How to properly analyze a Baltimore investment property

Buying an investment property in Baltimore can be a rewarding and profitable experience or a money pit, and it all depends on how well you can analyze the numbers. All of your money will be made on the buy and realized when you sell! 

Consider this guide as an introduction to property analysis 101; You can use this on anything from a single-family home to a 200 unit apartment complex; however, some properties will require a more detailed review to obtain an accurate picture. 

Glossary Of Terms

One Percent Rule- 

 The 1% measures the gross income of the property against the purchase price. To pass the 1% rule, the gross monthly income of the property must meet or exceed 1% of the purchase price. 

Net Operating Income “N.O.I” 

Gross income – Operating expenses = N.OI this does not include the mortgage payment.  

Capital Expenditure ” Cap-Ex” 

Cap Rate or capitalization rate is calculated by dividing the N.O.I by the market value of the property. For example, a property worth 1 million dollars with an annual N.O.I. of $75,000 has a cap rate of 7.5% 

  Multi-unit properties Vs. Single-family homes  

Market comparables, also known as “Comps,” determine the value of single-family properties. A comp is a nearby property with similar attributes such as bedrooms, bathrooms, square footage, and design.Baltimore Apartment Building Management

 Investment properties with multiple units are priced differently using cap rate, N.O.I., and D.S.R. aka D.S.C.R. ( Debt Service Coverage Ratio). The best deals will have both cash flow and appreciation. 

Both single-family and multi-family properties can be profitable and financially rewarding; it just depends on you, your long term goals, risk tolerance, and effective property management. 

Good data in equals good data out. 

An accurate analysis involves sourcing and entering loads of data into a financial model and using the calculations to determine if the investment meets your risk-reward ratio. Essential pieces of information include

  • Property and Unit details: Total number of units, square footage of the units, how are utilities metered, unit, property layout. 
  • Purchase information: Total purchase price and any renovation costs 
  • Monthly mortgage payment 
  • Income: Collected rents, laundry income, R.U.B.S. reimbursements 
  • Expenses: The cost of resident requested maintenance, preventative maintenance previous year maintenance expenditures, property taxes, insurance, 

Actual Numbers Vs. Pro-Forma Data

Make sure you use the actual numbers for your model. Reliable, accurate information from bank statements, maintenance request history, tax returns, and utility bills. It’s in the seller’s best interest to paint an appealing—not always accurate, picture. 

For example, they may provide rental income numbers taken from scheduled rents while neglecting to mention that the property has a 40% economic vacancy rate or have a lapse in memory when asked when kitchens were last updated. Part of being a real estate investor is ensuring you have the best available information.

“Pro-forma” data sets are those that present the best possible scenario based on anticipated changes such as raising rents or implementing a utility bill back program such as R.U.B.S.

Base your analysis on the actual numbers obtained from bank statements, maintenance request history, tax returns, and utility bills. 

Getting the real numbers 

  • Property details should be available from the seller and confirmed by you or your property manager.  
  • Purchase information: walk the units, speak with current residents, and see for yourself the condition of the appliances, HVAC systems, and the interior and exterior condition of the property. 
  • Your lender can provide Mortage information. 
  • Income- Request all of the information mentioned in the above paragraph. 
  • Expenses should also come directly from the seller or property management company. 

Example Analysis 

The best way to learn is by doing! Let’s take our example property at 123 W Main street and use the data below to complete an analysis. 

Number of Units- 10 

8 Occupied units 

With 1 vacant and the other needing 7K in repairs. 

Our purchase price $800,000.00

Gross income $ 96,000

Cap rate 8%

Vacancy rate 20%

Taxes $7800

Insurance $1500

Maintenance $5,000

Utilities (Water, common area electric) – $6600 

Additonal income- ( laundry) $1800

Management fees: $ 7680

N.O.I $69,220.00

Calculating net operating income

Net Operating income is the property’s total income after all expenses, not including your mortgage payment; this is the most critical figure you have in your arsenal. 

The N.O.I. of a property is calculated by adding 12 months of income and expenses together then subtracting expenses from income.  

12 months of income – 12 months of expenses = N.O.I. 

Evaluating Income 

The total income or Gross income is all income from the property, including rents, laundry income, storage income, utility bill back programs, etc. 

In our example, 123 W Main Street has ten units renting for between $800 and $1000 per month, for a total of $8000 per month. In addition, we have a laundry facility that produces $1800 per year. 

Property management in BaltimoreThat means the total monthly income is $8,150, and the annual income is $97800.

The majority of any property’s income will be from collected rents, which is why physical and economic vacancy rates are vital to know. 

You can google ” average vacancy rate in ( your M.S.A.)” for a general idea of what your local rate is. For our example, we will use Baltimore, MD that has an average vacancy rate of 5.8% 

Does the historical vacancy rate match the average vacancy trend? 

If not, ask the following questions; 

  • Am I looking at Pro-forma or actual data? 
  •  If this is an actual data set, what is property management doing or doing wrong?
  • Are the rents in the building in line with the Fair Market Rent ( FMR) for the area?
  • What is the current situation with current lease agreements? Are they long term residents? Do they all expire around the same date? 

You should always estimate on the conservative side when it comes to vacancy rates! We have two vacant out of ten units in our example property, equating to 20 percent vacancy. Remember, because we are using actual data, our monthly income is still $8150.00 for a total annual income of 97800.00. 

It costs to be the boss.

