Boston’s real estate market has a long history of high prices. In fact, it’s not uncommon for people to avoid real estate in Boston because of the costs associated with it. Just how unaffordable it is might come as a surprise, though. Boston is the seventh-most expensive real estate market in North America, according to the International Housing Affordably Study.
Boston has a home price-to-income ratio of 10. That puts the city in the “Severely Unaffordable” category, sitting behind Vancouver, Manhattan, San Francisco, Brooklyn, New York, and Los Angeles.
The researchers scored Boston a 10 after looking at the median home sale price and median family income. The median home sale price in Boston is $610,000, but the median family income is just $61,176. That means it’s really hard for most Boston residents to afford a home.
Why Is Boston So Expensive?
Big cities tend to be expensive, but few are as expensive as Boston is. Why is real estate in the city so costly?
First, it shares a common trait with many of the high-priced cities in the country. The population is growing much faster than the construction rate. In fact, if you live in Boston and decide to put your house up for sale, there is a good chance you won’t find another one to buy because there are so few available. That means people are holding onto their real estate. They are afraid to sell, and that just makes the market even tighter.
Then, there is the issue with what’s being built in Boston. Developers seem to like the finer things in life, or at least they want to find renters who do. They’ve built luxury towers with apartments and condos specifically made for people with disposable income to spare. These properties aren’t built with the typical Boston family in mind. They’re made for retirees who want to leave the suburbs for the city and students who are still on mom and dad’s payroll. To make matters worse, these units are typically studios and one-bedroom condos, so even if most families could afford them, they wouldn’t be big enough.
While people are scouring the city looking for places to live, these luxury condo owners are doing their best to woo renters to their properties. Luxury rentals outnumber luxury renters, so owners are offering free months of rent in an effort to break free from the competition. That’s great for luxury renters, but what about everyone else? They’re stuck trying to find something they can afford, and many are coming up short.
An influx of major corporations is also adding to the demand. Fenway, the Financial District, Kenmore, and the Seaport have all seen huge corporate growth over the recent years. Countless businesses are leaving the security of the suburbs to reach young graduates in the city, and it’s making the population grow even more. Graduates are staying in the city to work, and others are moving to the city for jobs. The housing market can’t keep up with this growth.
Then, there’s the Boston Redevelopment Authority. The BRA is in control of what gets built it the city, and it even has control over where each structure is built. The BRA pays a role in getting developers to build residential properties, and it fails time and time again. Developers aren’t interested in building housing. They prefer the solid return on investment that comes with office space and hotels.
The small return on investment that comes with housing is largely due to zoning issues. The BRA is behind when it comes to zoning, and that makes it difficult to encourage developers to build housing. Much of the city is zoned as if it’s the suburbs, meaning that developers can’t build structures as high as they would like. They spend time and money trying to convince the BRA to let them add additional floors. Sometimes, the request is granted, and other times, it is not. Many developers aren’t willing to take the risk.
The BRA is also responsible for the land speculation that takes place in the city. While the organization could put a stop to it, it’s failed to do so. The Seaport is a great example of this. Eight billion dollars was put into the Seaport to get it ready for development, and then it switched hands from one land speculator to the next. Speculators bought and sold the potential to develop the property, but nothing was built in the process. Those extra costs were added to the land values, making the property even more expensive.
Is There a Solution?
Housing prices have been going up faster than inflation or wages in Boston for years, and it has families and real estate professionals wondering if there is an end in sight. Major cities that have managed to keep real estate relatively affordable fall into one of two categories. They either have ample land that makes it easy to build new developments, or they have slow-growing economies and few jobs available.
Boston doesn’t fit into either of those categories, so finding a fix will be a little more difficult. However, there are some potential options out there that could make real estate more affordable. Don’t be surprised if Boston tries at least one of these options in the near future, before the real estate market gets completely out of control.
Market urbanism is one of the most interesting possibilities. If the city takes this approach, it will build more housing. This goes beyond simply building the housing. The city will have to encourage builders to get to work by loosening zoning laws and streamlining regulatory checks. The city will also have to turn more of the power and control over to the developers. Developers will need to have the freedom to meet the needs of potential renters and buyers, or there won’t be any sense in building the property. In other words, the BRA will need to step aside and let developers get to work.
