All Forum Posts by: Sebastian E.

@Jeffrey Ward This is a fairly common conversation among Baltimore real estate investors and if you search in the archives you will find more versions of this conversation.

I can only speak from my experience, which I would say has been moderately successful. I have owned about 15-20 of this caliber property in the last 24 months and my experiences have been mixed. I have 1 that I bought for 25k put 5k into it and it rents easily at 950 with the tenant paying like clockwork. 

I had another one that I bought for 8k put 40k into and have it rented section 8 at $850. The problem is that I can not refinance it so now I am selling it to get my cash out. I am under contract to sell it at 5k loss because the block is terrible. So, if you are going to try these areas it is wise to make sure you have an exit strategy. I have another similar one that I bought for 4500 put 20k into and sold for 25k. So while it feels nice to make some improvements to a block and help to stimulate the economy--it is not exactly a business success.

I am in the process of doing a block of 10 houses and this where the real money is because you can control many more of the variables. You have better control of your comps which helps with resale and refinancing. 

I have been doing this for 2 years and I am still learning, so part of it is just putting in the time and figuring it out. My take on the broader situation tends to fluctuate but I believe class C/D investing in Baltimore City if done in a targeted, professional, and consistent way is a giant economic opportunity. I disagree that appreciation is off the table in some of these areas. I'd actually be willing to bet that in the next 10 years you will see greater % appreciation in an area like Lexington around the West Baltimore MARC station than you will in Canton unless Baltimore can figure out how to solve it's property tax problem. 

To summarize, I think onesie-twosie investing in C/D areas is not worth your time. Unfortunately, for the onesie-twosie investor this aspect of the market is most accessible because most people with some ambition can save or borrow 10k to buy one of these houses. That is extremely risky and foolish to do. My sense is that there are chosen investors and contractors that operate within a system that is corrupt in Baltimore that will get the vast share of the value in the redevelopment of the C/D areas that will be redeveloped. One other thing to include about Baltimore is that given the demographics, geographics and sheer volume of the problem at hand there will be areas that will not be redeveloped and will eventually need to be razed. 

This is all not taking into account the fact the city of Baltimore will face a huge budget shortfall, which will lead to more problems in solving basic city problems. We can only hope for a big change in leadership, that the city declare bankruptcy and cede its political power to the county and state, some kind of large federal spending program targeting poor areas or some kind of combination. I have zero faith in the city's ability to solve the problems of blight and crime in Baltimore. The problems are too large and I think the politicians are not capable to solve them. 

CPA question: If you have capital gains on a multifamily property that you have lived in 2 out of the past 5 years is the home sale tax exclusion prorated to only the unit you lived in or can you use the exemption on the entire building? I'd appreciate any guidance if anyone has had experience with such a situation. 

Hi Keenan,

I think your risks are fairly muted relative to the general risk of real estate investing mentioned earlier. People will always need places to live no matter what happens and everything I am seeing from the conventional lending market is that loans will continue to through and there will be work arounds to deal with the issues around appraisals. Did you finance with a conventional renovation loan product or HML?

@Ali Boone Just so I understand this model correctly:

Your operator finds people to sell him properties subject to their existing mortgages and then finds an investor to finance the renovation (before transferring the property) and then after the renovation the operator places a tenant and then sells the property to investor at a predetermined price. Since he is buying deals subject to, the new buyer would clear the previous mortgage and I guess your operator would charge a premium on top of that and then a premium for doing the renovation, finding a tenant, and then managing it afterward.

Am I basically following the model correctly?

It is innovative but like you said is a huge risk to investors. Baltimore City is a challenging city to do rehabs from a regulatory perspective and tenant placement is also a big challenge given the economics and demographics.

 I have helped a few clients clear inventory that they had purchased in turn key deals that went poorly (some with the operator that you made reference to above) and those folks lost a lot of money in those deals. 

I am generally skeptical of OOS investors investing Baltimore City. I have personally bought, rehabbed and rented over 20 properties in Baltimore City and also had a lot of lessons learned that I would not wish upon anyone else. I think it is possible to do it with the right team of people in place that you can trust but I would urge caution to investors out there.

@Nick Bowes These are just my thoughts based on my experience. 

The Zillow numbers are basically useless in Baltimore City. You would either need to establish a relationship with a local lender and sell them your vision of what you are doing or a lender who has no clue and hope it slips the cracks IF you get a favorable appraisal. There is just a lot of variability on the appraisal side. Of course if you could find a portfolio lender who would lend using an income approach that could work. You would most likely need to season them though and as @Jarred Sleeth mentioned those are not so easy to come by. 

As for section 8 they also won't be all that helpful. There are areas where rentals won't get approved because of too much blight but your bigger concern is finding section 8 tenants who are going to want to live in a 50-70k house when they have the option to live in a 100 - 130k house. Section 8 tenants have certain demands since the market rate tenant pool is not very reliable. You generally will need updated heating, central air, granite kitchen, updated bathrooms, and be on a decent block. 

So lots to take into consideration. Generally speaking I think out of state investing is a bad idea but I think out of state investing that you are talking about is a terrible idea. If you are ok with 5-7% cap rates then I think you will be safe but you are talking about which are 20% + cap rates you will get your lunch eaten. 

@Nick Bowes 

I agree with @Ozzy Sirimsi 

I have properties with those numbers in my portfolio but they required quite a bit of work and specialized skill to acquire, rehab, and now manage. If you have a good PM and contractor in place, I don't think it is impossible to find those kinds of numbers on the buy and reno side but you will be looking more at the $800-950 range for rentals in those areas and might have trouble getting section 8 tenants. At that point your bottleneck will be your refi. Without any direct knowledge of your credit and cash position, it might be difficult to refi out of these properties. I have had that problem with a few of mine.
 

@Briyana Hawkins what are the cross streets?

25% down on a multi unit in Baltimore City in an up and coming area. 

In my experience in Baltimore City they are just more work. You can make more money but you either need to put in more hours or hire people to handle the greater workload, so depending on how you value your time and how much you are paying people it might not be the best use of your time. I am in the process of putting all my properties under management because I was hitting a ceiling with the amount of time I was putting into management which was stifling my growth. I think it can be a good strategy if like you said you have good systems in place. 

@Tony DiDomenico I made it a point to try a few different models in Baltimore and I took some licks along the way. I think it is a great place to invest if you can manage your tenant and regulatory risks and also figure out how to finance and execute your renovations so that you can pull your money back out have been the biggest hurdles. The last part around the refinance can be a particular challenge but I have figured out some ways to get around that now as well. Happy to share what I know.