Welcome to Passive Real Estate Investing. I’m your host, Marco Santarelli
You know this is time for another sparse market spotlight. Baltimore, Maryland is the next exciting market that we are entering into. And for those of you that don’t know, Baltimore is a very large coastal city located in the state of Maryland. It’s actually not that far from Washington DC and it has a core population of about 600,000 and we’re going to find out more about that here today as we learn about this market. But it’s made up of over 200 neighborhoods. And when you get out into the suburbs, you’ll realize that it is actually a very large market. It’s also the largest community in the state of Maryland. But what’s interesting about Baltimore, I’ve come to find out it has a very, very large stock of pre-world war II architecture and it makes it one of the older and more historic cities in the country. And I’m actually looking forward to going out there as kind of an educational tour for myself and my family about US history.
But with me today is Zander and Eric, they are our newest trusted local property partners. So welcome to the show guys.
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Thanks Marco. Appreciate it. Nice to, uh, to be on here. Appreciate you having us.
Absolutely. So you know, whenever we open up a new market and then every once in awhile thereafter we kind of have these market spotlights to learn about the market and then update ourselves about the market. So we’ve been actually having requests for Baltimore interestingly enough. And as we were talking about the market before we started recording here, sometimes there’s a little bit of negative stigma with a particular market, but then you come to realize that you have to put everything in context. I like to start off with the most general of questions and that is to ask you guys why would I or anyone want to invest in Baltimore?
Sure. That’s a great question, Marco. And I, I think, uh, as we mentioned before, a lot of people paint the entire area, with one brush. I’m actually a lifelong Baltimore resident, so, uh, I can speak from the heart when, when I say and believe in investing here in Baltimore, we’ve built a substantial run a portfolio ourselves. And needless to say, if we didn’t believe in the market, probably wouldn’t do that. So it is centrally located. It is really close to DC in a way. We’re probably DC’s little brother, but that’s not a bad thing with the 95 corridors and our proximity to the coast, having the port of Baltimore and then having all the major technology and hospitals and universities that we have here in Baltimore, it is a really strong market and even better rental market from the landlord investor standpoint of view.
So, as I mentioned before, Baltimore has become very popular among investors and there’s probably a lot of reasons for that. And one that I’m learning about right now is that it is or has a booming business sector. There’s a lot of businesses that are coming in or starting up entrepreneurs or expanding or starting new businesses there. I don’t know if you can shed some light or color in that particular part of the market, but what’s going on there? What’s driving the market?
Sure. Well, it’s definitely a couple of different things, but that brings up a key story that’s been in development for a few years. Under Armour who owned by Kevin plank, who is a Baltimore native also is actually their development arm. It has been developing a five-point $6 billion area of the city. They’re basically developing it from the ground up and that’s kind of a microcosm of what’s happened in the city for the past 20 years. So I actually also live in an area that many years ago was very poorly developed and now is surrounded by high rise buildings and um, all kinds of investments in new companies coming into town. So we are home to several fortune 500 companies. And again, that goes from the higher level of a Fortune 500 company all the way down into what we do, which is dealing with single investors that are, are buying single-family homes and, and investing in that way. Um, it’s been competitive across the board. So there’s been a lot of major development and then a lot of, I’ll say smaller development, like what we do with the investors, buying homes, fixing them up, and then renting ever selling up. So it’s definitely a booming economy here though.
Kind of a macro question, but I’m just curious, you guys are in what you might call a prime location because you’re near some pretty major key cities like Washington, DC and to a lesser degree, you’ve got New York state there. How much of an impact do these markets have on Baltimore? In other words, is Baltimore kind of a commuter outlying community for these larger employment areas
at? Yeah, that’s a great question. And actually it is. So there is a huge contingent of commuters that go down to that DC world. There are military bases on the way, and then, of course, all the employment actually in DC, so a lot of military, federal government, and then so contractors that live in the Baltimore area and commute down, whether it be by car, which is a bit of a nightmare or even by train. So there’s a huge population here because the cost of living is less than the DC and the DC suburbs that take on that commute. So absolutely it feeds off of that.
What other things might be driving the market, if any? I kind of just throwing this out there as far as my own education, of course.
Sure. So a lot of people have probably heard of Johns Hopkins, that’s a massive hospital and university system here in Baltimore. You can’t go anywhere in town without seeing an office or something that’s related to or inside of the Hopkins network. It’s pretty incredible. So they’re really, really big. Another big one is the port of Baltimore. It’s one of the biggest ports on the East coast in terms of the volume that they handle. There are over 140,000 jobs directly linked to the port of Baltimore and that’s really boomed in the last few years. It received new ownership maybe, I think it was four years ago and they’ve like quadrupled what the business there is in a really short time. So which is key because again, a lot of those jobs are really our target audience and the rental properties that we work on.
