too good to be true? What am i missing here?

Question

Hello from Chicago,
New to real-estate and potentially interested in starting with multi-unit properties here in Chicago. I been doing some light searching around and found some pretty impressive numbers with relatively low capital needed to achieve.

Example: one of many with similar numbers. https://www.loopnet.com/Listing/5902-W-Ohio-St-Chicago-IL/13763945/

This 9 unit building is $425k and generates $49k net income. With $125,000 down the mortgage is $1500 month. $1,500 x 12(months) = $18,000 annually.

$49,000(net income) - 18,000(mortgage expenses) = 31,000 profit.

that's a 30% return... (excluding appreciation) What am i missing? There seems to be many buildings producing these numbers, and why doesn't everybody just buy them all...?

*** I have free time and want to start a real-estate business. Goal is scale-ability and to re-invest cash flow into more properties, compounding the processes.

Allan Smith · Answer

Yes you can't go by the listing for income and expenses. Typical expenses are 50% of gross income, rule of thumb.

Wayne Brooks · Answer

The expense numbers are Always artificially low, and the income Artificially high (doesn’t account for true vacancies) on these listings.  Example...$4,000 “repairs” on a 9 unit building.....turn over costs between tenants on a unit can be $1,000-$4,000, plus ongoing maintenance repairs and capex (replacing carpet, appliances, roof, etc) will be Way over $450/year per unit.

Mason B. · Answer

I know Chicago's geography very well, and I understand avoiding section 8 housing and the blocks that are total trash, especially as a first time investor. but Chicago is gentrifying every neighborhood, especially around the Oak Park, Austin, Garfield park area. Hipsters and yuppis are already migrating to them, and the same surrounding blocks already have people doing rehabs. Again, not saying to id buy in the center of the hood, but i don't know if they should be entirely avoided. If its on a main street, near Oak park, highway, there's other investors in the area, and the surrounding blocks are decent, then maybe?You would of said the same thing about  Wicker park, Logan Square, River North (Cabrini Green), Fulton Market, South Loop, Hyde Park, humboldt park, or Pilsen 15-20 years ago... Now these are the hottest neighborhoods in Chicago. There aren't even buildings left in the areas you would want ideally want to own a building in (for 350-450k budget)

Jennifer Hyman · Answer

Hi @Mason Barnard! We property manage near the library and it's a great neighborhood. It's technically in Austin, but for all practical purposes it is Oak Park. The area is gentrifying east. I took some clients through a recent rehab at Huron and Austin - great looking building. Nurses and new doctors who wanted to live close to the hospital. Overall, I've been showing that area to new/young professionals who don't want to live in the city, but want easy access to public transportation to the city. Have you had a chance to walk through it yet? The apt sizes look just right for your target market. I'd love to see what the floor plans are.

Lynnette E. · Answer

It may be a low income or very low income building that has legal requirements to rent to low income folks.  Yes, they stay forever and there often is a waiting list.  They also do not clean or care for anything much.  And someone else already took all the tax credits for the building and now they are dumping the mess on someone else.

If they have long term tenants, you can bet that the floors need to be redone, rooms need painting, all appliances are past their useful life, tubs, counters, etc are all at the end of their lives, so is the roof and HVAC system...  They told you they spend $4k a year on maintenance.  Believe them.  Most decent landlords spend about 10-20% of the rent on maintenance/capex things.  You are buying from someone that barely keeps the toilets and sinks unclogged and maybe repairs an appliance or fixes roof leak, once in a while, when it gets real bad.

I would expect the property needs major capex things and general maintenance to not be a slumlord.  And that you will not be able to raise the rent, much, ever, if its low/very low income restricted. And your clients are low income clients, they can not afford soap, windex, or a vacuum and mop.

Timothy M. · Answer

@Mason Barnard The building in question is in Austin. Not a particularly great neighborhood, and ask yourself - if it were such a bargain, wouldn't someone local have snapped it up...?

John Teachout · Answer

When you say "net income", is that after setting aside management, maintenance, vacancy, capex, etc?

John Warren · Answer

@Mason Barnard what you are describing is investing for future appreciation. The idea of urban pioneering works very, very well if you are right. If the area doesn't gentrify, just make sure you have enough cash flow coming in to work in the existing environment. You can definitely make money in the Austin neighborhood (or any neighborhood for that matter), but you need to know block by block where you are at.

Eric M. · Answer

Sounds like you have it figured out, Austin is the next Wicker Park! I say buy it. Great deal! You will learn a lot no matter what.

Mason B. · Answer

NOTE: I also am not expecting or trying to get a 30% return. I know that's a ridiculous target. And of course i would set aside whatever amount necessary.

What is the best way to for someone in their mid twenties to invest $75k-100k, into realestate, with the goal of scale-ability, and to generate somewhat passive cash flow (I do have time, it doesn't need to be passive at first) with relatively low risk (trying not to lose money)... The idea of multi unit buildings, in Chicago, makes a lot of sense to me, ive always lived in them, all my landlords have been successful, i have the time, i think i have the capital, and i want to get the experience, and want to better understand this... What can i do to get the ball rolling. I think i would be in over my head doing a heavy duty rehab (at first) or flip...

too good to be true? What am i missing here?

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