Help me analyze this flip or brrrr deal in Baltimore

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Help me analyze this flip or brrrr deal in Baltimore

Lisa S.
Baltimore, MD · Member since 2016 · 51 posts · 28 votes

I'm pretty much a newbie at this, and so just playing around with numbers as an exercise. Here's how I approached it:

Searching on CL and Zillow got me to this SFH in the Hampden neighborhood of Baltimore (hipster/very desirable, lots of cute restaurants, shops, Whole Foods, etc.). What's more, it's on the "Miracle on 34th Street". It's listed as 4 bedroom 1.5 bath, 1480 sf, and the pictures show a house that definitely needs paint, floors refinished at least, a full kitchen and bathroom rehab, and I'd assume you'd want to make the half-bath a full bath for value. 

Here's the link on Zillow: http://u.zillow.com/p2T5Pj/

But the price is listed as $145k on Craigslist and on this site: http://realpropertyinvestorsmd.com/baltimore-city-...

However, I don't really believe the numbers that "Real Property Investors MD" cite. They estimate a renovation cost of $45k and say that it has an ARV of $289k.

Here's why I don't believe it:

1) Renos cost a lot. Let's assume kitchen minimum $20k, bathrooms minimum $15k, add at least $10k for walls, floors, miscellaneous, maybe add a parking pad (area doesn't have garages) and that's assuming no major structural issues. I'd assume at least $50-60k to be safe. 

2) Comp on the same street that appears to be under contract for $259.9k- but slightly larger at 1900 sf, 2.5 baths, fully renovated: http://u.zillow.com/p2T5Pn/

3) General Zillow #s for Hampden are more like $220k, not close to $300k. (Note: I know that Zillow isn't the be-all-end-all, but it's what I have easy access to right now). 

Ok - so is this a good deal?

As a flip:

Used the BP calculator assuming an ARV of $250k, wanting a $25k profit and rehab costs of $60k - in that case, maximum allowable offer of $132,900.

As a BRRRR:

Used the BP calculator, not sure if I did this correctly, but the general guidelines were that rents in the area (it's a very desirable area) are around $1500. The calculator tells me that theres no cash flow in Y1 with the same rehab budget as in my flip scenario, but that Y2 and beyond would deliver a 20% cash-on-cash ROI, again assuming I could refinance to 70% of the ARV. In this scenario I assumed I would have to pay $145k.

What does the community think? I'd appreciate any thoughts, especially about my assumptions and process for thinking about this deal. This is really just an exercise for me as I'm exploring neighborhoods and potential strategies in Baltimore. 

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Ray Johnson
Irvine, CA · Member since 2016 · 545 posts · 614 votes
10y

Hi Lisa, I'm a little late to the conversation but wanted to add a few things. I invest in the Baltimore area and have a few suggestions.

There are several avenues to buy properties with better pricing over what you're looking at. Some things to consider;

1) Why Hampden for your first project? This will be a Class A property for Baltimore once completed based on the rehab cost you're projecting, you can have Class B or B- property for far less money generating a much better return on your investment. As a newbie you have to remember you aren't living in this house so choosing financial planning over a product you could see yourself living in is a key mindset for this business as a newbie.

2) The rehab numbers you're quoting sound like retail numbers or a home with higher-end finishes. Keep in mind that you'll want to connect with a good contractor that will not be paying retail pricing and shouldn't be charging you retail pricing for the rehab.

3) Regarding the contractor, contact several and make sure to get a few bids before selecting a contractor to do the work.

4) Try to connect with a good realtor in the area that can give you hard numbers for your analysis, I don't use "Zestimates" for my rental projections, I use prior 12 month rents for trending and current rent listing actuals in the area of my projects. If you can take a Saturday and visit properties on the area you're interested in and see what the interior finishes are like before overspending to compete with current product on the market. 

5) Baltimore can be a good area to build a portfolio, make sure you understand the market within the different neighborhoods, How to use them to obtain your financial goals, and establish relationships within the industry, It'll make investing much easier and cheaper whether you're only doing one property or starting your portfolio.

