Feedback/advice on a property

[Otto Freiberg]

Hey guys, I was looking for some advice/input from some experienced investors on a property that I’m in the process of purchasing. I’ve already put an offer in and just went through the inspection process. The address is W. Polk, with the purchase price being 564,500. It’s a 3 unit (9 beds 6 baths) in Tri-taylor a few blocks from the Blue Line Western station. Current rents are 1,100 on first floor, 1350 second floor, and vacant top floor (where I would be moving into). Both renters are section 8, with first floor being on month to month currently. First floor is under market for rent, and is a hoarder so if I do end up with this property I’d look to make some improvements and look for new tenants, ideally grad students within the UIC medical district area.

Now for some more numbers, I was looking to put 5% down at a 4% interest rate putting my monthly payment right $2,600. After taxes and insurance as well as PMI I'd be put right at $3500. Taking current rents into account I'd have a negative 1050 cash flow as I would be living in the top floor. The building is 17 years old, but was construction as a section 8 farm essentially. Low quality construction throughout and all the issues that come with it. A/C units (3) are 17 years old, roof is 17 years old with skylights currently leaking, there is staining in some of the bedrooms that are near the bathroom showers, and the utility closets are moist and rusting. The biggest issue that worries me is the steps to enter the house are concrete decked with a steel supporting structure. This steel is rusted severely and I worry what the cost of a total replacement would be, or even the cost to have it sanded, painted, and beefed up a bit.

After moving into the property my plan was to live in the top floor as is, end the first floor units lease with 60 days to move. Then I’d look rent single rooms on first floor with utilities included in the cost for a slight premium as it’s single rooms. Putting locks on the doors and having the shared living space should get around $700 per room, allowing me to carry the higher vacancy rate as two of three rooms rented give $1400/mo – 200/mo for utilities.

Concerns, I have a lot of them! First and foremost, I’m overpaying and I know it. I don’t think by much, but I believe the property with all it’s issues and current rents is worth more to the low-mid 500’s instead of the high, but reflecting on what I made as an offer (550,000 and their counter of 564,500) it’s because I believe it’s a decent area to be in. My other big concern is that all the utility/appliances/roof are at their end of life. I’d be replacing things as they fail, but I would still feel the cost especially when the roof will need replacing in a few years.

So guys with more experience and cooler head than I, am I making a mistake or is this a decent deal? I’ll be paying for everything with my fulltime job, and being 22 there definitely tons of time for me to play the long game. But I wouldn’t want to start out on a losing property, and I’m trying to pay the smallest tuition fee I can to learn the industry. Thank for reading and your input!

[Jerry N.]

We are pretty conservative but still have always eventually found and made good deals, so keep that in mind while reading this. When you buy a property you always need to think about how you would sell it and what you could get for it. You circumstances could change and suddenly you need to sell. That being said, the single room rentals make work for you as an owner occupant, but no one would likely pay you based on the cash flow. The conservative way to calculate value is base it on 3 units and a multiple of rents for that area. That is the way a potential buyer would look at the property.

So you just need to do the math they talk about here on bigger pockets. Purchase + rehab + closing costs = your total cost to get the market rents. I don’t really know that neighborhood over there – your assumption seems reasonable for students. For rehab costs I would include $2-3k+ for roof repair, cost for at least one furnace, maybe 2, cost for the stair repair $?? and some allowance for replacing appliances (figure at least half the appliances if they are all 17 years old, all if you are upgrading units to increase rents). Take market rent for the area time multiple for the area and compare to your total cost. That will give you an idea of what you are paying relative to a true investor.

The stair repair and steel decking will probably be a pretty big hit too. I can’t tell in the picture exactly what the front and supports look like. Scraping, repair and painting and regular preventative maintenance should help. There are some good iron/steel companies too, but if the supports have rusted and safety or stability is an issue, I would take the time to call a couple companies and ask them to drive by and give you an estimate on things.

I have no idea how easy or challenging it will be to get a hoarder to move AND remove all their belongings. The section 8 tenant will likely lose their voucher if they don’t move but that doesn’t mean they will take their stuff or even move. There may be some mental health issues and that is one of the reasons for the hoarding. If there is any security deposit, I wouldn’t count on it covering the cost of cleaning, repair and/or dumpsters or extra pick up costs or fines from the city (this happens is some neighborhoods – don’t know about over there). So that would be extra cost to add into the equation.

Everyone has different circumstances, so even overpaying it might be worth it to you. But understand the hit you might take if you need to sell quickly or even a few years down the road. If you plan to get students in I would really scope out the block and path to bus, etc. to make sure it is safe and there are other students next door, down the street etc. Might be hard to get the only students on the block.

You are young and seem ambitious enough to take it on. Good luck!