Bethesda Deal Analysis

16 Replies

Hi everyone,

This is my first post on BP ever.

Goal: Rental Investments that beat stock market ROI @ 10% (my IRR). I am an options trader, decent with numbers and get 20% cash on cash with non-directional, non-speculative options trading with consistency for the last 5+ years.

Deal: This is the current property under contract:

The property has appraised for $835k as a tear down in the recent past, so purchase price seems like a good deal. The property is actually 4 beds 2.5 baths in the main unit, a basement with a 1 BD/1BA (no walk-out) and studio w/1BA above garage.

Strategy Analysis:

Plan A - Subdivision: 

Sub-divide Lot (may need a variance application with Montgomery county). I have a developer partner currently verifying the feasibility. If Plan A works out, this deal is a no brainer. Property lot is 12,500 sq, ft and sub-division is feasible. Developer partner and I would split costs of rehab and flip in this case.

Plan B - McMansion:

Reclaim 2000 sq ft from the backyard, which as we see from pics is pretty large. Estimated cost: $200k. Flipped purchase price $1.2-1.4MM per recently sold comps.

Plan C - Buy & Hold:

This is the scenario I need help with. Let's say the lot can't be sub-divided, and I don't want to invest another $200k. What is the ROI in that case, and can it beat the stock market?

Cost of Acquisition: $70K down payment + 15K upgrades (max) = $85k

Monthly Payment: $4600

Cap Ex + Property Management: $700/mo with long term renters for main unit

Total conservative cash-out monthly: $5200

Rental Income: Main unit rented for $3200/mo (it has for many years) and a studio above the garage (never rented) can rent for $1200/mo. With upgrades we think we can get $3400/mo for main unit. Total conservative rent: $4500. Could be as high as $4600 in this area based on actual rent comps. 

Cash flow: -$700/month

With the historical appreciation for this property in Bethesda being 0.8%, I created a spreadsheet to compare profits from both approaches.

It seems the stock market approach overtakes this real estate deal on year 7 even if I assume no cap-ex and breakeven MoM. So realistically, holding this property post 6 years may not be feasible. Perhaps it back to plan B in that case. Is this the right way to think about this deal? Also, why invest another $200k when you can likely buy other properties in cheaper areas?

How do you all compare your IRR with a property like this? Do seasoned RE investors stay away from high-priced locations such as Bethesda? And focus only on properties that cash flow +ve and have appreciation upside only?

If so, how do you find such deals in the DC metro area without going into areas like Baltimore where getting shot at is the price of admission?

Appreciate any feedback. Thanks in advance.

Bodhi Tree

Spreadsheet comparing the Stock Returns with 7% to RE investment on this property (it adds the principal gained from rent to appreciation of 0.8%)

