One investor I consulted with a long time ago in Baltimore calculated their return without accounting for vacancy rates, resulting in unexpected cash flow in the first year. I have seen similar cases multiple times over the decades I've observed this market.

The recent median sale price in Baltimore City is around $265,000, and the median rent is reported at $1,600 per month. Dividing the annual rental income of $19,200 by the purchase price gives a total return of about 7.2 percent. The rental prices are relatively high compared to the sale prices, making it seem like an attractive market at first glance.

According to the 1 percent rule, a property priced at $265,000 should have a monthly rent of $2,650, but the actual median rent of $1,600 is about 60 percent of this benchmark. Compared to other major cities, this gap is relatively small, which is why Baltimore is considered a market where rental prices are relatively high compared to sale prices.

The issue lies with property taxes and vacancy rates. Baltimore City's property tax rate is $2.248 per $100 of assessed value, the highest in Maryland, with a median effective tax rate of about 1.48 percent. For a $265,000 home, the annual property tax would be around $3,900. If vacancy rates are not accounted for, the net operating income will appear inflated.

In the aforementioned case, the investor calculated without considering vacancy periods at all. In areas where rental prices are high compared to sale prices, tenant turnover can be frequent, or the risk of rental delinquency can be relatively high, so it is realistic to factor in a vacancy loss of around 5 percent. Applying the 50 percent rule, the net operating income would be around $9,600 annually, and the cap rate would drop to about 3.6 percent. While this is half of the total return, it is still not low compared to other major cities.

However, when looking at total returns, the story changes. Baltimore has significant fluctuations in market trends by area, so even if the cap rate is decent, long-term capital gains can vary greatly by location. A good cap rate does not automatically guarantee total returns.

When considering cash-on-cash returns, the low market prices mean that the cash needed for down payments is also small. In such markets, leverage can have a significant effect, and when loan conditions are favorable, cash-on-cash returns can often be noticeably higher than the cap rate.

In Baltimore, there are significant differences in rental demand and vacancy trends by area, so it is necessary to check the vacancy rates and rental demand specific to the neighborhood rather than relying solely on the citywide average. For investors coming from out of state, it is also important to note that Maryland's property tax structure may differ significantly from their previous residence.

Tax benefits from depreciation should also be considered in total income calculations. In relatively low-priced Baltimore, the impact of depreciation tax benefits compared to building value may differ from that in higher-priced markets, so it is advisable to verify actual figures with a tax professional.

Baltimore also has a large stock of older homes. If plumbing, electrical, or roof conditions are not thoroughly checked during the pre-purchase inspection, maintenance costs in the first year can increase significantly, rendering the cap rate calculation meaningless.

Baltimore operates a landlord registration system, so including the costs of obtaining a rental license and regular inspections in operating expenses is closer to an accurate calculation of net operating income. These administrative costs can vary greatly by area, so it is wise to check the regulations for the specific area before purchasing.

If you are considering moving to or investing in Baltimore from out of state, it is safe to verify Maryland's rental income reporting procedures and landlord registration requirements with an accounting professional, as they may differ from your previous residence. If you plan to manage remotely, it is also advisable to prepare for selecting a local management company.

Tax and rental-related conditions can vary by property, and this article does not constitute investment or legal advice. Please consult with a professional before entering into any contracts.