Your Input on this 4 Unit Multifamily in Baltimore

7 Replies

Hi, my name is Alexander and I invest in Washington DC and Richmond on SFH units (buying rentals). I recently have shifted my focus to Baltimore focusing on small multifamily units (under 5). Below is a potential "live" deal and I wanted to get advice since several factors are in play to come to a fair offer (including bring rents to market value and adding a new unit).

a. Location Info: Charles Village near Safeway and CVS.

b. Property Info: 3 unit multi-family zoned "B23 Community Business" (i.e., mixed commercial and residential). All 3 units are currently rented out. All units have individual metering minus water. The basement unit is not individually metered (yet).

c. Unit Info: 

- Unit #1: Commerical space currently renting for $750 but should be renting closer to $1000. The unit is a studio layout. The unit is in good condition. Requires minimal work to uprent out.

- Unit #2: 1 bedroom / 1 bathroom. The unit is in decent condition but will need cosmetic uplift (e.g, paint, new kitchen tile, etc) to bring in a top price of $950 monthly. 

- Unit #3: Studio loft currently rented for $825 but after cleaning up and upgrading kitchen should be renting for $1000.

- Unit #4: Basement unit is "technically" a unit meaning it has own entrance (back and front), separate bedroom and bathroom, kitchen and 2 egress windows. Hope in the future is to renovate (est $8k - 10k) to clean up finish bathroom, kitchen and pave backyard for 1 parking space. Estimated rental would be $850. 

#1 Question: The current NOI/Purchase Price is 4.9 CAP (I know horrible). Is this typical for multifamily in Baltimore? My research shows it really should be in between 6 -7. What is a good CAP rate for the Charles Village area?

#2 Question: How hard or easy is it to re-zone a 3 unit to a 4 unit?

#3 Question: My plan is to invest $24K to raise the current annual gross rent from $29,100 to $46,200. Normally, I would offer a "fair" value price base on what it cashflows now but with all of the outbidding going on in Charles Village, I thought the CAP rate would be fine since I would be raising the value over time (long-term investor) by increasing the NOI.

Please let me know what you think, especially those from the Baltimore area. I have combed through many deals and this is one where I see the value play for this changing area -- but before I make a mistake please share your thoughts.

P.S. I would not normally ask a question like this but with JMU and other developments going on, Charles Village seems a good spot to surf the gentrification wave but I wanted to hear from others who have experience with Baltimore to get a "gut" check perspective moment.

1 - CAP rate is low, but it is hard to get cheap multi-unit these days.

2- It is will be hard to change it from 3 to 4 units, you might not be able to do it especially for a basement unit.

3- Your estimate to almost double the rent is too optimistic. 22nd to 25th is not a great area. It could help you to find renters quickly but might not help to increase the rent that significantly.

Ozzy -

Thanks for your input, reply in point format:

1. It seems that Baltimore multifamily units are just expensive right now that is that.

2. I plan to go to the zoning department to find out the process.

3. I had two RE agents and one property manager look at the place and estimate ranges of market rent amounts. All confirm the building has low rents. To be conservative, I took the lowest numbers and from viewing Craigslist and other sources it should be higher. So the goal is to gradually increase rent at each tenant turnover.

Lastly, is this a good deal in Baltimore or should I continue looking elsewhere?

By the way, since your are a RE could we connect offline?

Hi @Alexander Biniam ,

I focus on small multis in Baltimore 5-50 units, but I also got a 4 unit.

1. Unfortunately, there is not enough data for me to tell you if this is a good deal, or not. Location is key in Baltimore and some people say this deal is in Charles Village, JHU, Mt. Vernon, etc. when the deals are actually nearby those areas and in not such desirable locations that can bring top rent or the best tenants. 

When purchasing a property, I stick to my numbers and don’t try to pay now what the asset may be worth tomorrow after I do all the work, that’s my reward for estabilizing the asset. I know I miss lots of deals in this market, but I still buy some and are way better than buying an average deal. 

When I buy, I don't focus too much on CAP rate, I make sure that the property will cash flow, at least, $300/door (after ALL expenses, capex, debt service, etc.) finance at 100% of the purchase price + rehab cost, which should be 65-70% of the ARV. So that's how I get to my purchase price.

2. I recently got  approved to add an additional unit to a 6 unit property. It will be easier or harder to get it approved depending on the neighborhood your property is located and current zoning and use. You don’t need to go to the zoning department, you can call them, but basically you will have to:

    - Check current zoning: it may be already zoned for 4 units, but being used as a 3 units. If so, you will need to apply for a use and occupancy permit (you will have to pull some building permits too to do whatever work you need to do to finish the 4th unit)

     - If it is zoned for 3 units, you will have to appeal the current zoning asking for a variance. You will have to bring some documents to the zoning office (call them) and a floor plan of each floor, including your proposed additional unit. You will be asked to attend a hearing at the city council to defend your case. They may or may not approve you. They don’t want to hear that you want to add an additional unit to make more money, you will have to explain them how is that going to be beneficial for the neighborhood and/or the rest of the tenants in the building. You will most likely be required to add an off-street parking spot for each additional unit you ask for. The process is not difficult, getting approved is a different story. I can put you in contact with someone that does this for a living and can help you with it. 