If you kind of stepped back and looked at the economy, what are the major industries in Baltimore? I know a lot of people think of the Northeast as being steel or oil. What makes up the Baltimore economy?
Sure. Well, those steel is definitely true. It was, Baltimore was kind of known for that. It’s the same historically, but really what’s come up a lot is healthcare technology like you said. And then the, I’ll say the blue-collar jobs, like the port of Baltimore, have really grown, especially in the last few years. So yeah, I think those are probably the key biggest ones. And then again, like we talked about the the military, federal defense, those subsidiaries that all feed off of DC, they are very prevalent in Baltimore
in terms of population when you look at the suburbs, uh, so you’re including everything. How big market or Metro are we talking here? I know it’s several million, of course. I can’t remember the number off the top of my head. Okay. Yeah, I know it’s several million. I think it’s just under 3 million. So it’s, it’s a very large metropolitan area. It’s not like it’s a, what I’d call like a second-tier market. It’s, it really is a, a major metropolitan area. Right? Yeah, that’s correct. Absolutely. Okay. All right, cool. So you talked a little bit about major employers there. Is there anything else you want to add to that list or have you kind of covered that?
Uh, we talked about under the Cormack spites is a really big company. They’re headquartered here in Baltimore. Okay. Amazon has a ton of factories or I should say more warehouses and factories, but warehouses right here in Baltimore that of course work heavily with the port. Um, and then again being located right off of the 95 corridors or 95 actually runs through the edge of the city. There is a lot of jobs all affiliated with that. Those are some of the really big names that again are a fortune 500. Um, and then actually Marriott, the hotel chain is a quarter here in Baltimore as well.
Okay, great. So I think one thing I just like to repeat, I’ve mentioned this many times in, in episodes over the last five years, when you look at a city or a market, you can’t judge that market based on limited information and things you hear in the media. Because when you look at the metropolitan area that’s made up of hundreds of thousands of people, or in this case when you’re over a million or even 2 million, you have to understand that you’ve got the core city of Baltimore or LA or wherever it may be. And then you’ve got dozens if not hundreds of suburbs, the submarkets and then those are made up of neighborhoods. So it continues to get granular and granular and smaller and smaller. And that just means that every single metropolitan area has its high-end luxury areas. It’s low-end war zones and a broad spectrum of suburbs and neighborhoods in between.
So as long as you’ve got stability and a vibrant or growing and healthy economy within a market, then it’s just a matter of picking the suburbs and neighborhoods within that metropolitan area. That makes sense from an investment perspective where you’ve got inventory, strong rental demand, a large rental pool, the quality inventory with a team to go along with it. And you can be successful as a real estate investor because you can get your cash flow and you can get your growth as that happens over the years. So people listening to this and thinking about Baltimore is an option. You have to understand that there’s, it’s much more than just the city or the name of Baltimore. It’s really where are all the opportunities in that market. And that’s why we’re talking about this today. So I’m going to use that as a segue to start talking about the areas and the deals that we can find in the Baltimore market. So let’s start with the range of neighborhoods that you guys focus on and types of inventory that you’ve been providing to our clients so far.
Absolutely. Great question Marco, and I think we speak better and passionately about this and really anybody in our market because we spent the last four years building our own portfolio that’s just under 300 homes all built the exact same way that we still do it today. So we really focus only on being neighborhoods could be B minus to B plus, but we stay in B neighborhoods again where there are homeowners and renters and it’s close, you know, for commuters, close to shopping, amenities, et cetera. That’s where we really focus and there is a huge demand in our market for rentals in those neighborhoods. Obviously, like you said, nobody wants to really live in the war zones. They want to be in quality neighborhoods and they want quality housing, which kind of segues into the back end of what we do with the renovation side of things where again, we take that really seriously.
And that’s how we build our portfolio. We’re building our homes to last, and I shouldn’t say building, we’re strictly in the renovation business, not the construction business when you’re in our market, but the homes are built to last. So 99% of our renovations have a brand new roof, brand new HVC systems, kitchens, bathrooms, electric, plumbing, et cetera. Our actual average renovation costs have right around $70,000. So it’s substantial and that built to last for the tenant and for the owner. So when we take that approach, it starts at the neighborhood level and then works all the way down. So the renovation level, everything that we do is held at a really high standard. And the last part of that would be that the property management side, which I know we’ll get more into, but we run that in the house for a reason cause we want to hold it to that same standard that we’ve held the rest of the model to.
