Baltimore BOTE Gut Check

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Baltimore BOTE Gut Check

Bobby Akines
Developer · Washington D.C. · Member since 2014 · 27 posts · 10 votes

Hi BP Universe,

See an email I sent to my wife outlining a strategy for investing in Baltimore. Would appreciate any feedback on the info below!

  • Goal is to invest in three properties in Baltimore in 2021
    • Target investment is 3-unit rowhouse in need of repair
    • Target submarkets could include (in order of my interest):
    • Average renovated value, After Renovation Value, or "ARV" = ~$200k
    • Average renovation costs of around $50k
    • Hard money lender will lend at ~70% of ARV, or $140k
    • Purchase price of up to $125k, total costs $175k ($125 PP + $50 reno)
    • Equity required per investment: $175-$140k= $35k
    • Refi proceeds = $200k refi at 80% = $160k
    • Net refi proceeds = $160k-$140k hard money loan repay = $20k
    • Equity after refi = $15k
    • Potential income from property:
      • Gross Rent: $3,000/mo, $36k/year
      • Expenses, $1,000/mo, $12k/year
      • Net Operating Income (NOI) $28k/year
      • Loan Exp** $850/mo, $11,000
      • Net Cash Flow: $17,000
      • Return on Equity 113%, 1.13x multiple

    **Assumes the loan at 80% LTV per above, $160k, on a 30 year amortization with a 10 year term. The loan is not self-amortizing, meaning you have a "balloon payment" at the end of the term to pay off the remaining principal balance. At that point you either sell the property or refinance again. If you refi, you likely harvest additional capital.

    Note the above numbers are not a perfect BRRRR (Buy, Renovate, Rent, Refinance, Repeat) deal - that would be getting 100% of your equity back, but still getting 60% of your equity out is pretty good!

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    Seth Hochberg
    Member since 2020 · 121 posts · 135 votes
    5y

    Hi Bobby - looks like you've deeply researched this. I can follow the numbers, but it seems like you're leaving too much into the deals. A perfect BRRRR is getting all your money back for an infinite ROI. If you leave a few thousand in, you're still getting a super high ROI. But getting 60% of your equity back? If you have to leave a lot into the house, why bother with doing any repairs at all?

    For example:

    House A is 100k and ready to rent. You put in 20% (20k) and you get a nice 10% ROI or something like that.

    House B is the same as house A, but in needs of major repair. You buy it at 50k and you put in 50k in rehab. Now the ARV is 100k. You pull out 80%, leaving 20% in the deal. The ROI is still the same 10%.

    Why would you bother with house B if you could just as easily go the House A route? I would aim for 100% equity out in a BRRRR, and be ok with leaving some money in the deal if the rehab doesn't go perfectly according to plan. My thought process is, "WORST CASE, I leave 20% equity in the deal and I just did an extremely time consuming process I could have easily done without any rehab. But at least I learned from it". I would never aim to leave that kind of money in the deal.

    Let me know if I'm misunderstanding you. 

    Also, I personally, plan to avoid a lot of neighborhoods in West Baltimore that you mentioned above. Too many properties selling for under 50k in a neighborhood is not an easy place to invest (unless you know exactly what you're getting into).

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    • Seth Hochberg
      Member since 2020 · 121 posts · 135 votes
      5y

      Hi Bobby - looks like you've deeply researched this. I can follow the numbers, but it seems like you're leaving too much into the deals. A perfect BRRRR is getting all your money back for an infinite ROI. If you leave a few thousand in, you're still getting a super high ROI. But getting 60% of your equity back? If you have to leave a lot into the house, why bother with doing any repairs at all?

      For example:

      House A is 100k and ready to rent. You put in 20% (20k) and you get a nice 10% ROI or something like that.

      House B is the same as house A, but in needs of major repair. You buy it at 50k and you put in 50k in rehab. Now the ARV is 100k. You pull out 80%, leaving 20% in the deal. The ROI is still the same 10%.

      Why would you bother with house B if you could just as easily go the House A route? I would aim for 100% equity out in a BRRRR, and be ok with leaving some money in the deal if the rehab doesn't go perfectly according to plan. My thought process is, "WORST CASE, I leave 20% equity in the deal and I just did an extremely time consuming process I could have easily done without any rehab. But at least I learned from it". I would never aim to leave that kind of money in the deal.

