BRRR in Baltimore! Feedback on numbers- Any holes?

Question

I am hoping to get a few additional eyes on these numbers and get a few other perspectives before pulling the trigger. I have been going back and forth with the bank on a foreclosure in Baltimore city, MD. This property is in a good area and next to Johns Hopkins and somewhat close to the water. The property is 4 bedrooms, 3 baths and also has a somewhat finished basement with an entrance and exit that will be a separate room w/ kitchen and bathroom (Not a legal duplex).

The numbers:

I had this house under contract for 205k but after inspection, pulled out. My number back to them was 190k which did not go through. At this point, they have reached back out and asked if I was still interested in submitting that offer.

I have comp'd the house at an ARV of 330k.

With a cash offer of hard money @190k and estimated repairs needed at 60K (My money) (I got a few quotes during inspection period) that leaves me with 250k initial investment. I will be paying .0725 on an interest only hard money loan(190k)- So add another 9k to that number. 259K.

• ARV=330k @ 70% cash out refinance of $231K cash out.
• Pay back my investors after 8 months @ (.0725) 190+9 = 199k
• 231k - 199k = (Leaves me with $32k cash in pocket)
• 60K renovation cost - $32k = a final investment of (-$28K) with about 100k equity in the house.

So - now I will have a $230k mortgage on the house - I will handle the prop management and lets say with the mortgage P+I, insurance and taxes it is around ~$1800/mo

I plan to live in one of the rooms, but without me I could get around $3000/mo in rent.

Really appreciate any feedback or thoughts. Is there anything I am missing. This would be my first "official" investment property- so I really want to make sure I get it right. Also, what ARV would be the lowest you would feel comfortable with?

Thanks!

Matt Schelberg · Answer

@Mike Rubin Good analysis.  If this is a rental property I would be more concerned with operating performance than ARV.  Yes, the ARV will help ensure you're able to pull out your cash in the refi, but if you are holding for many years it is less important.

I recommend making some estimates of maintenance, capex, vacancy, and property management (even if you are self-managing) to determine operating performance.  The BP rental property calculator is good with this.  Avoid the mistake of assuming that "rent minus mortgage = profit".

If your mortgage payment would only be $1,800 in Baltimore City (with its 2.3+% property tax rate) I'm guessing that your property assessment is significantly less than your estimate of ARV.  What will happen to your numbers if the city decides to one day tax you at the property's market value of $330k?  That is a monthly tax of $650.  That is what makes it tough to rent high-value homes in the city. (But it's less difficult if you are renting rooms.)

Matt Schelberg · Answer

@Mike Rubin You asked about other rental markets outside the city.  There are solid rental markets in eastern Baltimore County in neighborhoods like Dundalk, Essex, and Middle River.  Many buy-and-hold investors look at the 1950s rowhouses in those neighborhoods.  They are well constructed; there is strong demand from both market tenants and Section 8. Employment is strong.  Low taxes, good schools.  And most importantly the price:rent ratio is very attractive.

Ozzy Sirimsi · Answer

Hi @Mike Rubin

I think you can rent to each room to  graduate studetns, nurses etc.. to 800-900 range, assuming you are next to hospital, plus you are considering private apartment so  $3000  is very accurate.

If you are putting 60K in to it, it means you do change a lot of things in the house, so first couple years you should be good in terms of expenses.

If you are going to house hack, I would go for it.

Also, city would not come at your house and increase your tax %300 percent at one night.

Andy Gross · Answer

Interesting. Not familiar with that particular block of houses, but you are super close to the park. I think you'll find you're getting more than just Hopkins students. You'll probably end up with a steady stream of 20-somethings just out of college, some of which might be employed or go to school. A good friend of mine lived in the next block and worked at an advertising agency, and I lived 4 blocks south while in grad school in another part of town. I think $700/room isn't crazy, if the place is nice. Historically, it got more expensive closer to Canton Square or the water, but that area has transformed in the past 15 years. Also, if you can get a legit apartment in the basement, you're in good shape.All in all, not a bad place to buy. I think that you'd be well off house-hacking it. I would double and triple check that ARV, though. Prices in that area are highly variable depending on the street, block, number and size of bedrooms, bathrooms, condition, whether it has a roofdeck, parking, etc.But, as someone above noted, keep in mind property tax and city sewer/water.It's not perfect for BRRR, but it sounds solid for house-hacking in the short to medium term.

Mike Rubin · Answer

@Andy Gross I plan to turn the basement into a "private" apartment. Kitchen, full bath, bedroom and charge $900/mo. Upstairs has 4 bedrooms and 3.5 bathrooms. I would rent that for $2100/mo. $700/room is pretty standard and it gives them one room free. It should attract a lot of Hopkins workers and students. There is no dedicated parking.. It is below Hopkins on 100 block S. Chester. Thoughts?

I am concerned with the margin and am trying to minimize it by already having an inspection and a few contractors in. Hoping to make up for a lot with some after my 9-5 sweat equity.

Mike Rubin · Answer

@Jason DiClemente - Thanks for the response. 1. Hard money is set up and good to go. Technically, it is a family member willing to lend to me under those conditions and rate.

2. This is where I am struggling. I understand the BRRRR method (have yet to pull it off). My question is trying to figure out if gaining that amount of equity(~100K) and a cash flowing rental property is worth the initial deposit of 20-30K?

As an additional note, I plan on a lot of it being sweat equity and also will live there while I fix up and then either 1031 or continue to keep it as a rental and move to the next.

Mike Rubin · Answer

@Matt Schelberg

Andy Gross · Answer

First, $3k/month in rent is a pretty high number, which I would double check. I think that number depends largely on which side of Hopkins you are on.You also don't have a ton of margin built in, so if your ARV is too optimistic, or you have a surprise during the renovation, your final investment number is going to up.

Mike Rubin · Answer

@Jeffrey H. Care to elaborate? With the assumptions made, do you have any feedback on the deal?

BRRR in Baltimore! Feedback on numbers- Any holes?

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