Baltimore Deal Analysis Practice/Questions

17 Replies

Hey BP,

I came across this listing on Trulia, and I'm hoping that someone else can check my work.

I did my analysis on google sheets here, the result of which is that I expect a healthy cash-flow.

Overall, its $46k to purchase, maybe $5k in surprise fixes, $1200/mo rent, $400/mo expenses, $250/mo mortgage. Cash-flow is about $600/mo, and CoCR is 41% if I finance 20% down.

  • Are these numbers reasonable for Baltimore?
  • Is a 8.5% vacancy rate too pessimistic? What is typical of Baltimore?
  • Did I miss or underestimate any of the expenses?
  • What are typically provided utilities in Baltimore?

At the same time, I'm unsure about investing in an area with lots of section 8, bad schools, higher crime, etc. Investors that target these areas, what have your experiences been?

I'm still trying to narrow in on what my criteria are, so thanks for the help!

Double the 5k for suprise fixes, cause those things are always suprising. Other than that I have no clue.

@Christopher Pepper   your expenses are probably low. I go by the 50% rule. (50% of your rent will go to expenses NOT including financing expense) This covers repairs, vacancy, reserves etc.

I just recently heard the area 4 X 4 has a bad reputation among tenants and is harder to fill. Of course I heard it on a day i went there and was surprised to also see the neighborhood looked better with fewer boarded up properties.

If you are in that area you WANT section 8. The kind of market tenant you would get there would probably be a tough one to manage. If I bought there I would definitely want a section 8 tenant and the property is good enough to attract one. (section 8 tenants typically want better units in Baltimore)

The make ready number or $5k may be plenty or may be low. I have spent double that on a house that I thought was virtually "Ready to rent." Keep in mind you will have closing costs of 1-2K

Other than the adjustments I mentioned those numbers should be easy to reach in Baltimore. This is just a typical deal noting special. Deal like this are all over the city.

Ned

Do you think it could be rented in anout month in any given year? I noticed that the vacancy rate looks like it's based on a 1 month assumption. I'd study that more. As well as down time to get space ready for next tenant. good luck. 

1. youre not paying 46, maybe out the door 46., but 46 is list.

2. water bill?? dont forget that hideousness

3. 1200 a month is going to be paid with a voucher, no market tenant is going to pay that here. and this is the massive variable in your formula. house doesnt look horrible, though definitely a half-hearted rehab (wire mold, poorly designed bathroom, carpet)

4. 4x4 isnt  bel air edision. this is in the 4x4

@Ned Carey , my understanding of the 50% rule is that I should use it to roughly estimate expenses and decide if the property is worth a detailed analysis.  Do you not try to "itemize" your expenses?  I agree that my expenses seem a little low, but I'm not sure which item is the culprit.  

When you say these kind of properties are all over the city, are there other neighborhoods with this kind of unit that would not require Section 8?  I'm still thinking that Section 8 is not what I'd like to do with my first property.

@Jack Edgar jr , yes I'm basing the vacancy number on the assumption that I get to keep 11/12 months rent.  I figured one month would be plenty for turnover, but I guess this might not take in to account make-ready costs or tenant acquisition costs.  Is this where you'd account for that?  What would be a reasonable vacancy rate for Baltimore? 10%?

Account Closed, 1) Good point. 2) Is water a common bill paid by the landlord in Baltimore? What about trash?

@Christopher Pepper since there is no way to know the actual expenses, I use 50% as a guideline.  I would never assume less in Baltimore because of my experience and the age of the  housing stock.

Regarding "Knowing" the actual expenses. Lets say a tenant lives in a property for 5 years and it is $5000 worth of work to turn it over for the next tenant.  That is $1000 a year in expenses that wont show up for 5 years. 

Of course it could be $3000 worth of work over a 7 year period. Or I could be $10,000 for a 2.5 year stay. There is no way to know the real numbers so I figure on the conservative side.

