Craig Bettenhausen bought a three-bedroom, two-bath rowhouse in Remington — with a serious cigarette smell and some sloppy electrical work — for $86,000. Two months later, after some upgrades and deep cleaning, he rented out the house for $1,400 a month, at least double what a 30-year mortgage plus taxes might have cost on the property.
The house on Huntingdon Avenue is just one example of a conundrum facing many renters in Baltimore: In many cases, it can be cheaper to buy a house than to rent one. The city's real estate market is improving but hasn't kept pace with the increasingly expensive rental market.
Baltimore had the highest return on investment for rentals bought by cash investors of any jurisdiction in the country, according to an analysis this year by RealtyTrac, a California real estate firm. And, taking into account the city's median household income of $41,385, RealtyTrac determined Baltimore was the second-least affordable place to rent in the nation, after the Bronx in New York.
Of course, not every home can be bought cheaper than it can be rented. But many can be, and observers say the city may be reaching a tipping point where the expense of the rental market will encourage more people to buy.
"I think it has to do with the fact that Baltimore is a hot market for young professionals, and their interest is in not owning a home yet," said Tom Sadowski, president and CEO of the Economic Alliance of Greater Baltimore. "That being said, I think the day is coming soon where homeownership is going to be on the rise here in Baltimore."
In downtown Baltimore, or anywhere within a 1-mile radius of Pratt and Light streets, the average rent on a two-bedroom apartment is $1,950, according to the Downtown Partnership. For Class A buildings on the higher end, the average downtown rent on a two-bedroom apartment is $2,171. Other apartment listing services, such as ApartmentList.com and Zumper, put the median cost between $1,100 and $1,440 for a two-bedroom anywhere in the city.
Thousands of new apartments have been built in the last few years or are in the works. They include 10 Light Street, the historic former Bank of America building with an Under Armour-branded gym that is now advertising some large one-bedrooms on upper floors for more than $3,000 or $4,000 a month.
Some have raised concerns that the market might not support a glut of expensive apartments, but Cary Euwer, president of 10 Light Street owner Metropolitan Partnership, said the popularity of downtown was building on itself, and he envisions more apartments in the works.
"It kind of follows the millennial theme of 'I want to rent, and I want to walk to work, and I want to walk to the harbor, I want to walk to restaurants and retail, I want to go to the gym,'" Euwer said. "In Baltimore, there are so many wonderful historic buildings that are being renovated, so that builds a critical mass."
Lois Foster, a real estate agent and property manager who owns Property Management Services Inc., frequently handles renting out houses in the city's popular neighborhoods and said she almost always gets the price she's asking.
"Canton, Federal Hill, Fells Point, you can find some really good buys, and it would be cheaper to buy them," she said. "But they're also sought-after areas for renters, and because interest rates are so low, you could probably get into it for less than you could rent it."
For example, Foster said, she quickly rented out a four-bedroom house on Baltimore Street in the Patterson Park neighborhood for $3,000 a month, though the owners' mortgage was only $1,800 a month. A separate unit in the basement provided even more income for the owners, she said.
Many people who are choosing to rent work at Johns Hopkins Hospital, Foster said, and know they could relocate in a few years. The recession also played a role, she said.
"I just sold a house, and the buyers had a heck of a time getting qualified," she said. "I do know that it's tough. And then you've also got the empty-nesters who aren't necessarily interested in owning a house anymore. They want to call the landlord and say 'Come fix this.'"
Bettenhausen became a landlord in an effort to improve Remington, where he's lived since 2006 after renovating a fixer-upper on Huntingdon Avenue.
"I'd rather it be me, rather than someone rent it out and not take care of it and turn it into another blighted property," said Bettenhausen, who edits the community newsletter.
He and his wife researched comparable rents and thought the $1,400-a-month rent was middle of the road for the neighborhood.
"We didn't want to be pricing people out," he said.
At $86,000, the house he and his wife bought was probably underpriced, he said, and they took a gamble that they could get the cigarette smell out. They spent less than $10,000 to scrub the ducts, paint and fix several other problems, including the electrical issues.
Taking taxes, repairs, insurance and a contingency fund into account, Bettenhausen estimated he has about a 25 percent profit margin.
Bettenhausen said he thought there were an array of factors contributing to the expense of the city's rentals. Many students at nearby Johns Hopkins University come from very expensive cities like New York and don't think twice about paying prices that might be eye-popping to locals. Some may be in transient careers and not want to be tied down by a house.
"The need to collect a lot of capital, even to buy a small house, is keeping people out of the market," Bettenhausen said. "I think people get trapped in having high rent and not being able to build up their savings to buy a house."
Baltimore is like many other large U.S. cities in attracting young people who prefer to rent or can't afford to buy. RealtyTrac's analysis found that in 76 percent of counties, it was cheaper to buy than to rent, said Daren Blomquist, a vice president of the firm.
Still, Baltimore stuck out.
"You have the combination of a fairly low household income in Baltimore City, but parts of the area, it's gentrifying and rents are going up," Blomquist said. "But to buy it's only 14 percent of monthly income, so the balances are tipped heavily in favor of buying in Baltimore City compared to the rest of the country."
The story is more mixed in other parts of the metro area.
RealtyTrac's analysis identified Howard County as the fifth-most affordable place to rent in the country, again taking into account median income. Yet it is cheaper to buy than to rent in other suburbs.
Mary Pat Fitzgerald, a real estate agent with Coldwell Banker, works primarily in the Rodgers Forge and Towson areas, and said she's helped eight to 10 families transition from renting to homeownership over the past few years.
"The same house to rent in my neighborhood, [of Rodgers Forge] between $1,800 to $1,900 a month, a purchaser could get a mortgage payment of $1,600 a month on average," she said. "And there's the tax benefits."
Still, Fitzgerald said, she wasn't having any problems selling houses.
"I think in time the rental market will be affected in that more people will buy because they'll see the value in it," she said. "It seems like the rental market is also strong, but it seems like the buying market is on the upswing."
Least affordable rental markets
RealtyTrac deemed these the least affordable rental markets in the United States by determining what percent of median income is needed to pay the fair market rent for a three-bedroom apartment.
1. The Bronx, N.Y.: 69 percent.
2. Baltimore: 49 percent
3. Philadelphia: 48 percent
4. Brooklyn, N.Y.: 48 percent
5. Miami: 45 percent