I can tell you from my own experience and just working with providers all around the country, but even all the rentals that I have renovated and flipped or renovated and kept that $70,000 scope of work, that’s a very large budget when it comes to a renovation. So that begs the question, what is the price range of the properties that are in these B class neighborhoods that you’re talking about? Give me the low, the high, maybe the, the median, and then also talk about the rent range for those same types of properties. So how those map out with each other.
Sure. So our average resale price is $152,000 our total range would be 130,000 on the lower end and 200,000 on the upper end. And then we stay very close, if not exactly to the one to one rent to sale price ratio. I’ll say our lowest end rental price will be right about $1,300 a month. And our top-end rental price would be 2000 or just under 2000 a month. But again, our average and in the majority of right in that 150,000 range with a $1,500 rent price range. Um, again, sometimes it’s 1400 could be 1600 just depends on the house in the neighborhood. Okay. So those are good numbers and you know, it’s nice to see a 1% rent to price or rent a value ratio, but often we find that RV ratio of 0.9% even 0.8% is still cashflow as well. And it works.
You don’t have to be married to 1%. And the other thing too is if you’re in an area that’s experiencing strong growth, good growth, and that’s expected or predicted to continue for years, what’s you’re going to make in terms of price growth? The appreciation on that property far outstrips the difference or differential that you have in that cash flow from a property that has an RV ratio of less than 1%. So it’s always a given to take. You have to look at it that way. Sure. Yeah. And we have found in our market and with our portfolio, like you said, the ratio might not always be exactly one, but it’s usually pretty close. But every deal that we work on, the cash flow is really good. We don’t take deals based on appreciation, but it’s always on cashflow. And then we’ve found, luckily over time we’ve seen about a 5% appreciation each year.
Again, that’s just an added bonus to us. We didn’t, we have speculated on appreciation, but the data for us has shown that it’s been about 5% every year, which is a huge bonus, um, on top of like the great cash flow that we focus on. Yeah, well that’s very strong. Of course, that can’t be sustainable forever, but as long as it’s keeping up with the real rate of inflation, then you know, that’s something that’s realistic because your rents should theoretically keep up with that as well. At least it averages out that way over time. Absolutely. Great. So let’s, we may bounce back here to the properties here in a minute and talk about property management. Is it, um, you know, a sister company of yours, what are the services, what are the, uh, fees? And I know that this can change with different clients, but just give us kind of an overview of all that.
Yeah, absolutely. So interestingly, we can get really excited to talk about property management and I feel like most people wouldn’t say that, but we do run it. It is inhouse, it’s not a sister company. We have a hundred percent control of it. And again, we develop that and built that with our own portfolio. We just felt that honestly, a third party couldn’t provide us with the proper level of service that we will need. And that extends, you know, on these transactions as well. So it’s all done in house. We are super competitive on the rates. We only charged a 6% management fee monthly. Our goal really by the time a new owner gets to our property management stage is to build a longterm relationship. It’s not about charging a meter nine or 10%. It’s hoped that will work together on many more deals. So we only charge 6% of the management.
A renewal fee is only $100 new tenant placement fee after the first year. It’s just one month of rent. So again, it is, it’s fully in house, it’s full service. We have a 24 seven maintenance team. Everything is done online. The tenant screening process is very rigid and very thorough. And then a really interesting stat, Marco, you’ll probably like this that we figured out the other day. When we lease a home and it comes up for renewal a year later, 85% of our tenants are renewing. I think that’s a really strong number and it speaks volumes to the quality of the house, the neighborhood and the management side. Like I said earlier, there’s a strong demand for all of those things and not the greatest quantity available. So we really found that our tenants like us and want to stay in our homes for long periods of time, which again from the backend cashflow view is really beneficial.
Yeah, that’s a good stick rate. And someone listening to this that are thinking about Baltimore as their first market to build their portfolio or the next market where they’re expanding and growing their portfolio into, you know, I have this rule of thumb of acquiring three to five or more, but three to five properties in your first or your next market, build that footprint there and then you can move on to another market if it makes sense at whatever time. But you know, if they’re going to be working with you guys, it’s not going to be just a one-off property. Really build a footprint there, of three to five properties and then if you want to move to another market, move to another market. But that you know, allows you to build a portfolio with some geographic diversification. And I think that’s an important thing. You know, you mentioned relationships, we’ll share, there’s always going to be a relationship there because odds are you’re going to be dealing with investor clients that have multiple properties under management with you. But that’s what we like to see.