The issue should not be section 8 or not, the issue should be good tenant vs bad tenant. That said you can get houses that would attract decent tenants for that price, more or less, in better neighborhoods. By the way, section 8 tenant are pickier and harder to attract than market tenants. Market tenants will go where they can afford. Section 8 tenants will go where the government can afford.

I think water is usually paid by the tenant. However new court cases have interpreted that a tenant cannot be evicted over unpaid water bills. Trash is collected by the city, paid for by your taxes.

Originally posted by @Christopher Pepper :

$250/mo mortgage. Cash-flow is about $600/mo, and CoCR is 41% if I finance 20% down.

 Are you sure you can finance a property in the area on your terms?

@Sebastian Taylor brings up a good point. New investors sometimes assume they can get financing, when financing investment properties is very different that purchasing a home. 

First yes bank do redline areas and will not finance some areas. More realistically is there is a minimum that banks will lend. It is as much work to make a 30K loan as a 200K loan. Getting loans under $50k or even $75K may be difficult.

I personally feel it's more important to provide affordable housing.  Section 8 doesn't solve a whole lot imo.  If it's an area you don't feel comfortable working in, socializing in or just being there period...why would you invest there?  Get out there start looking at properties.  Find one that you like,  they look a lot different in person.  Find a neighborhood you want to see grow, and find a tenant you want work with. If your self managing a property your expenses should be less then 50 percent.  If your doing the repairs yourself these also will be less.  You will make and lose the most money on your purchase price. Just like any other real estate deal.  A good agent should help guide u through some of the local markets. A good agent is worth there weight in gold.

@Christopher Pepper

This area is one of the tougher neighborhoods to rent in east baltimore as @Ned Carey mentioned.  So If your are still contemplating this as a rental I would definitely raise the vacancy to about 1.5-2 x's the monthly rent. Also your property insurance deduction is considerably low as well as your repairs, while your license/permit is excessive for an monthly expense. 

I would suggest you look more into lowering the rental payment if you aren't interested section 8, because most investors qualify tenants based on the tenant earning 3x the monthly rent, yet the median income for this area is roughly 35k according to 2010 census. A strategy to keep units occupied is to be slightly under or equal to market rents in lower income neighborhoods.  

 

@Christopher Pepper unpaid water bills (which are insanely high in the way that snoop dogg is high) cannot be chased in rent court anymore. What this means to you is that a tenant that does not pay their water can only be forced to in 2 ways: 1. breach of lease filing (water is their obligation per lease and fail to do it = breach of lease) 2. voucher tenant, get a small claim court judgement for unpaid water, send it to sec 8 for review, ultimately terminating their voucher. 

2 problems with the previous: breach is more expensive to file, and ultimately results in eviction. voucher filing may result in termination of of voucher.....but this also means landlord stops getting paid and you still have the burden of getting idiot out of house. 

of course, lest we forget a tenant's desire to never pay bills, water being another ungodly high bill they will never pay. 

conclusion: estimate monthly water bill, include in rent, landlord is responsible.

Account Closed, thanks for bringing this to my attention.  I wasn't aware of these kinds of "minimums" banks might have!

An option for financing inexpensive homes is a blanket mortgage. That is one mortgage that covers more than one property.

2 months is for the high turnover you can expect for the area as well as tenant placement. It is in your best interest to over estimate, this gives you  reassurance given the worst case scenario. Insurance that is liquid can only be a benefit. 

Unpaid water bills  can result in a yaw lein against your property here in Maryland. Which ultimately falls back on the owner. 

estimate monthly water bill, include in rent, landlord is responsible.

 @Account Closed , this way tenants will open bottle refilling station and sell your water, won't they?

Is invoicing them every month with rent plus past water bill amount viable?

@Sebastian Taylor   not likely. water isnt yet at crack prices. plus you can always terminate said lease or overcompensate for "overages" in rent.

invoicing people who don't pay bills is a waste of time.

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