Hope this helps, Let me know if you have any other questions.

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  • Mario Ortner
    Van Nuys, CA · Member since 2016 · 18 posts · 7 votes
    10y

    Hi Lisa,

    I am an architect from Los Angeles and am looking to invest in Baltimore as Real Estate in LA is way too prohibitive. I am planning to travel to Baltimore early next month (September) to get to know the area and maybe look at some Auctions there. Let me know if you'd like to meet. I am open to invest with a partner if it makes sense. Let me know if interested. Take care. 

    1Reply
  • Lisa S.
    OP
    Baltimore, MD · Member since 2016 · 51 posts · 28 votes
    10y

    Any thoughts on this analysis? I'd really appreciate some responses from experienced investors in the area. (Baltimore)

    0Reply
  • Darren Budahn
    Investor · Milwaukee, WI · Member since 2014 · 811 posts · 420 votes
    10y
    Hopefully some of the local Baltimore people will chime in for you. I would just say a full bathroom renovation shouldn't be $15,000 though.
    0Reply
  • Lisa S.
    OP
    Baltimore, MD · Member since 2016 · 51 posts · 28 votes
    10y

    Thanks @Darren Budahn - I'm pretty conservative about costs for stuff like that, but that's probably just my lack of experience talking (and not having good contractor/partners)

    0Reply
  • Darren Budahn
    Investor · Milwaukee, WI · Member since 2014 · 811 posts · 420 votes
    10y

    @Lisa S.

    Yeah, Always better to be conservative with the numbers. But your overall estimate of about 50k for a full remodel on a house that size seems like it would  be in the ballpark though. Where's all the Baltimore folks? :)

    2Reply
  • Andrew Boykins
    Business Manager · Annandale, VA · Member since 2012 · 23 posts · 7 votes
    10y

    I invest in row homes in Baltimore doing the brrr strategy. Rehabs in Baltimore will range widely based on the level of finish. Based on the ARV you mentioned I would say 60k is probably low and extremely low if you don't have a fair contractor you could trust. The ARV seems very achievable and the rent actually sounds a little low to me.

    0Reply
  • Andrew Boykins
    Business Manager · Annandale, VA · Member since 2012 · 23 posts · 7 votes
    10y

    And what I mean by low on the rent is that it's too low for you to make money. Does 1.5k even cover the mortgage, taxes, and insurance. Much less the vacancies, repairs, and property management. I don't think you would even get a commercial loan for the full value based on that. For every 100k in property value you probably need almost 1k in rent. So I would want at least  2.5k in rent to be comfortable 

    1Reply
  • Lisa S.
    OP
    Baltimore, MD · Member since 2016 · 51 posts · 28 votes
    10y

    Thanks @Andrew Boykins, that's helpful. I would think a house in that area would go for $2500, but was just going off the Zestimate without doing a ton of research. 

    Good to know about the renovation costs. How much are you putting into these row houses?

    0Reply
  • Andrew Boykins
    Business Manager · Annandale, VA · Member since 2012 · 23 posts · 7 votes
    10y

    I put in 40k to 60k for a full remodel. But that's with moderate finishes. I still do granite and all that but not high end floor, tile work,  appliances, etc. Another factor with some of the higher end home is the historic charm of the home. Leveraging the historic charm of the home can be a big value add but I don't know what the cost of that is. 

    1Reply
  • Travis Lauchman
    Investor · Baltimore, MD · Member since 2013 · 65 posts · 23 votes
    10y

    Hey Lisa. The company I work with bought, renovated, and sold 905 W 38th St within the past year. We purchased the house for around $115k, put about $110k into it (full gut renovation including finished basement, high-end finishes, CHAP tax credit, parking, roofdeck) and sold it for $325k prior to it even hitting the market. This was an exploratory project for us as we tend to stick closer to the harbor neighborhoods but it worked out great and we are seeing an influx of young professional buyers willing to spend top-dollar on a high-end product. I actually looked at that house on 34th some months ago but couldn't make sense of the numbers. Good luck and let me know if I can be helpful to you!

