extra $500/mo for increased property taxes and you are still saving $660/mo compared to your condo purchase.
But there are MANY other benefits to multi-family home ownership:
Your mortgage is locked in for 30 years, meaning your payment remains the same, but Somerville rents historically increase at least 2-3% every year on average (that’s a $364/mo rent increase in 5 years assuming 2% annual rent increase - which is low in my opinion).
2-families historically rise in value at a much faster rate than 2-bed/1-bath condos in Somerville - why? The main answer is there is much less inventory and much more buyer demand, but the second reason is they generate cash for you at a faster rate than a condo will.
At some point in the future you could leave your unit and rent out both units and potentially start cash flowing.
At some point in the future, if your family grows, you could leave the smaller unit and move into the larger unit and rent out the smaller one - saving you the trouble of buying in the near term.
Every year, you are increasing equity in your house with the help of another tenant paying down your mortgage.
In most years your property will appreciate conservatively 2-3% year, and if you buy right, likely much more than that. 2% of $1,090,000 is $21,800/yr if you were curious. 5% of $1,090,000 is $54,500/yr.
If you ever decide to sell, your capital gains are tax free up to $250k if single or $500k if married, for your portion of the multi that is owner occupied.
If you ever decide to sell, your capital gains from the investment portion can be 1031 exchanged into a new property with even better numbers, deferring any capital gains tax on your property.
You can depreciate the property over 27.5 years, which will reduce your tax burden on any rental income.
All of the above assumptions don’t take into account that interest rates could actually DROP at some point. If rates ever go back down to say 3-4.5%, your numbers start to look MUCH better. While the monthly mortgage is $6,890/mo at 7%, if you refinance at 4.5%, your new monthly mortgage payment drops to $5,245/mo.
There are a few important warnings I need to add in here, despite how much I love all of the above:
You need to be honest with yourself - are you ready to be a landlord? That means taking care of yourself AND your tenants. It means extra work, time, and effort that you may not have. It also might just not be your thing.
5% down payments will not make your offers super competitive in the Cambridge/Medford/Somerville markets - purchasing a multi-family with this little down will require a great deal of patience and the right market conditions and a realtor who can help guide you to the right property.
I am a big believer in changing your financial position in life through multi-family real estate investing and if you’d like to discuss further, please reply back to this email or give me a call or text anytime: 617-833-7457.
Conclusion
I hope you found this edition of The Sage Report helpful. If you have ANY real estate questions, call me anytime at 617-833-7457 or shoot me an email at Sage@CambridgeSage.com. Be well!
All my best,
Sage Jankowitz