There was a case where a consultant completely overlooked management fees while calculating the rental yield for properties in Boston. While the total yield seemed decent at first glance, the issue was that it was calculated without including the management fees.

The median rent is $2,492 per month, and the median sale price is around $710,000. Dividing the annual rental income of $29,904 by the purchase price gives a total yield of about 4.2 percent. If an investment decision was made based solely on this number, it would later be realized that the calculation omitted management fees.

According to the 1 percent rule, a property priced at $710,000 should have a monthly rent of at least $7,100 to pass, but the actual median rent of $2,492 is only about one-third of that benchmark. In a market like Boston, where sale prices are among the highest in the nation, finding properties that meet the 1 percent rule is practically difficult.

For the 2026 fiscal year, Boston's residential property tax rate is $12.40 per $1,000, or 1.24 percent. A 35 percent homestead exemption applies to actual residents, but this exemption does not apply to properties purchased for rental purposes, meaning investors bear the full tax rate. For a $710,000 home, the annual property tax alone would be around $8,800.

Let's examine the difference that omitting management fees can make. Management fees are typically set at 8 to 12 percent of the rent, which means an additional $2,400 to $3,600 would be deducted annually based on the $2,492 rent. There is a noticeable difference between the cap rate calculated without including management fees and the one that does, after adding property taxes, insurance, and maintenance costs. Even using the 50 percent rule, the net operating income would be around $14,900, and the cap rate would drop to about 2.1 percent.

Despite this, Boston continues to be mentioned as a viable investment location because the expected appreciation is higher than in other areas, and the total return, which includes the increase in asset value due to loan principal repayment, can offset the lower cap rate to a significant extent. However, both the sale prices and property tax burdens are high in this market, so omitting even small items like management fees can significantly disrupt actual cash flow plans.

Cash-on-cash return also varies depending on the size of the down payment and loan terms. In a market like Boston, where sale prices are high, the cash amount going into the down payment is also substantial, so omitting a small item like management fees can distort the entire cash-on-cash return calculation.

Boston is known for having consistently strong rental demand, but due to high sale prices and property tax burdens, the market does not offer as much leeway in terms of net profit as one might expect. If planning to use property management, it seems realistic to include management fees in the operating cost from the start.

Depreciation tax benefits are also worth noting. In a high-priced market like Boston, the amount deducted annually when depreciating the building value over 27.5 years tends to be larger, so the actual return can sometimes be better than what is calculated based solely on the cap rate.

If considering property management, it is advisable to carefully check the contract for any separately charged items, such as tenant recruitment fees and lease renewal fees, in addition to management fees. In a market like Boston, where there are many management companies, it is common for fee structures to vary significantly from one company to another.

Insurance costs are another item that can be easily overlooked. Boston has areas with risks related to flooding and heavy snowfall, so depending on the property's location, additional endorsements may be necessary beyond standard homeowners insurance, making it wise to obtain estimates in advance.

If moving to or considering investing in Boston from another state, it can be helpful to compare Massachusetts's income tax and property tax structures, as they may differ from your previous residence. Especially, the state income tax filing procedures for rental income can vary greatly from state to state, so it is safe to verify this with a tax professional.

Tax and rental conditions can vary by property, and this article does not constitute investment or legal advice. It is recommended to consult with a professional before finalizing any contracts.