For anyone looking to purchase an investment property for the first time, NOI (net operating income) is one of the fundamental equations you need to know to estimate its potential profitability. Net operating income in real estate is a financial breakdown of the total revenue that the property will generate in a year minus the normal operating expenses. In short, it’s an annual profit projection for investment properties.
In a competitive real estate market like Boston, it’s important to analyze a property based on NOI before you decide to purchase. Some properties may be priced too high to actualize any meaningful profit and can end up being a money pit for years to come. While it’s hard to generalize an entire neighborhood in terms of NOI, we can use median sales prices and average rent prices by neighborhood to get a general sense of which areas may provide the best opportunity for a profitable investment.
In order to calculate the NOI of a neighborhood, we’re projecting yearly operating expenses based on the mortgage payments of a standard loan taken out of the median sales price. We’re also accounting for the yearly property tax expenses based on the property tax rate of the area, and adding in the average homeowner’s insurance of that neighborhood. To calculate yearly revenue, we’re taking the average rent price of that neighborhood and multiplying by 12 months.
Boston Neighborhoods With The Highest Single Family Net Operating Income
Many new investors make the financial decision to start small with their property investment portfolio with the intent of buying larger properties down the road. For some, starting with a single family home as an investment is a good option based on their budget and credit score.
In Boston, single family home prices have been soaring in recent years due to a short supply. For that reason, single family homes for sale in Boston generally do not provide the same NOI as a condo or multi-family investment based on median sales prices.
Keep in mind that each listed property is a unique opportunity, and even if the NOI of the median sales price is in the red there are likely still properties that will provide a positive NOI in the area. The 5 Boston neighborhoods with the best single-family NOI are ranked solely for the purpose of comparing house prices to other neighborhoods in terms of potential investment profitability.
The data suggests that single family homes are the least viable investment vehicle by property type in Boston. Boston’s estimated NOI is -$6,533 based on standard loan terms for a single family home. In fact the neighborhood with the highest average NOI, Roxbury, is still averaging a $2.5K annual loss at the 1 year single family median sales price and the current average rent price of apartments in Boston.
|Best SF NOI by Neighborhood||Avg. Rent x 12||Estimated Annual Expenses*||NOI|
*Annual expenses estimated by financing the 1 year median sale price with a 30 year loan at 3% APR and 30% down payment + property taxes at the neighborhood’s property tax rate + average homeowner’s insurance + 10% maintenance.
Boston Neighborhoods With The Highest Condo Net Operating Income
If we were to run the same formula on Boston’s median condo sale price, we get a similar yearly NOI for Boston condos (-$6,733) as we did for single-family homes. However, by breaking down condo NOI by neighborhood we can see that there are 3 neighborhoods that would yield a positive NOI based on current median condo prices and average rent prices: West End (+$1,079), Allston (+$985), and Fenway (+$388). So it would appear that in Boston, condos offer investors more opportunities for profitability in general than single family homes.
|Best Condo NOI by Neighborhood||Avg. Rent x 12||Estimated Annual Expenses||NOI|
Neighborhoods in Boston With The Best NOI By Property Size
If we shift our focus from property type to size, we find even more potential opportunities for profitable investments. In Boston, larger units provide more upside in terms of positive ROI than smaller units. In fact for 4 and 5 bedroom properties in Boston, the estimated NOI are both positive ($3,453 and $5,383 respectively) based on current median sales prices and average rent prices.
As you can see in the following tables, there are a few neighborhoods that keep popping up in the list of best average NOI. West Roxbury seems to yield healthy NOIs for small properties while Roxbury, Fort Hill, and Mission Hill are among the most profitable neighborhoods for larger property sizes.
|Studio NOI by Neighborhood||Avg. Rent x 12||Estimated Annual Expenses||NOI|
|1BR NOI by Neighborhood||Avg. Rent x 12||Estimated Annual Expenses||NOI|
|2BR NOI by Neighborhood||Avg. Rent x 12||Estimated Annual Expenses||NOI|
|3BR NOI by Neighborhood||Avg. Rent x 12||Estimated Annual Expenses||NOI|
|4BR NOI by Neighborhood||Avg. Rent x 12||Estimated Annual Expenses||NOI|
|5BR NOI by Neighborhood||Avg. Rent x 12||Estimated Annual Expenses||NOI|
Running metro-wide NOI analyses like this one can be a worthwhile research step for any investor unfamiliar with a new market. By finding which neighborhoods are yielding the most profitability, you can spend less time combing through listings and more time viewing potential properties.