Baltimore BOTE Gut Check

[Bobby Akines]

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):
  • Hollins Mark/Popplton/Franklin Square/Union Square
    • Hollins Market
      
    • HM Now Open!
    • UMB BioPark
    • UMB Community Engagement Center
      
  • Charles Village/Charles South
    • Neighborhood Overview
    • Greysteel Report
  • Bolton Hill/Reservoir Hill
    • Innovation District
  • Hampden
  • Harlem Park/Sandtown-Winchester
• 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!

[Seth Hochberg]

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).