Commercial or Residential valuation on Non-conforming building?

Question

Wassup BP!,

I'm evaluating a post auction deal in West Baltimore City (Allendale). Its currently zoned R-6 with 2 Apartments and a Non-Conforming Beauty Salon. It has the Beauty Salon and an "unused commercial unit" that the owner uses for storage. As background, the owner does not have leases in place, all his tenants have been month-to-month, with one tenant and the salon currently renting. My question is, how do I "value" the property? With the zoning, its listed as Residential, but since its non-conforming does that allow it to qualify as a commercial property? I think there's about a $50-100k swing in ARV (the higher valuation being commercial at a 7-8% CAP rate). I'd like to put an offer in this week since i think there is some value add in the property, but I can see at this point why it hasn't sold yet. My gut says, it will require a residential valuation and conventional mortgage to BRRR into.

But what say you BP? I feel like @Ned Carey may be one to weigh in here.

Thanks in advance,

-Michael

Ned Carey · Answer

@Michael Tucker just to pluck a number out of my head I would say at least $12% up to 15%. But I wouldn't go by cap rate on a property this small particularly in Baltimore. You probably won't get good accurate number for expenses and vacancy so you won't get an accurate cap rate anyway. I am going to make my decision based on how it compares to other deals I could get, whether SFH or small multi unit.

For a quick crude calculation I would not buy property that the monthly rent was less than 2% of the purchase price. I want closer to 3%. The exception would be a property in a primo neighborhood, Charles Village, Federal hill, Hampden etc.

Account Closed · Answer

Ask your GUT this "Dear GUT, if I put an offer on this property, subject to an assignment by private or public treaty, how much can I make within 7 weeks?"

If your GUT says you can make $5-10,000 on an assignment - do it - if your GUT says Hey - I'm not sure about this deal - than walk - get a better deal -

Ned Carey · Answer

@Kelly M. Living in a small multi family is a whole different calculation. There is no formula for that because part of the calculation is an intangible, the value you put on your own home.  Everyone needs a place to live and that normally means you will have a housing cost.  When you live in 1 unit of a 2-4 unit building it is not likely to have positive cash flow at the start but in can reduce your housing cost. In that sense it is making you money.

Neighborhoods that don't make any sense for cash flow, might be perfect for a small multi unit  to live in. It could be the cheapest way to live in the neighborhood you want.

Another option is buy a SFH and rent out a room or two.

Kelly M. · Answer

@Ned Carey that is super helpful, thanks. I'm actually looking for a multi unit to live in, what the BP folks call "house hacking" I guess. I thought multifamily would be the best way to do that.  I have been looking for about a year now with no success. I'm starting to reconsider my options. Would buying a affordable starter home and renting it down the road make more sense in Baltimore?

Ned Carey · Answer

@Kelly M. it depends on the area. There are some areas where you would struggle to get 1% but those are not areas I would invest.  1.5% is fine for a nice area that is likely to appreciate. I don't know much about station north but it seems to be an upcoming area. But Station North is a transitional area and some parts still have a way to go.

Yes it is hard to find good deals now but they are out there. However multi unit buildings are priced very high now. I don't think the best deals in Baltimore right now are multi family buildings.

Keep in mind the percentage thing is a very crude way to evaluate deals. What percentage is appropriate depends on the market and your goals. Some people want pure cash flow and appreciation is not that important to them. Other investors do not need current cash flow so they look for appreciation.  I think the strength in Baltimore is the cash flow play and personally that is what I look for.

Kelly PS welcome to BP.  I see this is your first post.

Kelly M. · Answer

I'm new to the BP world and real estate. Planning on purchasing a small multi family soon. I'm curious about the monthly rent percentage mentioned by @Ned Carey. I'm currently searching in Station North and I'm finding the percentage is closer to 1or 1.5%. Is it just hard to find good deals right now or is this normal for this area?

Michael Tucker · Answer

Thanks per usual @ned Carey. I spoke to a couple lenders and they said that they'd likely evaluate it based on income as well. it's right about the 2% Mark, ARV with rehab push closer to 3 off the top of my head.

Michael Tucker · Answer

Forgot to "mention" you, rate do you think is more accurate @Ned Carey?

Michael Tucker · Answer

What CAP rate do you think is more accurate, 10%?

Ned Carey · Answer

@Michael Tucker you need to make sure the current use is a legal non-conforming use.  A call to zoning should give you that information.  For $25 the city will provide you with a certificate of a legal non=conforming use if  a lender or othe person needs it.  As long as it is currently a legal use then I don't think the zoning makes much difference in the valuation.

I am not sure what you mean by "qualify as a commercial property"  Qualify by who? A lender is going to treat it based on its use, not what the city calls it.

7-8 Cap in Allendale - not with my money and I suggest not with yours.

Commercial or Residential valuation on Non-conforming building?

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