This is an interesting proposition, and it could work. However, that doesn’t mean it’s a perfect solution. Zoning laws maintain property values, and while Boston’s are exceptionally restrictive, you can’t do away with them entirely. There is a place for zoning laws, but the BRA needs to make changes to the existing laws. Developers need to be able to have a solid return on investment when building residential property, or they won’t put their time and money into it. That’s almost impossible with the current zoning laws.
A right to housing is another possibility. The city could offer an expanded voucher system so people of all income levels would be able to pay rent. This system comes with its own set of pros and cons. On one hand, it would allow Boston’s job market to continue to grow. When people have places to live, they are able to continue to work in the city.
Vouchers do come with their own costs, though, such as increased taxes. Also, landlords will likely have to undergo inspections when renting to people with vouchers. This might make real estate investors less likely to buy properties in the city. They might prefer to go to another city that doesn’t have as many rules in place.
Rent control could also help. This is the process of capping rent in selected apartment complexes. Rent control does make properties more affordable, but it can cause landlords to be less interested in maintaining them. Some landlords fail to upgrade properties because they are located in a rent-controlled building. It takes longer to get a return on the investment when you can’t raise the rent, so they don’t put money into the properties.
Rent control also reduces mobility. People are afraid to move because they are getting such a great deal on the rent. Because of that, they stay put, even when they would be better suited somewhere else.
In reality, there likely isn’t one solution but a mixture of solutions. Simply flooding the market with vouchers won’t be a cure, but increasing access to vouchers could help. Making all buildings rent controlled won’t fix the issue, but adding a few rent-controlled properties can give lower-income people a chance. Also, loosening some zoning regulations could help builders get more housing up, but if the zoning restrictions get too loose, they’ll add to the problem instead of fixing it.
The problem isn’t likely to be fixed soon, so what does this mean if you want to buy a property and rent it out in Boston? Is it possible to turn a profit in the city?
It is, but you have to be smart about it. Just jumping in blindly will set you up for failure, so follow some tips to get ahead of the curve.
Buy Property People Really Want
You could probably go out and buy some luxury property right now. As nice as it would be to find a property quickly, you need to remember the supply and demand issue in the city. Most Bostonians are looking for an affordable property that has multiple bedrooms. If your property has a single bedroom and is going for more than the average cost of rent, you might end up having to hold onto it for a long time.
Be Flexible with the Debt-to-Income Ratio
Most landlords look at an income-to-rent ratio when approving tenants. The ratio needs to be around 30 percent to approve the tenant. That works in most places, but as you know by now, Boston is expensive. It’s not just expensive when it comes to home sale prices, either. It’s also expensive regarding rent. In fact, it’s more affordable to buy than to rent in Boston.
That means you need to be flexible when it comes to the income-to-rent ratio. Of course, you want your tenants to have jobs, and you want them to be able to afford the monthly rent, but don’t deny someone just because the ratio doesn’t sit at that perfect 30 percent.
Then, set up an online rent collection service. These services reduce late payments, so you’ll have an extra layer of protection in place.
Reduce Your Liability
You are going to put quite a bit of money on the line when you invest in Boston real estate. You don’t want to lose anything in the process, so it’s important to recommend tenants sign up for renter’s insurance. You can even request renter’s insurance with the application. This will protect you in case anything happens on the property, and it will also protect your tenant.
Boston is going through a bit of a crisis regarding affordability. That means you can keep a tenant for life if you offer fair rental prices and you don’t raise the rent very often. You might have to raise the rent at some point, but communicate your needs to the tenant and explain the reason for the increase.
Keep in mind that it’s cheaper to hold onto an existing tenant than it is to find a new one. If you work with your tenant and you’re upfront about price increases, you can have a tenant for life.
Taking the Plunge
Taking the plunge into the Boston real estate market can be a little frightening. It’s an expensive market, and that scares some landlords away. However, the rental demand is there, so you can fill your property with tenants if you can find one to buy. Also, there is reason to believe the city will begin to address some of the issues in the near future. That will make it even easier for landlords.
You can beat the rush of landlords by getting into the market now. Then, you’ll be an old pro by the time more properties become available. At the point, you can add some of those to your inventory, as well.