9825 Old Georgetown Road
Base Plan - Stocks (assumes 7% return with stocks) Plan C - Long Term Rentals (Assumes no cap-ex & break even)
Total Profit (Stocks) Total Profit (Col H + K) Appreciation on Price YoY with 0.8%
Principal Invested $100,000.00   $701,220.00 (Loan Amount) Interest Principal Balance $780,000.00 Profit (appreciation)
1 $107,000.00 $7,000.00 $11,466.00 $17,039 $5,226 $695,994 $786,240.00 $6,240.00
2 $114,490.00 $14,490.00 $23,370.92 $33,690 $10,841 $685,153 $792,529.92 $12,529.92
3 $122,504.30 $22,504.30 $30,252.16 $33,149 $11,382 $673,771 $798,870.16 $18,870.16
4 $131,079.60 $31,079.60 $37,210.12 $32,582 $11,949 $661,821 $805,261.12 $25,261.12
5 $140,255.17 $40,255.17 $44,248.21 $31,986 $12,545 $649,276 $811,703.21 $31,703.21
stock returns overtake RE 6 $150,073.04 $50,073.04 $51,366.84   $31,361 $13,170 $636,106 $818,196.84 $38,196.84
7 $160,578.15 $60,578.15 $58,569.41 $30,704 $13,827 $622,279 $824,742.41 $44,742.41
8 $171,818.62 $71,818.62 $65,856.35 $30,015 $14,516 $607,763 $831,340.35 $51,340.35
9 $183,845.92 $83,845.92 $73,231.07 $29,291 $15,240 $592,522 $837,991.07 $57,991.07
10 $196,715.14 $96,715.14 $80,695.00 $28,531 $16,000 $576,523 $844,695.00 $64,695.00
11 $210,485.20 $110,485.20 $88,250.56 $27,733 $16,798 $559,725 $851,452.56 $71,452.56
12 $225,219.16 $125,219.16 $95,899.18 $26,896 $17,635 $542,090 $858,264.18 $78,264.18
13 $240,984.50 $140,984.50 $103,644.29 $26,017 $18,514 $523,576 $865,130.29 $85,130.29
14 $257,853.42 $157,853.42 $111,488.34 $25,094 $19,437 $504,139 $872,051.34 $92,051.34
15 $275,903.15 $175,903.15 $119,433.75 $24,125 $20,406 $483,733 $879,027.75 $99,027.75
16 $295,216.37 $195,216.37 $127,482.97 $23,107 $21,423 $462,309 $886,059.97 $106,059.97
17 $315,881.52 $215,881.52 $135,640.45 $22,039 $22,492 $439,818 $893,148.45 $113,148.45
18 $337,993.23 $237,993.23 $143,906.64 $20,918 $23,613 $416,205 $900,293.64 $120,293.64
19 $361,652.75 $261,652.75 $152,285.99 $19,741 $24,790 $391,415 $907,495.99 $127,495.99
20 $386,968.45 $286,968.45 $160,781.95 $18,505 $26,026 $365,389 $914,755.95 $134,755.95
21 $414,056.24 $314,056.24 $169,397.00 $17,208 $27,323 $338,066 $922,074.00 $142,074.00
22 $443,040.17 $343,040.17 $178,136.59 $15,845 $28,686 $309,380 $929,450.59 $149,450.59
23 $474,052.99 $374,052.99 $187,002.20 $14,415 $30,116 $279,264 $936,886.20 $156,886.20
24 $507,236.70 $407,236.70 $195,998.29 $12,914 $31,617 $247,647 $944,381.29 $164,381.29
25 $542,743.26 $442,743.26 $205,129.34 $11,338 $33,193 $214,454 $951,936.34 $171,936.34
26 $580,735.29 $480,735.29 $214,399.83 $9,683 $34,848 $179,606 $959,551.83 $179,551.83
27 $621,386.76 $521,386.76 $223,813.24 $7,946 $36,585 $143,021 $967,228.24 $187,228.24
28 $664,883.84 $564,883.84 $233,375.07 $6,122 $38,409 $104,611 $974,966.07 $194,966.07
29 $711,425.70 $611,425.70 $243,089.80 $4,207 $40,324 $64,287 $982,765.80 $202,765.80
30 $761,225.50 $661,225.50 $252,962.92 $2,196 $42,335 $21,952 $990,627.92 $210,627.92
$313 $21,952 $0

Great buy in Bethesda, congrats.

I personally would rent it out immediately, at least for the first year while trying to subdivide .  If you can get the variance for MC then after that first year you have the best option on the table.  

I do think you should be careful within the next 1-2 years with new construction development in Bethesda as it has tremendously slowed down and the numbers just aren't being reached in certain areas anymore.  

If the teardown value is $835k, you already have 60k in equity initially , you rent it out for the first year, still losing that $700/month ($5,600) but you will retain that in principal pay down from your tenants.   Your exit strategy can be just resell as is to another developer or put on open market for $835k (if it doesn't appreciate at all) , make $45-65k and move to the next project.  But I do think owning this in Bethesda undervalue has a HUGE upside.  

Good luck.

You likely wont be able to subdivide.

Also this backs up to Old Georgetown. Make sure you account for that in your numbers. There will be a pretty descent value adjustment downward for backing to a major road.  

Size of the property here is going to make a huge difference on expected build and sell prices. I think Id adjust about $100k for the road.

Im not sure what you have it under contract for....but I think the profit here might be pretty slim. 

Congrats! This seems like a great deal! I can follow your logic as far as comparing it to the stock investment and it makes sense to me. In my opinion if it truly won't cashflow, that wouldn't be something I personally would look to hold for the long term, but that's just me, I'm sure some people would feel that the appreciation would make up for it. Assuming you can't get the variance and we're only talking about options B or C, I'd say B is the obvious choice. If you can put in $200k and sell for $1.2-1.4 million within a year (depending on your rehab timeline) that seems like a great profit to me...$270k in for a $325K profit (not including carrying costs and sales expenses on both ends for simplicity) is about 120% COC ROI even if it takes the whole year to resell. Assuming you have the capital, that looks much better than the 7% stock return. One thing I would say is to make sure you do account of ALL expenses if you choose to go this route. The people I've heard get burned on flips do it in 3 ways for the most part: Pay to much up front, which it doesn't like you are; Go over budget on the rehab; Or forget to, or don't account for enough carrying costs in case you get stuck holding it longer than you expect. As far as that $200k being able to buy several other properties instead, you're not wrong, but that decision comes down to your goals and strategy, I know there are people who specialize in high end flips just like this one, but in the end it's up to you.

Hope this helps and thanks for sharing your deal! I'm a numbers guy as well (also traded options while I was in college) and love working through all the numbers even when it's not my deal.

Originally posted by @Bodhi Tree :

Thanks for the prompt and welcoming responses. 

