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Boston's Multifamily Lending Market Advances in 2017

The multifamily lending market in Boston is rapidly growing in Boston, Massachusetts. With a record year for multifamily mortgage lending, the market is strong. Through a few simple tips and changes, buyers can invest in a multifamily property in Boston.

Multifamily Lending Increases in Boston

In 2016, multifamily lending advanced by 8 percent in 2016. Boston had nearly 3,000 multifamily lenders offering new mortgages in the region. In total, lenders provided $269.2 billion for mortgages on apartment buildings that had five or more units. The report by the Mortgage Bankers Association (MBA) showed that the largest lender closed on more than 7,500 loans. Meanwhile, 61 percent of active lenders closed on five or less loans. These loans ranged from tens of thousands to hundreds of millions of dollars.

In 2017, the same momentum has continued. There is a strong demand by borrowers for multifamily properties. At the same time, lenders are increasingly interested in lending to these multifamily projects. From the $269.2 billion in loans, the largest share went to Fannie Mae and Freddie Mac. While Fannie Mae and Freddie Mac made up 39 percent of the total, other top lenders in 2016 included Wells Fargo, JP Morgan Chase and Co., CBRE Capital Markets Inc., Berkadia and Walker & Dunlop. Altogether, there were 2,822 active lenders during last year.

The Boston Housing Market

This housing market consists of Suffolk, Middlesex, Essex, Plymouth and Norfolk Counties. Within this, Suffolk County includes the actual city of Boston. The sales market within this area is tight with a sales vacancy rate of just 0.6 percent. In July 2016, there was just a 1.8-month supply of single family homes. At the same time, demand for single-family homes is estimated to be at 20,550 new homes. There are only 3,145 of these homes being constructed, but an estimated 49,700 vacant units are expected to reenter the marketplace.

Despite an increased construction of multifamily units since 2013, there is still just a 4.3 percent vacancy rate in Boston HMA. In 2010, this figure was at 5.8 percent. In April 2015, this area was considered the third most expensive market for rentals in the country. Multifamily production began to rise in 2012. Because of the tight apartment market, rents increased by an average of 4 percent, or $91. Areas like the Beacon Hill, Financial District and Back Bay neighborhoods have seen their average rent increase to the highest levels recorded. Meanwhile, vacancy rates range from 3.8 percent in the Intown Boston market to 2.1 percent in the Southwest Boston market.

The Massachusetts Housing Market

In May, Massachusetts home prices attained record highs. Despite the high value of homes, sellers are still reluctant to place their homes on the market. The supply of condominiums and single-family homes remains low, so sellers are often unable to buy a new place to live without paying a higher price. Bidding wars and crowded open houses have quickly become the norm.

While the higher prices have encouraged some people to place their homes on the market, it is not enough to satisfy demand. In May, the median price of a single-family home in Massachusetts advanced 9.2 percent from May 2016. It is now at $385,000. Greater Boston saw an even more stunning increase. For this area, the median sale price hit $600,000 in May. This is a 13.1 percent increase since May 2016.

At the same time, sales volume was down 2.3 percent in Massachusetts from 2016. In Greater Boston, it declined by 2.2 percent. Because of the limited inventory, many buyers paid 10 to 20 percent higher than the asking price. Additional jobs in the area have increased the population growth. This in turn has pushed housing prices higher. A larger inventory is necessary, but the market has not adjusted yet.

Buying a Multifamily Home

Buying a home is part of the American dream. Many people start by investing in a single-family home. While this is one way to enter the real estate market, a multifamily home allows owners to receive rental income as well. Over time, renters will pay back the mortgage loan and help reduce your cost of living.

With a single-family mortgage, the home buyer pays two to five times the equity that they gain because of mortgage interest. While this still allows the buyer to develop equity, a multifamily home offers a lucrative alternative. Renters at the multifamily property ultimately pay for the mortgage loan and interest. A small multifamily property often has a price similar to a single-family home, but it offers more earning potential. For new investors, these smaller properties combine the benefits of an investment property and a single-family home. Thy can generate income like an investment property while having just to two to four units. Depending on the lender, a multifamily property can be financed for as little as 3.5 percent down. The seller may also be able to cover some of the closing costs.

Choosing the Right Property

A multifamily property can be as small as two units or as large as thousands of units. They are essentially any property that has more than one unit. Small multifamily properties have two, three or four units. A large multifamily property has five or more units.

Other than the size, the main difference in these properties is the way that they are financed and valued. Small multifamily properties are typically classified as residential by lenders. With large multifamily properties, the property is classified as commercial real estate. This classification means different rules and lending requirements. With a small multifamily property, the value is based on what residential properties sold for in the neighboring area. For a large multifamily property, the commercial value is based on the return on investment (ROI) that commercial properties achieve in the surrounding area. This ROI is known as the cap rate and is used for comparing commercial properties.

The Benefits and Drawbacks of Multifamily Properties

Many people turn to multifamily properties because it can increase their cash flow. When purchased correctly, these properties can develop a positive cash flow as soon as they are bought. In terms of the loan, a multifamily property can be simpler. If you were to purchase 20 single-family homes, you would have to complete 20 loan applications. With a single, multifamily home, you get one loan for multiple units. The same concept makes administrative details like insurance simpler with a multifamily home.

Large multifamily units are also valued based on the ROI they give the owner. They have less competition from single-family homeowners, which means you are only competing against other investors.

While there are many benefits to multifamily properties, there are some drawbacks as well. Obviously, a multifamily property will generally cost more than a single-family property. At the same time, this is balanced out by lower down payment options for financing. New owners may also find that a multifamily property is more management intensive because of the extra tenants. This can be addressed through hiring a property management company that can manage the property.