Absolutely. We’ve been, I think pretty blessed that we’ve had several buyers come back to us really quickly bought their first one and then within two weeks are like, okay, I’m ready to buy another. And again, it’s been, like you said, really a positive relationship. Um, and at the end I think we all have the same goals and that’s what’s important for us to be on the same team.
Yeah, exactly. So let’s just briefly bounce back to the properties here. Let’s describe a typical rental property or typical investment property in these B class neighborhoods. Let’s talk about the size, number of bedrooms. If you want, you could even kind of throw in a little bit of the tenant demographic and rental pool that we’re attracting with those properties. Great
question. And I think one of the things that make Baltimore unique is that the majority of our housing stock right here, especially in these price points are actually row homes, which you don’t really see that in a lot of other places in the country. We kind of favor that, especially when we were building our portfolio. There is a little bit more security to us in a house that has another house on each side as opposed to a detach is by itself and more exposed to the elements. Our typical house would be a three-bedroom row home, roughly 1200 square feet above grade. They do almost always have a basement and then depending on the individual layout would have one or two bathrooms and we do have the occasional house that’s two bedrooms and the occasional house that’s four but the vast majority fall right in that three-bedroom line.
Does that kind of speak to what you’re looking for? Yeah. Now I’m curious what is the ratio of the row home product versus the standalone single-family detached home in the price point that we really favor and stay in? I mean it’s probably 95% row home to not, we just don’t see in this price range the single-family standalone. So there’s probably a lot of people listening to this thinking the same question I’m about to ask you in the market, what makes up the majority of the housing stock? Is it this row housing? Is it just unique to Baltimore or the Northeast region that you live in? Yes, it is definitely probably not unique to just Baltimore cause I do know of another market very close to here that similar. But yes, it’s definitely unique to our market and the norm here and most people you’ll talk to that grew up in these row homes many years ago and still live in them today.
So that’s definitely the norm inside of this market. Yeah, and of course it goes without saying that these are all separate titles. They may have zero lot lines of a common wall, but that doesn’t necessarily make them condominium complex where you have a separate HOA. Maybe answer that question like how often do you find a homeowners association with condo fees or some sort of association fees? With a setup of row housing? Yeah, pretty much never inside of here we see that with new construction a lot like brand new construction, but outside of that in the areas in the homes that we’ve focused on are not HOA neighborhoods. They don’t have that, those extra fees that really eat into your cash flow. Maybe my last question here, and this is kind of a coming out from the left field, but how our property taxes calculated on properties, they’re, they’re a transfer tax on purchase and sale and then is there a formula or a certain calculation for the annual property taxes on the property?
How does that work? Sure. So yes, of course, there is a transfer tax. The city and state like to get their share of our deals, but outside of that they actually, the assessment we have found works in our favor as investors, it’s not reassessed on a sale. So we see a lot of our properties have substantially lower assessment values than what their market value is and what we’ve paid for them or what we sold them for. Our area does a three-year reassessment and it’s done by a large portion of a neighborhood at a time. So you can buy a house or sell a house at the top of the market and then likely the assessment is probably in the middle range rather than the top end of that neighborhood. And then it’s just a calculation. So whenever your assessed value is, I don’t remember what the number is, but the taxes are calculated off of that as a flat percentage. Great. All right. Before I have some closing comments here, I am going to ask you guys if there’s anything else you want to share that I didn’t you about the
market, the economy, the properties, the neighborhoods, the management, anything else you guys want to highlight or throw out there?
Just a couple I think. Interesting statistics. We try and keep our finger on the pulse of economic developments, obviously in our backyard and we try and stay ahead of that curve as much as possible so we can identify new up and coming neighborhoods inside of our market. So just a couple of cools statistics to share with you. Baltimore places fifth in the ranking of top 10 rising cities for startups. And uh, this is from Forbes magazine in 2018 and they based it on a few key measurables costs, education levels, presence of colleges inside of that market, working-age, population growth, and venture capital investments. So there’s the big shift for not only colleges, venture capital investments, which obviously all of that stuff is just a lead indicator as to what we can expect for housing needs. Right? Like there’s, you know, when, when you move jobs to the city, there’s no secret that you know, housing demand will follow.
