Deal in the Chicago area. Do the numbers work?

Question

Hi everyone,

I just put under contract a 2- flat building in the Chicago area. This is a class C neighborhood. Can you please give me some advice and criticize my analysis below? The first unit is renting for 700 (long term tenant). The second unit will be rehabbed. Each unit is about 850 SQ .

Are my numbers right? Am I missing something? There were very few comparables that I was able to find. And some of them were cash deals so I decided to value the deal using the cap rate formula. Please let me know what are your thoughts on this:

Mike H. · Answer

Bottom line is that you're going to owe 60k on the place and its worth 75k?Your mortgage payment should be around 400/month and thats only if you finance the entire thing.

1,500 a month in income and 400 a month in mortgage payment on a 75k property? Taxes another 300 a month? Personally, I'd contest them if the property is really only worth 75k. You should only be paying about 250 a month (that would be a 12% tax rate which is pretty high even for this state).

Try going with NREIG for insurance. They won't require you cover the place for what it would cost to rebuild it. I bet you can get your insurance to cone in at 75/mo or better- the thing is only 1,500 sq ft.....

So 400/mo mortg, 300/mo taxes, 75/mo insurance. Water 80/mo (40 a unit seems reasonable but maybe way over based on brie's units).  And I was assuming you'd be self managing so no PM fee.

There's 850/mo in expenses there so your gross profit is roughly 650/month.
At that price, you should make money providing your screening is good and your rehab includes anything that has a short lifespan (btw I replace water heaters on every house I get - no matter how good they look. After a year of sitting, they almost always end up having problems anyway)......

But the one risk I'd add is that you're investing in cook county. And that crazy county has some of the absolute worst landlord laws in the country. I would be very careful when you do your screening.

Account Closed · Answer

@Crystal Smith Great point.. Never thought about that... I might consider increasing the rehab budget and update older items so I don't deal with them later during the next couple of years.  Thanks Crystal!

Account Closed · Answer

@Troy Fisher Thanks a lot for the feedback. I will adjust the maintenance to a more conservative number. For some reason I thought the 10 % management fee was including everything. In that case, I might consider moving in the tenant to avoid marketing costs. Are these extra costs substantial?

Taxes are not a concern as this building was already an investment property so I believe this number should be accurate.

Account Closed · Answer

@Aaron Montague Thanks for your feedback. I agree, my main concern is the water estimate might be on the low side. I will do more research on those items.

I actually double posted this thread by accident thinking the first one didn't go through...

Here's the original thread.

http://www.biggerpockets.com/forums/88/topics/1701...

Cliff Mccue · Answer

Account Closed

It looks like you got most everything.   As others pointed out you are missing Cap-ex.  Depending how extensive of a rehab will have a large impact on your maintenance numbers.

Since it is a multi-unit you will be responsible for lawn care and snow removal unless you work something out with the tenants.  Either way expect that it will cost you money.

Also since it is a two unit, there might be common area electric and heat.

Crystal Smith · Answer

Account Closed I responded on your other thread that the numbers looked good except your missing CAPEX.  If the $20K renovation costs includes replacing large capital items then you should be ok for a few years w/ a low CAPEX.  But if items such as the roof, water heaters, boilers, & decks are old then you may want to include a $ figure in your annual budget for eventual replacement of these items.  The other choice is bump up your current renovation number & repair those items now.

Brie Schmidt · Answer

Account Closed - Water here is pretty cheap.  I have two 3-flats and my water last year was $502 for a building with 6 adults and $639 for a building with 5 adults and 2 teenagers.

Aaron Montague · Answer

Account Closed

Those numbers work, but I question the numbers.

In my book you aren't saving nearly enough for maintenance.  I'd put away a minimum of $150 per month, $175 if the place is in rough shape.

Your water bill looks low as well.  My water bill in VT averages $800 year.  Municipal Chicago probably has higher rates.  Dig REALLY deep into that one.

Insurance also looks low, but I'm used to paying New England prices.

Troy Fisher · Answer

I've yet to get reliable cost figures from a PM in Chicago, but from my experience in Vegas in C neighborhoods, you have to pay closer to 12-15% for it.

In Vegas, I have to give up 1month rents to the PM for the lease-up.  I expect Chicago to be the same $$ wise but not % wise.  So ~$500/lease up.  And then there's the phone answering charges, the maintenance overseeing charges.  For me, having to pay up to 15% as long as I get the results I want out of the property is fine.  But don't let the 10% fool you.

I'm preparing to leap into the Chicago market here soon, and my numbers are based on what I've researched, what some local investors have sent me and what some turnkey operators have advised.

Troy Fisher · Answer

First.  What zipcode and neighborhood are you looking at?

Second your operating numbers seem to be extremely low:

•  7% Maintenance fee is not going to be anywhere close to accurate.  You need to account for snow removal, capex improvements (New Boiler, New Roof). 
• Property Management is going to run you 10% easy, not including lease-ups, marketing and any other hidden PM fees
• Taxes are closer to 6.8% (you won't get the homeowner exemption)
• Certain areas (most C's) are going to require you to pay for Utilities.

Here are my example numbers from a down to the stud rehab:

Annual Expenses

• Annual Property Taxes $2,750
• Annual Maintenance $1,800
• Annual Insurance $960
• Property Upkeep/Other $400
• Property Management $2,444
• Utilities$1,000.00

Total: $9,354

Thoughts @Mark Ainley ?

Deal in the Chicago area. Do the numbers work?

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