    @Andrew Boykins I'd be curious to hear what $40-60k is getting you. I would like to being working the buy/hold and refi strategy but my brain is wired for doing $100k+ rehabs and that's simply too much to make economics work. 

    Happy weekend!

    2Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    10y

    @Lisa S. I think your calculations are closer to reality than the proposed numbers. A 289K level house is going to cost a lot more than $40 or even $60K to renovate.  Back in the boom time, people were spending $80 -$120K to renovate houses.

    Keep in mind a few things

    • Has this house recently been renovated or are the systems all dated and need to be replaced?
    • What is the floor plan? does the house need to be gutted and reconfigured or is the floor plan acceptable as it is?
    • What level of finishes are expected by the buyers?

    My guess is all systems will need to be replaced for a retail flip and high end finishes will be expected. An area like Hamden will be tough to cash flow fora rental when figuring all expenses.

    2Reply
  • Andrew Boykins
    Business Manager · Annandale, VA · Member since 2012 · 23 posts · 7 votes
    10y

    @Ned Carey I think you're point is correct in your overall point but you may have the numbers reversed.  @Lisa S. was saying ~$60k.  And while I spend ~$60k that's on lower end rowhomes and I would expect it to cost her more especially on her first deal.  I believe that Travis confirmed that based on his numbers.

    @Travis Lauchman, 40k to 60k gets me a full gut/renovation.  Again that's not with high end stuff.  It's laminate flooring or refinishing floors.  A bulk of the money is new systems: HVAC, plumbing, electric.  And if the basement is already unfinished, I don't spend the extra money to finish it.  So it's only ~1.2k sq ft. of space to renovate.

    0Reply
  • Travis Lauchman
    Investor · Baltimore, MD · Member since 2013 · 65 posts · 23 votes
    10y

    @Andrew Boykins thanks for the response. $60/SF seems like a good deal if you are getting all systems, new kitchen, and floor plan even if you aren't touching the basement. Do you manage all of the separate trades or are you able to get this type of deal with a GC?

    1Reply
  • Ray Johnson
    Irvine, CA · Member since 2016 · 545 posts · 614 votes
    10y

    Hi Lisa, I'm a little late to the conversation but wanted to add a few things. I invest in the Baltimore area and have a few suggestions.

    There are several avenues to buy properties with better pricing over what you're looking at. Some things to consider;

    1) Why Hampden for your first project? This will be a Class A property for Baltimore once completed based on the rehab cost you're projecting, you can have Class B or B- property for far less money generating a much better return on your investment. As a newbie you have to remember you aren't living in this house so choosing financial planning over a product you could see yourself living in is a key mindset for this business as a newbie.

    2) The rehab numbers you're quoting sound like retail numbers or a home with higher-end finishes. Keep in mind that you'll want to connect with a good contractor that will not be paying retail pricing and shouldn't be charging you retail pricing for the rehab.

    3) Regarding the contractor, contact several and make sure to get a few bids before selecting a contractor to do the work.

    4) Try to connect with a good realtor in the area that can give you hard numbers for your analysis, I don't use "Zestimates" for my rental projections, I use prior 12 month rents for trending and current rent listing actuals in the area of my projects. If you can take a Saturday and visit properties on the area you're interested in and see what the interior finishes are like before overspending to compete with current product on the market. 

    5) Baltimore can be a good area to build a portfolio, make sure you understand the market within the different neighborhoods, How to use them to obtain your financial goals, and establish relationships within the industry, It'll make investing much easier and cheaper whether you're only doing one property or starting your portfolio.

    Hope this helps, Let me know if you have any other questions.

    4Reply
  • Lisa S.
    OP
    Baltimore, MD · Member since 2016 · 51 posts · 28 votes
    10y

    Thanks @Ray Johnson - super helpful perspective. I was actually using this listing as an example, I agree with your assessment about Hampden. Just started working with a local realtor. 