@Russell Brazil why do you think plan A is not feasible? Small Lot size? Also, I’d the $100k adjustment for both build cost and sale price each or in total?

@Cassidy Burns what is the reason for construction slowdown? Less demand for higher end properties?

@Kyle Johnston thanks for your feedback on buy and hold. 

 Just knowing the county, they dont allow subdividing a lot very often. Usually when I do see it allowed, its east of New Hampshire ave.

For the $100k adjustment....if you are looking at the $1.4 million comps in the neighborhood, then a similar house backing to Old Georgetown would sell for about $1.3 million. Maybe as much as $150k off even. In the more median price point of $450k I usually see about a $30k adjustment for a major. 

Not to be a Debby downer but Your comparison of the stock market investing you’ve done has little value in this comparison . You cited the last few years .everybody has done well lately ..We are on the verge of a “ correction “ we will see how good your ROI looks in another 5 years then you can judge better .

@Dennis M. Thanks for your response; all feedback is welcome. Note the investing I refer to is not in stocks, but options (at 20%). The stocks have generated even higher returns when adding in dividends. The returns above at 7% are historical for S&P (after adjusting for taxes). I could've used 20% based on my history, but didn't for the same reasons of impending correction you state.

Investors compare their ROI to past experiences for IRR since that's all they have. I wish I'd started investing earlier (as we all do) to have truly tested the strategy during the 2008 recession. And yes, happy to have a conversation in 5 years too.

@Russell Brazil , Thanks for your response. Very informative. I thought the property being on a service road next to Old Georgetown would help this investment, but perhaps I was too hasty. 

This conversation has corrected a location bias in my investment approach: My asian background led me to assume that being close to major transportation is a huge plus. But this shouldn't be a plus for SF homes in a suburb such as Bethesda. In fact, the opposite is probably true. Thank you. Its good to have this perspective.

Season investors already made their $$$ in Bethesda.

Aside from tear-down rebuilds there aren’t many options to really generate “new” income in that area.

You’re seeing either McMansions in $1.4-1.8 range on relatively cramped lots; overpriced townhomes (EYA Montgomery & Grosvenor), or vertical condo builds (North Bethesda Market towers, Henri, 930 Rose, Pallas, etc).

The old White Flint Mall stomping grounds will probably be the same, once their century long pissing match with Lord & Taylor is figured out for good.

As I said in another post (and some got butthurt cause it’s the truth) Bethesda’s golden years for retail investment purposes are gone for the most part.

The opportunities will probably be more towards Silver Spring, Bowie, etc. Even that is bad, saw new luxury condo builds in Silver Spring which are embarrassingly small - we’re talking NYC sizes (400-600sqft).

Thanks @Aaron Hunt . I had the same experience with Silver Spring when conducting my search. Where in the metro-DC area does one look for for great opportunities then (defined as cash-flowing with appreciation upside - MF or SF)? 

Northern Virginia doesn't seem to be any better either.

Originally posted by @Bodhi Tree :

Thanks @Aaron Hunt. I had the same experience with Silver Spring when conducting my search. Where in the metro-DC area does one look for for great opportunities then (defined as cash-flowing with appreciation upside - MF or SF)? 

Northern Virginia doesn't seem to be any better either.

You don’t, haha. 

Unless you’re a big time builder and can dictate your own terms.

It’s just not a great area for investment purposes (right now), except maybe trying to get some of these folks out of their homes (off-market deals) who have camped out there for the past 30 years. Not easy to do though!

Is there a reason you’re looking in this area specifically?

@Aaron Hunt. I live in NoVA, and taking the 'invest local' approach to heart. Have been considering investing outside within a 'roadtrip distance' (defined as 5-6 hours) - Delaware, North Carolina, etc. Any suggestions?

Originally posted by @Bodhi Tree :

@Aaron Hunt. I live in NoVA, and taking the 'invest local' approach to heart. Have been considering investing outside within a 'roadtrip distance' (defined as 5-6 hours) - Delaware, North Carolina, etc. Any suggestions?

Got it. I personally like North Carolina (have been watching some of the cities there for a year or two now). It's also a very easy/quick flight - shuttles from DCA if you go that route. Delaware I don't know much about. Although you could snag some multi-families in that general direction for the cheaps (~2 hrs away from you).

I'm personally holding off on investing in that area. Time will tell if it's the right or wrong move.

Originally posted by @Tom Gimer :

@Russell Brazil But what about the soothing 24/7 hum of the Beltway a block away, the gorgeous view of bumper-to-bumper traffic, and the scent of gas fumes from the front porch? 

There were a couple of nice homes on sale on Thornbush, right off Grosvenor Lane, this past month. When you walked out to the backyard you couldn't hear anything but the noise from 270 - the home prices are supressed pretty significantly on these.