We can break down the majority of property expenses into the following categories: 



  • Resident requested 
  • Cap Ex 
  • Grounds care 
  • Common area cleaning ( for multifamily) 

Property Management 

Utility cost 

In general, you can take monthly figures for all of the above categories and multiply them by 12 for an annualized operation cost. 

Common expenses 

As an investor, you will have to contend with the following costs so you need to learn how to account for them. 

  • Maintenance and repair expenses: This can be difficult to estimate. We always recommend assuming 10% of the rent will go towards maintenance and repair, however, A newer property or one that has been recently renovated should have fewer repair costs than an older or poorly maintained property.
  • Capital expenditures: Or CapEx is the big-ticket items like roofs, appliances, HVAC systems, flooring, etc. Estimate the cost of replacing them, divide the cost by the estimated lifespan, and set that amount aside monthly.

See the I.R.S. publication here. 

  • Rental management: Property management companies in Baltimore typically charge a percentage of the rent or a flat fee, along with a fee to rent out a unit.  

Getting to N.O.I.

We have our gross income and the total expenses that brings us to our N.O.I. Using the formula above ( Gross income – Total expenses) $97800- $28580.00, we have our N.O.I. of $69,220.00. We will use this figure to finish our analysis. 

Econmics not emotions

An excellent real estate investment starts on a solid foundation of math and performance metrics. We now know that the N.O.I. is the total income a property produces without the cost of the loan. The next metric we will cover is Cash Flow. 

Is cash flow king? 

The simple definition of cash flow is money left over after your expenses ( Income- expenses= cashflow), however, that is an oversimplified version that could get you into trouble if you aren’t careful. 

New investors often forget about other expenses like 

  • Vacancy 
  • Insurance 
  • Taxes 
  • CapEx 
  • Utilities 
  • Repair and maintenance costs
  • Property Management 
  • Grounds maintenance

Cash flow includes your debt service under “expense.” In contrast, N.O.I. does not include debt service in the calculation. This is because monthly mortgage payments and terms are loan specific and therefore cannot be calculated in the figure that is property specific. N.O.I. is simply the total income produced by a property, and your cash flow is your total annual profit. 

Back to our example property at 123 W Main Street, the monthly debt service is $4452.00, and our total annual loan payments would be $53,424.00. For this property, our cash flow would be:

$69,220.00 – $53,424 = $15,796

If you paid cash for the property, you would see a tremendous increase in cash flow, so you should pay all cash, right? Not necessarily this brings us to our next metric, Return on Investment or Rate of Return.

Your Return On Investment ( R.O.I) 

Return on Investment or R.O.I. is just as important as your cashflow

In basic terms, the R.O.I. is how much profit is made on your investment as a percentage of the cost of that investment or your basis. Mathematically, that formula would be: R.O.I. = Cash flow/ investment basis

What is a reasonable R.O.I.? Let’s compare other investing vehicles.

  • High-interest savings accounts often have an R.O.I., or interest rate, of between 2-5%.
  • A certificate of deposit (CD) sports an R.O.I. of about 3%.
  • The stock market has an average R.O.I. of about 5-10%.

Revisiting our example property at 123 W Main Street, what is our R.O.I. here? Let us finish our analysis and figure it out! 

Capitalization rate (or cap rate)

A cap rate is similair to the N.O.I in that it is completely independent of financing costs and is calculated with the following formula. 

Cap rate = N.O.I / Property purchase price 

The cap rate is independent of the buyer and financing, making it the best indicator of a property’s potential return and, therefore, the most important metric for you to understand. 

Lets determine the cap rate for 123 W Main Street   $69220 / $880,000 = 7.86% 

In general, a good cap rate will range from 8-11%, depending on the market that you are investing in. 

When investing in larger properties, the property’s value is based on the cap rate of comparable properties in that market. So if the average cap rate in your area is 9%, look for a property with a cap rate of 9% at a minimum unless you are specifically looking for a property that you can add value to, think flipping but for an apartment building. 

Cash-on-cash return (COC) 

The Cash on Cash return, unlike the cap rate, is entirely dependant on your financing, and it’s directly related to the amount of money you put down.

For example, you put $200 into a savings account, and you might receive $8 per year, or 4% R.O.I. The C.O.C. would measure your return if you had instead put that $200 into the property. The C.O.C. formula is as follows.  

COC = Cash flow / investment basis

For W Main Street, our annual cash flow is $15,796, and our down payment and closing costs are $176,000, creating a C.O.C. of 8.97%.

Our property has beat out the savings accounts but not the stock market, so at this point, we need to determine if we can add some income streams to the property, and we can! We can turn both vacant units, as well as add in a utilities bill back program. With a little bit of extra time and effort, we can turn this place around and make it profitable! 

Our total Return On Investment 

Other vital financial considerations are tax consequences, appreciation, and accrued equity, while the C.O.C. only considers cash flow’s financial impact; total R.O.I. every factor that affects the bottom line. 

Remember that our analysis only covers year one of ownership. You should perform a Pro-forma analysis out to year 5 for a total picture. 

The Cornerstone of any investment: 

As you can see, we have a good deal here if we can manage the turnaround properly and then stay consistent with our long term management strategies. This is why property management in Baltimore is crucial to your investment success. A professional management company can take your vision and execute a plan that will produce long term success! If you are in need of a property management company in Baltimore, call HomeWorks Property management today at 410-413-1279