Baltimore B.R.R.R.R. Strategy... First Rehab!

16 Replies

All,

I have a property under contract that needs to be completely gutted.  The estimated cost to repair this 4-Unit is $120,000.

The purchase price is $16,000.00.  They are all 1 BRs in a C area.  Monthly rents for the area are $650-$700.  There are also 2 squatters there living in squalid conditions within 2 units. I have purchased investment property several times, but always avoided rehabs.

My questions: Where can I find financing for repair, while moving toward lease-up? Is there a local Maryland state, Baltimore city, or federal program than can provide grant money? Should I evict the tenants, even if they begin to pay rent (their units also need rehab)?

@Jamal Okon

Wow! This is your first rehab property and you swing for the fence! way to go! I do not know how hard it will be to evict squatters in a property in your area, but i would recommend getting them outa there ASAP. It will not be worth what little money the might give you.  If they are comfortable squatting... they will not make the kind off tenants that you want.  

As far as financing could you clean it up as best you can and then get a local bank to give you an In-House loan of some type?  the would give you 70% of the as is value.  That might give you enough to do 2 of the units and then you can repeat the process. 

Once all the rehab is done you can refinance out to a better loan product. 

Just my ideas 

@Jamal Okon

Sounds awfully ambitious to me my friend. First, I don't know Baltimore, but if the project is going to make money I doubt you will find and "grant money". Grants are usually designed to promote some type of broader social utility (i.e. give impoverished people a leg up, promote revitalization, etc.) Most of those goals are met by homeownership, not rental property acquisition. Again, I am thinking out loud and if anyone feels differently, please correct me. Few communities wish to promote more rentals or even the rehab of rentals. They would rather see rentals torn down and SFR built. Plus, everyone knows you will make money on the deal so they expect you to do it in the deal rather than rely on a grant/subsidy.

That being said, if you get the property under contract at a good enough price to make it beneficial to you, you will have a deal you can shop to someone else.  If it really is a good deal, there are investors out there who will give you money for a piece of it.  If you are worrying about sharing some of your deal, well insert @Brandon Turner 's favorite line here - "50% of a good deal is better than 100% of no deal."

However, since it is a 4-plex, if you plan to occupy one of the units you could use conventional financing (although for rehab you will need a 203K loan or similar).  There is a great section on this in Brandon's book "The Book on Investing in Real Estate with No (and Low) Money Down."

Before you get to the squatters, appreciate the value of 1 bedroom units in the area.  In most locations, 1 bedroom units experience high turn over and it is hard to find reliable tenants.  So be very careful when you are figuring your operating expenses and be conservative with vacancy rates.

If you decide to move forward, either get the seller to evict the squatters, or build in enough cushion to pay the squatters to go.  However, understand that as soon as you pay a squatter to leave you encourage others to try and slip in so they can get a pay day too.  So you will want to make sure you can build a case for trespassing against people who enter after acquisition (and maybe malicious destruction of property or burglary).  Before you offer to pay squatters to leave, make sure the other units are secure.  If they accept, make the squatters take all their stuff, and as soon as they are out the door, secure their units by changing locks, padlocking doors, posting no trespassing signs, documenting your measures with photos, and the next time you find someone there, call the police. 

Overall, it sounds like a really big project so be very careful and good luck!  All the resources and contacts you need to make the best possible moves are right here on Bigger Pockets!

Sounds like a heck of a project.  First of all I agree that you should insist on buying the property vacant - let the seller take care of evicting tenants if at all possible.  As far as financing, since you don't have experience (or, presumably, enough capital to self finance) you'll probably need to use hard money to purchase + rehab and then refinance out into something more conventional.  I've got 

I don't see any bank financing this project, and the only thing the gov't wants is you to pay their taxes, so don't expect anything grant related unless your buying the property from the city gov't. As for your first project, you will lose all the money you put into it if you haven't done a rehab before. C neighborhood multi units in Baltimore City are not for beginners, and most end up on the MLS half done for the original purchase price. 16k for a 4 unit means, no one else in their right mind would want that project period.

Well thank you for the insights.  I have not closed yet.  I grew up in Baltimore, so I know the area.  My girlfriend in HS lived a few blocks west...lol!  You can see Pimlico Race Track from the corner.

I do have 2 advantages in my favor.

1. I have my property management team in place, that I have been working with since 2008.  They recommended rehabbing it in sections, beginning with the 2 squatters' places. 

2. The contractor that came in with the best bid, I have also known since 2008.  He is very professional and does excellent work.

Not sure if this alters your opinion  @Ian Barnes

@Brian Tome I am definitely NOT planning on living in it.

Since I got this at auction, @Michael Noto what is the likelihood I can actually get the seller to evict?  Especially during the winter (with the blizzard of the century coming)... I know the City hates to remove people in the winter, especially with children (one of the squatters has a child; and based on the condition of the place I don't blame them for not paying...)

@Joshua D. So I'd need to conduct some of the rehab myself, prior to going to the local bank? Then they provide funding. Baltimore has a program called "Vacants to Value" which on the surface does not specify any SFR versus MFR... I am digging into it.

Anyone have experience with Community Development Block Grants?

I was thinking Hard Money as one option @Joseph Norman, but it appears your comment was truncated.  What were you trying to say?

Thanks again for all the feedback!!

@Jamal Okon sounds like you are going in with your eyes open, so best of luck on your project.

Whatever the outcome, you should post the particulars in the success stories/cautionary tales forum.  That way other investors can benefit from your experience ... and I hope it will be all good!

With the blizzard on the way , how are they going to keep warm?  Maybe start a small fire ? kerosene heater ?  who knows .   Put up some " no trespassing' signs  just to help cover yourself 

@Jamal Okon I don't know your state/local laws, but if this was in Chicago I would definitely get rid of all the tenants; and at this time of the year, I would go in knowing I couldn't do anything with them until March or April. Chicago is a tenant-friendly city. 

I don't know what type of tenants would be ok with living with squatters, that's why I'm saying get rid of them all. If the numbers are right and you have the patience and guts for this project, go for it. You should have a huge contingency plan!

Good luck,

@Jamal Okon to get rid of the squatters you can try brute force, a couple of big guys to scare them away. The legal process is called wrongful detainer. It is easier than an landlord tenant eviction but still takes about 2 months total. You file for wrongful detainer in the basement of 503 E Fayette st. The same place you do rent court filings.

The issue with trying to collect rents from the squaters is lead paint. If the property is old as I would expect in that area, i surely has lead paint. If it needs a full gut rehab the it surely will not pass a lead paint test.