    0Reply
  • Ray Slack
    Investor · White Haven PA · Member since 2014 · 362 posts · 221 votes
    10y

    I 100% agree with @Ray Johnson  

    1. WHY HAMPDEN?  Many newbie investors choose an area they would like to live in to invest in.  In my opinon this not always the right move.  Hampden may be good for a flip property but your return on a buy and hold would be much better in a middle/lower income area of the city that rents well. 

    I also agree with Ray that you construction numbers seem off.  Most of your rehab money will go into things you can't see.  Systems/ electric/ roof ect.   Your kitchen should be costing you about $15k MAX bathrooms $7500 MAX  what is your $10k for walls? that seems hight as well. While I disagree with some of your specific prices I think $50-$60k is a resonable reno cost for a rental on this.   I would also point out this property has been on the market almost a year 10/15 as you can see on zillow without much of a price reduction.

    1Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    10y

    @Lisa S. I agree with @Ray Johnson and @Ray Slack about the numbers. When I said your numbers looked closer to reality, I should have said your specific rehab costs mentioned are high but the whole project you are about right. 

    You shouldn't spend $20K on a kitchen unless it is very large. What drives up costs on rehabs are often the little things you don't think about. High end trim work, door knobs, light  fixtures can really add up.

    1Reply
  • Lisa S.
    OP
    Baltimore, MD · Member since 2016 · 51 posts · 28 votes
    10y

    @Ray Slack good call. You can pretty much imagine the psychology of the owner of that building. They think, "well, I own this house on 34th street, property values are rising around me, I should get $x for this!" - except no one's buying, because it's a huge rehab project and the numbers don't make sense at that sales price. So it's sitting on the market and they're probably ignoring their realtor. 

    0Reply
  • Account Closed
    Investor · Baltimore, MD · Member since 2014 · 1k+ posts · 688 votes
    10y
    Anytime one attempts to summarize, the summary will be less than the truth. The truth you are seeking involves doing the work to learn it. 1. The neighborhood/house/street location/etc. Near 83? Right off busy falls rd? Next to a warehouse? Need to know such things to assess true value. 2. The house...structurally difficult to rehab? Rehabbed already? How? Whats good? Bad? What must change? How much? Each specific house has its specific costs...some house need more duct, some less, some have it already. To answer your question...Is it a good deal? Are you correct or incorrect? Not enough information to answer. Nobody here, more than likely, has that information either.
    0Reply
  • Lisa S.
    OP
    Baltimore, MD · Member since 2016 · 51 posts · 28 votes
    10y
    Originally posted by @Account Closed:

    Anytime one attempts to summarize, the summary will be less than the truth. The truth you are seeking involves doing the work to learn it. 1. The neighborhood/house/street location/etc. Near 83? Right off busy falls rd? Next to a warehouse? Need to know such things to assess true value. 2. The house...structurally difficult to rehab? Rehabbed already? How? Whats good? Bad? What must change? How much? Each specific house has its specific costs...some house need more duct, some less, some have it already.

    To answer your question...Is it a good deal? Are you correct or incorrect? Not enough information to answer. Nobody here, more than likely, has that information either.

     So...fully understand all that. It was, to quote myself, "just playing around with numbers as an exercise. Here's how I approached it:" - and wanted to spark some discussion about how other investors are assessing properties in the Baltimore area. Got some great responses!

    0Reply
  • Rich Baer
    Real Estate Investment Attorney · Kingsville, MD · Member since 2016 · 643 posts · 408 votes
    10y

    @Lisa S.

    This house has been shopped around for a while now. No one has jumped on it because it is priced in no man's land. This is a good Hampden location no doubt. However, the investor sweet spot for purchase ans rehab is $120,000 to $135,000. For rental it does not even come close to working.

    Your rehab costs are standard no matter who you use. The most important number is your purchase price and carrying costs.

    The $160,000 price only works if you are paying cash and have your own salaried work crew.

    0Reply
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