Cannot find decent COC return for multi-units in Chicago North Side - Need Advice!

[Harmony Romano]

I am a new investor looking to get a multi-unit for long term rental. I live in Chicago's North Side so that is where I have limited my search as I understand the neighborhoods better. Whenever I calculate coc, the very best I can find is around 5-6%. Most seem to come out lower. Maybe I am calculating this incorrectly or maybe that is to be expected in this market? The latest property I've looked at still only gives me an estimated 6% COC even with a 2-1 buydown and a potential offer under listing. (Biggerpockets' rental calculator gave me the same result.) Any advice is appreciated! Do you count vacancy/maintenance of 15% in your costs for the year, or do you omit this as you consider it a reserve rather than an expense? Do you accept an estimated coc of 6%?

[John Warren]

@Harmony Romano I think it is ok to squeeze your vacancy and maintenance/CapEx numbers to fit an actual deal. I doubt anyone on the north side has a 7% vacancy rate unless they are asleep at the wheel for instance, while that vacancy rate might be common in other areas. I think you can safely factor in about 1 month's rent for one unit for a real world vacancy rate.

For maintenance, the issue with percentages has always been that they are not truly correct. For example, if your rent is $3,000 per month, it will still cost you the same to fix a toilet as it would in a $700 rental. 10% for CapEx and maintenance may or may not be correct depending on if a property has been renovated.

Finally, I would argue in favor of a true 5-6% COC return on the northside in the right neighborhood. COC is only one metric. You are missing the debt paydown, depreciation and appreciation in this figure. You also are missing some potential moves with your loan that could juice those returns in the future. You could refinance to a lower rate, you could refinance out of an FHA to save PMI, etc.

A lot of folks don't realize how powerful some of these small moves you make as an owner can be over time. The clock can't start ticking until you own. If you purchased three years ago, you would know that the market was "too hot" and there was "no way you would get appreciation". Then the market shot up 20%. Maybe the market sags in a year, but guess what.... prices and rents will go up over time.