Other drawbacks include government regulations about how you raise money for multifamily homes. You might not have to compete with homeowners anymore, but the competition for multifamily properties includes sophisticated, skilled buyers. In addition, there are generally fewer multifamily than single-family properties to choose from.

The Process of Buying a Multifamily Property

The first step in buying a multifamily property is finding the right one. Start by going to a real estate website and looking through different properties. Location is important because the right location will attract more renters. In addition, you may want to consider where your other properties are located to make property management easier. You also want to look at the number of units as well as the rent it currently brings in. Many investors look for properties that rent for twice the mortgage cost. This means that half of the income is left over after your loan cost is paid each month.

Once you have one or more properties that seem like a good fit, the next step is to figure out what your ideal price is. The list price is often higher than your ideal price, but you can always make an offer that is lower than the list price. Because the Boston multifamily market is growing, this might not be possible in the current bidding environment.

Now, you are ready to actually look at the property. You can contact your real estate agent or visit an open house. Many of the units may be occupied by renters, so you may only be able to check out unoccupied dwellings. See how the units compare to other rentals on the market. If they are in better shape or have larger rooms, you may be able to charge a higher rental price. You will also want to look for expected repairs. If the listing price is right, a few minor repairs might not hurt your budget. If extensive repairs are needed, the property might not be worth the effort.

Making an Offer

If the building is perfect for your needs, then it is time to make an offer. You want to research the market before you make an offer because you do not want to bid too low or too high. In a competitive market like Boston, your offer may need to be higher than the listing price to get accepted. In a less competitive area, you may be able to offer less than the listed price. You will also need to consider your inspection contingency and financing contingency before making the offer. Other than earnest money, you will also need to decide on how quickly you want to close on the property.

From this point, the next step depends on the seller. If they accept your offer, you are ready to proceed to the next steps. In many cases, they might return with a different offer and negotiate. Work with your real estate agent to figure out the deal that works best for you. If there is a lot of competition for a property, the seller may have other buyers in line. In these cases, accepting the counter offer might be your best choice.

Inspecting the Multifamily Property

Most offers include an inspection contingency. This will include the amount of time you have to inspect the property. You can retain the right to walk away from the deal if it fails the inspection. In general, most buyers will need to hire a professional inspector to make sure that the building is up to code. If repairs are needed, a contractor can give you a quote for what they will cost.

The inspection period is an important time in the buying process. It is your final chance to make sure that the property is as good as it appears to be. This is your last opportunity to make sure that your repair costs are actually in line with the expected repairs. Use this time wisely to avoid buying a lemon.

Finding the Right Financing Options

Financing a multifamily dwelling is not always easy. In Boston, there were nearly 3,000 lenders that provided loans for multifamily properties. These loans are classified differently depending on the size of the property. A small multifamily property has four units or less. These smaller properties have more flexible financing terms and requirements. For a large multifamily property, you will find other regulations in place.

When you approach a lender, talk to them about requirements for your down payment. You may have limitations on where you can get funding sources for the project. Buyers sometimes set up longer time periods before closing so that they have time to approach conventional lenders for a loan. Other buyers pre-qualify for loans before they look for a property because it gives them an added peace of mind. The safest option is to make sure that you have several financing options available before you make an offer on a property.

There are some aspects that can make multifamily financing more appealing to the lender. If you have a larger down payment or a track record of real estate investments, lenders are more likely to trust you. In addition, the value of your property impacts their desire to lend. If your property will be worth more than 65 percent of the loan value after repairs, it makes the deal less risky for the lender. Likewise, having renters already at the property reduce the risk because the property is already drawing an income.

Closing on the Property

When your inspection and financing are complete, you are ready to close on the property. In most states, you will use a title company or an attorney to finish the closing process. Once this final step is complete, you officially own a multifamily property.

Typically, your real estate agent will send over a purchase and sale agreement for you to sign. Once this agreement is also signed by the seller, your title company will do a title search and prepare final documents. These documents may include things like the deed of trust or promissory note. Around this time, you will also want to look into property insurance so that your investment is protected. When everything is ready, you will make a final appointment to sign the last documents and get the keys.

After the closing is complete, you get to take over the property. You can directly manage it yourself as the landlord, or you can contract a property management company to do the work for you. It all depends on the amount of work and money you are willing to spend on the property.

Is Now the Right Time to Invest in Boston?

Since last year, lending for multifamily properties has increased by 8 percent. This record-setting year happened because of a growing marketplace and increased demand. While markets generally have boom and bust cycles, the Boston multifamily market is forecasted to continue growing.

This continued growth is due to an unmet demand for multifamily properties. More people want to rent in Boston than there are rentals available. The area had a sales vacancy rate of just 0.6 percent. While multifamily production has increased since 2012, it has not kept up with demand. The tight rental market means that rents are higher in price, but harder to find for tenants. This is ideal for owners of multifamily properties who want to rent out units to tenants.

The vacancy rate is currently lower than the historical average because the supply of homes has not kept up with the demand. Among apartment rentals, the vacancy rate was at just 2.1 percent in the Southwest Boston market. Because of the lack of vacant homes, rental prices have risen by an average of 4 percent. Only 3,145 single-family homes are under construction, but demand for these homes is at 20,550.

For landlords, this makes right now a potentially lucrative time to buy. Before investing in a multifamily property, make sure to do your due diligence. Analyze different properties and discuss your options with a real estate agent. With the right financing and research, you may be able to invest in your first multifamily property.

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