What Ratio Do You Use In Baltimore City?

[Russell Brazil]

What ratio are you Baltimore investors using to prescreen deals in Baltimore city?  In other Maryland counties I typically use the 1% rule and it turns out fine.  But with the insane real estate tax rate in Baltimore of $2.25 per $100, I was wondering what BP users were using.  I bet @Ned Carey is probably pretty knowledgeable in this area. Ive never owned in the Baltimore city limits, but have recently considered a few properties there.

[Ned Carey]

@Russell Brazil Personally I find the 1% test generally does not work very well anywhere by my standards.  With 50% for expenses it does not leave much for cash flow. For some people who have high income and can use the depreciation and don't need current cash flow it can work fine.

My criteria is simple

• Is is a really good deal
• Can I pull it off

Because of the way I source my deals I can sometimes meet the 6% test but generally 2-3% should be easy to get in Baltimore. If I had the cash and financing I would be buying in nicer neighborhoods at 2% all day long.

Regarding taxes, yes they are outrageous - not just the rate but the assessments. I doubt I have a single property I could sell for its assessed value. I know landlords that specifically target neighborhoods that have low assessments. That can mean an extra $1k net positive cash flow per year based on that one factor only. Mill HIll is one example in south west Baltimore.

[Gabriel G.]

@Ned Carey have you heard of people turning single family into multi families? My triplex in Charles Village is just a regular 3-story row home with a unit in each floor. I've also noticed a lot of cheap row homes in that area... Is it a  complicated process?

[Nancy Roth]

@Russell Brazil

Based on recent experience with investor buyers I see the market for rentals tightening in some of the nice bread-and-butter neighborhoods (as opposed to the red-hot ones near the water). Still, the 2% rule of thumb remains achievable in most of Baltimore. 

But as @Ned Carey points out, if you are willing to buy the very cheapest properties and can keep the costs of a full rental rehab down, you can do even better than 2%. Not everyone (like, ahem, me) is comfortable with that model. I have great respect for construction project risks and hazards. But for those less wimpy than I, it is still doable.

I agree with you 100% about the irrational property tax assessment process and rates in Baltimore City. Most assessments appear to have been performed during the height of the market 10 years ago, and have never come down, though those prices are totally irrelevant to today's market! Why one neighborhood, say, Belair-Edison, has very high assessments compared to a similar neighborhood, say, Gwynn Oak west of Hilton Ave., no one can explain (please speak up, BP readers, if you know!). I suspect it's about politics (certainly not the market) and city assessors are under pressure to keep assessments high. It's dishonest and outrageous and it breeds cynicism about the government's motives.

FWIW I have had good results using specialists to appeal the assessments on my rental properties. Though it's possible, I wouldn't advise filing an appeal yourself, as the law is complex, the procedure involves 3 levels of appeal, and you need more than a passing acquaintance with the arguments that will sway the city to give up some income. Well worth the cost of 50% of the first year's savings property tax savings in my opinion.

Good luck to you, Russell!

Nancy Roth

[Ned Carey]

Originally posted by @Gabriel G.:

@Ned Carey have you heard of people turning single family into multi families? My triplex in Charles Village is just a regular 3-story row home with a unit in each floor. I've also noticed a lot of cheap row homes in that area... Is it a  complicated process?

 Generally changing to multi family is tough unless it is already zoned for it. My understanding is that even if it is zoned properly then the city can deny based on parking issues. Apparently the city is against the idea of increasing housing density. 

Cheap row home in Charles Village? Cheap relative to what DC? My guess is we have different ideas of what cheap is.

PS in the future please start a new thread as you questions were not related to this thread.

[Gabriel G.]

@Ned Carey Thanks and will do. I figured it was an idea in order to get closer to the 2%... Just curious do you notice that it is easier to achieve the 2 or 3% ratio with SFR vice Multi?

[Ned Carey]

Right now multi families in the baltimore area do not provide as good a return as SFHs. This seems to be true both with large and small multi family properties. 

There are many factors that have driven multi family prices up and I believe many investors are taking risks at today's high MF prices they do not understand. 

[Russell Brazil]

Originally posted by @Ned Carey:

Right now multi families in the baltimore area do not provide as good a return as SFHs. This seems to be true both with large and small multi family properties. 

There are many factors that have driven multi family prices up and I believe many investors are taking risks at today's high MF prices they do not understand. 

 @Ned Carey I think the price of multifamily homes is being bid up in a number of markets.  Im involved in some MFH's in Massachusetts and I cant believe what some of the other properties in the area are going for.  And this is in pretty subpar areas too. Good for me, not so good for whoever I sell them to eventually.

[Gabriel G.]

@Ned Carey I am guilty as charged, I was telling @Russell Brazil today that I grossly overpaid for my MF. I barely made it to the 1% rule. Luckily I used the VA loan and didn't put any money down.

[Mike Hurney]

@Russell Brazil

"I think the price of multifamily homes is being bid up in a number of markets. Im involved in some MFH's in Massachusetts and I cant believe what some of the other properties in the area are going for. And this is in pretty subpar areas too. Good for me, not so good for whoever I sell them to eventually."

So we're going from "musical chairs' to the "greater fool theory"?

[Ray Slack]

Baltimore is a prime example of why you CAN NOT use a 1% 2% or any percent rule. You need to use a Cap Rate based on the amount of cash you are putting into a deal and the NOI you are getting on the rental. It's a basic formula that takes about 5 minutes to calculate on any deal. You have to learn how to do this simple calculation if you are going to invest in real estate PERIOD.. I read about someone buying a condo based on the 1 percent rule but they didn't take into account the $900 per month condo fee. I recently bought a townhouse in baltimore for $13,000 but the taxes on the property right now are $2300 per year. I'm sorry to be so blunt but if you don't know how to total up all your annual expenses and divide them by your projected income to get a cap rate you should not be investing in real estate. As far as Cap rates (which is basically your cash on cash return rate) I look for 10% to 20% based risk, potential appreciate, how difficult management will be on the specific property. If you still are stuck on the 1% rule or the 2% rule contact me through email as I have about 10 properties in baltimore city I will sell you out of my portfolio that meet your 1-2% rule requirement. Would they be a good investment for you? Probably not. But hey they will fall into your 1% to 2% rule.