Um, so we thought that was a pretty interesting statistic and we’ve always been tracking where I would say big money is moving because if you follow that, particularly from a housing perspective, you’re putting yourself in a good position to fill a need. So I think that’s a pretty cool statistic. The second wasn’t, it’s in relation to having the coverage that Baltimore gets and somehow, uh, you know, some of that can be, you know, negatively perceived. Here’s one that I’d like to share with you, that Maryland is the fourth safest state to raise children. That was done, um, and it’s on a website called safe home.org and that was in 2018. Pretty interesting statistic there I thought. And again, when you talk about like you know, micro markets versus macro markets, sometimes you, you know, you have an entire market that can get some negative publicity based on a very small portion or area of a particular coverage area. So uh, those are just two things that I thought would be interesting to share that someone that’s considering this market may see some value in.
Yeah, I find those, uh, those stats pretty interesting. I mean, anytime I’m reading stats about a market and what’s going on and why it’s the fastest-growing or the safest, those are always interesting to me. I like to put all of that together like a big jigsaw puzzle and take those pieces and I’ll put it all together and it gives me a more colorful, holistic picture of why that market is interesting or why I may want to be investing there. And you know, of course at the end of the day for me the two heavy factors are cashflow appreciation potential and the quality of the neighborhoods. When you take those three things and you tie in a good team, particularly on the management side, you have a winning formula. I’m not going to say anything is 100% guaranteed or risk-free, but if you can mitigate your risk and maximize your upside potential and I think combination of those things together probably make up 80 90% of your success, then you’re stacking the odds heavily in your favor and you’re going to do very, very well. And I think that’s what we’re seeing here with Baltimore as a market. The quality of the investment property there, the management team, the numbers, the growth, it just, it paints a very good picture. And I think I’m feeling very bullish about the future of the investment properties that are coming out of the Baltimore Metro area with you guys. We appreciate that. We’re excited as well. Sure. Definitely. All right. I’m done with my questions. Anything else you want to add?
You did a great job. Uh, guiding the conversation through. We feel like we, we had an opportunity, to share with you what we wanted to share with you and uh, hope that folks can find value in the information we shared today.
Yup. Yeah. I guess the final comment I’ll make and just wrapping up here with you guys today is if you’re listening to this and you’re interested in more information, the best thing you can do is just contact your investment counselor, learn a little bit more, ask some questions. And more importantly, is you got to realize that a lot of the properties that this is true for all the markets, not just Baltimore, but you may go to the website looking for what’s available in terms of Baltimore inventory. And you may see that there are very few, if any properties posted on the site at any given time. And the reason for that is because they go under contract pretty quick. And so we don’t necessarily keep them up on the website or what happens is, is that they never make it to the website. So if you’re working with your investment counselor here and you’ve been looking at properties in the Baltimore area, investors are putting them under contract so we can get them to you sometimes quicker by just communicating with your investment counselor because it may not be up in the website. So what I’ll probably end up doing is putting some properties up there as a representative or example properties that you could get your hands on or something similar to, but it just gives you a taste for what’s going on. So I think guys, maybe that’s what we need to do is have live inventory. Maybe a couple of example properties up there. So we’ll get grace to post that up.
And I think what’s really cool about that is the sample property or example property through the actual inventory that you see us producing and bringing out of renovation on a weekly basis is so consistent. We’ve really found such success with a very focused piece of inventory that there’s very little fluctuation between what you’ll see as an example property versus, you know, we’re projected to, to buy, renovate, and bring to market over a hundred units this year from number one through number 99. If you didn’t put addresses on them, it might be tough to tell the difference between them because we stay so focused on those neighborhoods that we’ve had success with. And we remodel with consistency because of the feedback we’ve got from not only investors but the tenants and how much they enjoy living in these units. And there’s always a balance, you know, for us to try and deliver that value to both the residents that live in our properties as well as the, you know, the investor that’s purchasing the property on the back end. So, um, I think that’ll be really cool when you, when we get a chance to put up some example properties, you’ll see literally a mirror image of, of the inventory that then eventually makes it to the website. Because we do focus, we have a very, very, very small what we call buy box here. We just don’t fluctuate a lot on that. We have some non-negotiables and you know that uh, we try and really, really stay in our lane sort of speak, uh, with the inventory that we purchased.
Right. Yup, that makes sense. Good stuff guys. Well Zander, Eric, I want to thank you for your time coming on the show. We’ve done a 30-minute episode here for a, a spotlight on Baltimore and I think there’s going to be a lot of good stuff to come, so I appreciate you guys taking the time. Thanks, Marco. Thanks for having us. Sounds good. So for everybody listening, if you haven’t already subscribed, click that button. Subscribe to the show. Help us spread the word. I always read every single review on iTunes, so leave us a rating and review. I thank you in advance. We will get this posted here soon. Thank you for listening and we will see you on our next episode.
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