3. You need to be sure of your numbers. If you have triple check them, you can do it. However, don't pay today what the property will be valued at after you improved the NOI.

3 to a 4 easy or hard? Thats relative, but what is true is tht you will have to endure a process. Call baltimore zoning to find out what that process is than decide yourself if its worth your time?

Cap rate? cap rate i find to be useless in that it only compares one property to another, instead of to what is important ( does this make profit? Is its profit going to continue? Does the profit satisfy what i want for the mo ney i have spent?) cap rate might be a tool to use for the last decision, but one of many. Concentrate on what is important. Aka is it rentable? Are the current tenants worth dealing woth? The houses condition and the longterm sustainability of it?..your zoning question? 

Your third question doesnt actually have a question. Is it a good idea to improve a property on a long term hold? Always. How much you should spend, what you should do, and what you will get as a result are different questions  specific to each place

Hi @David Fernandez,

Thanks for the reply. I hope to build my portfolio up to the 50 unit level.

1. In an attempt to be private, I may have not given you enough location info but the off-market is between 24 and 25th street, across the street from the Safeway making it a good location.

Based on your loan structure and profit requirements ($300 per door) then most market sales wouldn’t work for you unless it needs major rehab.

From my numbers, I would be cash flowing $100 per door and my Cash on Cash ROI would be 9.49%. Not great but I normally target 13% so maybe I have answered my own question.

2. Glad it worked out for you on the additional unit. How many weeks or months did it take to get it approved?

Can you please email me the contact that does this for a living? Would love to call your contact this week to determine my next move.

3. Very wise words that you can’t pay with present money for future (to-be)value.

Originally posted by @Alexander Biniam :

Ozzy -

Thanks for your input, reply in point format:

1. It seems that Baltimore multifamily units are just expensive right now that is that.

2. I plan to go to the zoning department to find out the process.

3. I had two RE agents and one property manager look at the place and estimate ranges of market rent amounts. All confirm the building has low rents. To be conservative, I took the lowest numbers and from viewing Craigslist and other sources it should be higher. So the goal is to gradually increase rent at each tenant turnover.

Lastly, is this a good deal in Baltimore or should I continue looking elsewhere?

By the way, since your are a RE could we connect offline?

Don't get me wrong, I am not saying you cannot increase the rent, I am skeptical about 49K number, to get there you need full occupancy and higher rent.

I lived on 27th for years, and I know tenant type changes around 25th and lower which could cause higher turnover and vacancy.

However I am not sure how  Clavel's popularity or R house or Parts and Labor changed the dynamics, I might need to update my info on it :D))

I sent you a DM, you can ask me anything if you have questions.

Good Luck!!!

Originally posted by @Alexander Biniam :

Hi @David Fernandez,

Thanks for the reply. I hope to build my portfolio up to the 50 unit level.

1. In an attempt to be private, I may have not given you enough location info but the off-market is between 24 and 25th street, across the street from the Safeway making it a good location.

Based on your loan structure and profit requirements ($300 per door) then most market sales wouldn’t work for you unless it needs major rehab.

From my numbers, I would be cash flowing $100 per door and my Cash on Cash ROI would be 9.49%. Not great but I normally target 13% so maybe I have answered my own question.

2. Glad it worked out for you on the additional unit. How many weeks or months did it take to get it approved?

Can you please email me the contact that does this for a living? Would love to call your contact this week to determine my next move.

3. Very wise words that you can’t pay with present money for future (to-be)value.

I understand not giving the exact address, no worries. I can't tell you if it is a good or bad deal because we don't have all the data (expenses). Some people forget some items when analyzing deals, just make sure you include everything: utilities you will be paying, vacancy, maintenance, capex, license fees, property management fees, insurance, taxes (do not use current taxes, use the taxes that you will be paying after purchase ~ Purchase Price x 0.0236), etc. Make sure you include all expenses in your analysis and you should be able to see if it works for you, or not, at current purchase price.

I mentioned location as I just wanted to reinforced the importance of the location in Baltimore City. This property seems to be located, technically, in Old Goucher, not Charles Village. 25th St separates both neighborhoods, which are quite different the farther away you get from 25th. I do not own any deals in these areas, so I cant't tell you exactly how being above or below 25th can affect the types of tenants and rents you can get (above 25th is better), but obviously, be a little more cautious with your income assumptions and try to get comps below 25th st.

With your numbers, will you be cash flowing $100/door with 3 or 4 units? If it is only with 3 units, adding the 4th can be a big plus for you. I will DM you the contact information of the person who helped me re-zoning my 6 unit to 7 units. It took me 2 months to get it approved. The process is not long. You basically need to submit your application, hang a sign outside your building at least 21 days before the hearing, and then attend the hearing. You are approved/rejected the same day. It can take more or less time depending on when the next hearing is held. 

Good luck!

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