What to look for in a Multi-family investment? Chicago

Question

Hello Everyone - Long time investor, first time post!  I've worked residential for the past 10 years (buy & hold and fix and flip) and ready to take the plunge into multi-family investing.

I'm looking at 5-7 unit buildings for my first opportunity. I'm currently looking at value-add, cap rates and COC return, but what other criteria should I consider? What do other savvy investors look for when looking to make a purchase?

Thanks in advance for your time.

Hector

Jordan Callaway · Answer

@Hector Estrada Hello Hector! in my opinion, you may want to try to find something in your same price range with slightly more units (6 unit buildings tend to sell for a premium thus are not very cash-flow positive). If you can find something 9-12 units may be worth considering. Especially with your background of experience, it's not that much more work for 9 units than 6. As for things to look out for... I agree with the sentiment above, CAP is important, but the main thing to consider in Illinois/Chicago is what is the current assessed value? This is very important and you must consider this prior to writing an offer in IL. For example in Cook county: if the county assessor's office says the assessed value is $40,000 (a fair market value in cook county X 10 = $400,000); if the property is listed for $800,000 and the assessor believes the fair market is $400,000 the taxes in theory could double upon a recorded sale. So if taxes in the offering memorandum say "$8,000" and then it sells, and the taxes go to $16,000 it means that on a 6-unit building you'd have to somehow recuperate that additional $8,000 (or on a 6 flat it would be $8,000/12 months/6 units = $111 increase in rent, just to pay for the new taxes to equal the return you thought you were getting before! Also, make sure you build in enough for janitor/maintenance/repair/cleaning/decorating/supplies/management (even if it's you now)/Misc./Reserves...

This is not even taking into consideration the new cook county assessor who claims he's going after real estate investors for more taxes. This is not to scare you, it's to prepare you! I'm sure you're already aware, but brokers aren't able to publish PRO FORMA taxes because they themselves don't even know what will happen. In other states, and other non-cook counties within IL, there are different formulas for projecting taxes (like some states are 1% or 2% of price, making it easy to predict).

Jordan

This is not even taking into consideration the new cook county assessor who claims he's going after real estate investors for more taxes. This is not to scare you, it's to prepare you! I'm sure you're already aware, but brokers aren't able to publish PRO FORMA taxes because they themselves don't even know what will happen. In other states, and other non-cook counties within IL, there are different formulas for projecting taxes (like some states are 1% or 2% of price, making it easy to predict).

Jordan

Joseph Konney · Answer

Hi @Hector Estrada-

In my opinion, generally, small commercial multifamily (5+ units) are a potential sweet spot for value. They can be slightly out of reach for many due to not being applicable to most government subidized loans, typically require 25%+ down payments, and often require strong cash reserves by lenders. The big institutions are usually not looking for smaller commercial apartment buildings. Therefore, overall demand may not be as high which could create a potential value opportunity.

On the west and south sides of Chicago, there are several properties that will cash flow after expenses, budgeting, management, and even 25% down mortgage. I see a lot of poorly managed and value add opportunities in these areas.

As far as property taxes, there is always ongoing regulatory change. However, you can easily check with the cook county (https://ccrecorder.org/) to see the the current property value which the assessor is basing the tax on. The last three 5+ unit buildings I have purchased have all been under the county's value and tax is being REDUCED on appeal. The appeal can be done yourself or there are a number of attorneys who will appeal on your behalf for 1/3 to 1/2 of your first year savings.

There is a nice graphic in this article that shows Cook County Assessor EAV (equalized assessed valuation) changes regionally:https://www.chicagobusiness.co...

Joe Willets · Answer

@Hector Estrada, Cap rates are important because it shows the reality of the NOI vs purchase price.  It's not easy for me to give good numbers, as my market (AZ) is pretty different from yours.  In AZ 5-6% is pretty normal.  Keep in mind, on the listings, they numbers will be "proforma" (read: notional).

The other HUGE thing to take into consideration is Debt Service Cover Ratio (sometimes seen as DSR, DCR, or DSCR).  You need to know the Net Operating Income (gross income-total operating costs) and divide that by the total debt service (principal+interest).  NOI/Debt Service=DSCR.  If you get a number below 1.2(+/-), you will probably have a hard time qualifying the property for the amount of money you need.

Basically, never ignore the potential debt service for a property.  It can change the amount required for down payment, or even kill a deal.

Hector Estrada · Answer

Hector

Crystal Smith · Answer

Given your background in residential flipping plus buy and hold I suggest you check out Community Investment Corp. (CIC).  They fund programs to purchase, renovate, then refinance (Takeout loans) for apartment buildings in 6 counties, including Cook County.

Greg Dickerson · Answer

You also want to look at the age, condition and type of construction of the building. Whats the CAPx look like, deferred maintenance etc.

You also need to consider the location, demographics, crime rate, schools, jobs, vacancy rates of the property and the area it's in.

Check historical rents for the property and the area. Are they appreciating or in decline.

Be aware of rent control laws in effect or that are changing. many states are becoming more and more tenant friendly and making life hard on property owners.

What to look for in a Multi-family investment? Chicago

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