Mid-Sized Multi-Families in Chicago, What am I Missing?

Question

I live and invest in DC, but I'm from the Chicago burbs, so every now and again I Redfin properties in Chicago.  The other day I'm browsing around the Austin neighborhood on the west side, and I find a bunch of multi-family properties that aren't selling but seem like no-brainers.

I'm finding places listed at $450k, with gross rents of $15k.  Even assuming 60% expenses and a 30% down mortgage at 5.5%, you're looking at like $4k/month cash flow, or a 35% CoC return.

I've got a friend who lives in Austin, so I've spent some time there and know it isn't exactly Chicago's premier neighborhood, but it doesn't strike me as a terrible area either.  And these numbers seem sick.

So I've gotta ask, what am I missing?  I haven't done any multi-family, so are my numbers off somehow? This just seems too good to be true.

Wendell De Guzman · Answer

I agree with @Brie Schmidt , @Joel Owens , @Derek Martin

and @Marc Boyd : investing in not-so-good areas with high crime rate is not a good idea. The way I classify areas are:

A - you get no cashflow but more AppreciationB - you get Both A & CC - you get Cashfow but little to no appreciationD - you get cashflow BUT with the tenant DRAMA and property DEPRECIATIONF - FORGET IT (war zone) or you're F****d up!

If you really want to invest in the D & F areas, tread with caution. You can make money but you have to almost live in your property so you can watch it like a hawk. Investing in those areas is definitely NOT passive because you have to actively manage those properties (and even actively manage the property managers). The worst mistake of my investing in career is buying a 100+ year old building in a war zone. You can listen to it here (as Brandon and Josh interviewed me):

http://Biggerpockets.com/show65

Jean Bolger · Answer

@Will Johnston If I were you, I'd call several property managers that work around there and get their take on the situation. To be sure, some of them may just try to talk you in to buying something there no matter what and hiring them so they can get some bucks off of you, so you'd need to be cautious. But you may get lucky and find someone who really knows what they are doing in that type of property/neighborhood. And if they are all leery of that neighborhood then at least you'll know it would be really difficult to make something work there.

A.J. Manaseer · Answer

I just got out of my ownership stake in a gut-rehabbed building in North Lawndale at a significant loss but I still couldn't be happier.  Gangs, drug-dealing, shootings, break-ins, graffiti, deadbeat tenants, garbage thrown everywhere, you name it - we had it all there.  Every property management company we interacted with either refused the job, wanted an exorbitant minimum monthly fee, or just plain did a terrible job managing the building.  Your only play is to fill it with Section 8 (which takes time but is do-able) - but its still not worth the headaches.

A.J. Manaseer · Answer

I just got out of my ownership stake in a gut-rehabbed building in North Lawndale at a significant loss but I still couldn't be happier.  Gangs, drug-dealing, shootings, break-ins, graffiti, deadbeat tenants, garbage thrown everywhere, you name it - we had it all there.  Every property management company we interacted with either refused the job, wanted an exorbitant minimum monthly fee, or just plain did a terrible job managing the building.  Basically your only play is to fill it with Section 8 (which takes time but is do-able), but its still not worth the headaches.

Larry Smet · Answer

And how much deferred maintenance have these properties gathered over the years?  Each of these properties could easily need gut rehabs.  Your theoretical 35% COC drops pretty fast when you don't have any tenants and have a big rehab bill coming out of the gates....

Joel Owens · Answer

That high level of violent crimes is a no go.

Even if you have a high level of non-violent crimes turning around an area is easier. If you have high violent crimes and low income then you can forget it. Could be decades if ever before a place turns over.

You need to find SAFE YIELD while getting a good return. That Is why it takes work to find deals.

You might have to create your yield by buying a big rehab property below market and fixing it out to rent in a good to great area. This way you get a cheaper price. Buy the ugliest house on the best street still rings true.

35% coc for a quality asset and areas just isn't realistic in my opinion. If you are hitting 20% coc you are doing well and many investors shoot for 10% minimum COC  with their "tax equivalent yield" higher after depreciation.

Brie Schmidt · Answer

@Will Johnston here is an Austin crime map.  I know a cop in Austin and all I can tell you is I would not take a free property there

Will Johnston · Answer

@Jean Bolger , that's great advice. Thanks!

Will Johnston · Answer

Thanks, @Marc Boyd .

I did take a quick look at some of the crime stats, seemed like they weren't great but not terrible either.  I'm not looking to invest in a war zone, but perfect neighborhoods tend to have terrible returns on rentals.

Derek Martin · Answer

I often drive through Austin on my way to work. Although, I try to avoid it. The answer to your question is one word: CRIME.

Yes, there are some areas close to Oak Park and Elmwood Park that are livable. But the majority of it is just too dangerous.

http://www.chicagomag.com/Chicago-Magazine/The-312/July-2012/Austin-Chicagos-Deadliest-Neighborhood/

Mid-Sized Multi-Families in Chicago, What am I Missing?

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