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

[Jamal Okon]

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)?

[Brian Tome]

@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!