      Let me know if I'm misunderstanding you. 

      Also, I personally, plan to avoid a lot of neighborhoods in West Baltimore that you mentioned above. Too many properties selling for under 50k in a neighborhood is not an easy place to invest (unless you know exactly what you're getting into).

      3Reply
    • Ozzy SirimsiBusiness Member
      Real Estate Agent · Baltimore, MD · Member since 2016 · 1k+ posts · 782 votes
      5y

      125K, 3 units

       you might be able to find something around Hollins Market, Harlem Park, Winchester area but rest will be very very hard and even if you find one  you will have 20 others offer on them.

      You should update your numbers. 

      1Reply
    • Bobby Akines
      OP
      Developer · Washington D.C. · Member since 2014 · 27 posts · 10 votes
      5y

      @Seth Hochberg thanks for reviewing. Reason for reno is to add value, get a spread on my ARV to cost basis, which is the only way to get equity out. My aim is to get 100% equity out but realizing that may not happen until I've built my business further.

      @Ozzy Sirimsi agreed, as I've studied further I realize those numbers are optimistic. Do you think that PP is achievable for SFH for conversion. Have been thinking more about buying and splitting.

      0Reply
    • Tim JacobPro Member
      Real Estate Agent · Baltimore, MD · Member since 2016 · 520 posts · 379 votes
      5y

      I think you should get a very realistic expectation on who your tenants will be on the backend of this work.  A few of those neighborhoods make sense but the arvs are going to adjust accordingly.  A decent 3 or 4 unit in charles village or south charles village is going for close to 300k and thats not renovated.  In single family the numbers go down but not too much.  To brrr some of the highrr end neighborhoods make sense like Charles Village, Bolton Hill or Hampden.  Some places are ok like Hollins Market or Reservoir Hill in parts but are somewhat block to block and really drop off.  I'd be careful in Sandtown and really think about your tenant base.

      0Reply
    • Bobby Akines
      OP
      Developer · Washington D.C. · Member since 2014 · 27 posts · 10 votes
      5y

      @Tim Jacob Thanks for the market insights! I'm surprised that a reno in Charles Village starts at $300k. I have an investor friend who is wrapping up a 5-unit SFH conversion in Station North that he got for $135k. Also I had reached out to Ben Frederick a while back and it seemed like they had cash flowing properties in CV for around that PP. What is a reasonable ARV in CV for a 3-4 unit with a decent reno? If you have basic numbers on those would love to see. I could flex up my equity investment to as high as $200k, but ideally I would spread that amount into at least two deals, so would aim to max out at $100k in any single deal, and not sure I could get the value spread to get that entire $100k back.

      Why do you say that the higher end neighborhoods are the best for BRRRR? Is that because there is more valued in renovated properties, i.e. more demand? That makes sense logically, but hadn't put the dots together that you will get greater value add spreads in more in-demand neighborhoods. Thanks

      0Reply
    • Tim JacobPro Member
      Real Estate Agent · Baltimore, MD · Member since 2016 · 520 posts · 379 votes
      5y

      I've renovated and managed buildings in both of those neighborhoods and have had no issues.  I would say especially with Station North and Old Goucher which is more southern Charles Village area between Charles and Calvert are though even there Charles in parts  is questionable.  If you stray east toward Greenmount things change over to really rough where arvs and tenant quality drop.  If you get closer to JHU in Charles Village or hit Mt Vernon things spread more east and west. 

      I wonder the exact location of your friends building.  For single family it could be less but be careful of the exact block.  135k is ok if it needs a ton of work in a good neighborhood or its really small.  Maybe if its in horrible shape than ok but you do get what you pay for.  You aren't going to change the block unless you buy it all so make sure it really is a good location as that will dictate tenant quality. 

      For brrrr for high end neighborhoods you have a huge spread.  If you purchase in the inner harbor or a nice part of the 83 Corridor like Hampden and its a place with parking and ample square footage to the point it could be a spacious 4/2.5 or 4/3 or 4/3.5with good finishes your arvs spike upto over 400k.  You might buy it for 200k though hopefully a little less
      but even if you sink in over 100k to the renovation which can be offset by project managing and sweat equity you can come out more on top bc the spread is so big to begin with.    

      2Reply
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