4 unit multifamily in Franklin square, Baltimore

[Nana Twum Okrah]

Property costs $115k, but needs approximately $90k of additional rehab. Estimating monthly income of $900. I'm not familiar with neighborhood and I've heard conflicting reports about investing in Baltimore, but I think rent is realistic. Property is close to the University of MD medical school and the Inner Harbor (main tourist area in Baltimore), so I'm excited about the rental prospects. 

However, I'm worried that the rehab cost is too high and may affect resale value and property appreciation, since I plan to trade up in about 2 years (1031 exchange). I'm hoping for a 3% annual appreciation.

Would appreciate any advise about, or direct experience with, risks of investing in this area, particularly about property values and rents. Thanks

[Alan C.]

Two observations:

1. If by monthly income you mean the gross rent is $900, then $205K ($115K+90K) is way too much to pay.

If you mean that $900 is your net income after all expenses (vacancy, maintenance, management, mortgage, etc.), then this could be a good deal.

2. I've posted elsewhere that you should never count on appreciation, especially given the current economic situation. My opinion is that property values will decrease for the next few years as properties flood the market when evictions and foreclosures are allowed to proceed. So if you count on the appreciation and it doesn't happen or your property value goes down, will that derail your plan? If not, then proceed. If I'm wrong, and your property appreciates then you get a bonus when you sell. 

One last thought: Why would you sell your property after 2 years? If it really cash flows, keep it and use any equity as leverage to buy more rentals. Even though a 1031 saves on taxes, it doesn't save on transaction fees and it puts you under the gun to find more property to buy. If you're young, build a portfolio of cash flowing properties rather than owning one large property. The income could be the same, but your risk is less if you have multiple properties.

Good luck with whatever way you decide to go.