Chicago 2 Flat Turnkey Analysis

[Alex Heifetz]

Hello BP!

I am a first-time out of state turnkey investor currently in talks over this South-side Chicago 2 flat in the Hyde Park township (60637 zip code).

Could anyone who actively invests in the are please weigh in? I would like to hear some impartial opinions both on the legitimacy of the numbers and on the prospects for long term appreciation. Macro economic indicators suggest that Chicago is a ripe opportunity, but I want to be sure that long term gains would percolate down to this region of the south side.

Alternatively, could anyone who has had positive or negative experience with Chicago turnkeys please offer your thoughts?

To generate these figures, I combined the seller's proforma numbers with research of my own. I have also increased the seller's vacancy, maintenance, and property maintenance estimates from 4%, 4%, and 8% to 6%, 6%, and 8%.

Thanks!

[Brie Schmidt]

Looks about right. For my Chicago properties I look for $1,200 in rent for every $100k spent so this is right on. Taxes look a little low compared to what I pay but we are on the North side so it might be a little higher. Run the Pin through Cook County Treasurer site to find the exact amount.

As far as appreciation, I hear Hyde Park is a solid neighborhood, but I am not familiar with it. I can tell you we have experienced amazing appreciation over the past few years. For example we bought a building for 300k appraised it 18 months later for 350k - no work done on it. Another we bought for 325k put 75k in and appraised for 575k 9 months later. Another one we are in the process of getting it appraised and that would be our best one yet.

[Wendell De Guzman]

I agree with @Brie Schmidt : your RE taxes are quite low specially for the price. Is that number given by the owner or you've researched that on your own? If the seller gave that number...well, don't believe it and do your due diligence.

Taxes here in the Chicago area are an arm and a leg. Also, Cook county is pro-tenants so be prepared for this. Your vacancy factor of 6% is way too low. If you're going to proceed with the purchase, buy rental income insurance from Aon Rent Protect. Factor in 10% vacancy to be conservative.

Given that Cook county (some people refer to it as "Crook county") is pro-tenants, I would never buy a keeper in Chicago unless it gives me a 15% CCR. The hassles are not worth it with a paltry 9%.

Lastly, if I were you, I will actually fly out here and visit the Chicago area. You need to have a feel of the different neighborhoods. There are only so much that online research can do for you. You need to talk to the neighbors. I see a lot of CA investors get in trouble financially for not doing their homework by just relying on what the brokers tell them or what they can get from the Internet...

[Alex Heifetz]

@Brie Schmidt Thanks so much for your quick response. I did use the Cook County Property Tax Portal to find the tax figures ($2,587 in 2012; $2,625 in 2013). What would you expect a comparable property to run in taxes a little to the north?

Although the property is in the Hyde Park township, the seller has identified the neighborhood as being Park Manor/Greater Grand Crossing. Is your impression of this area similar? I understand that the Chicago market is very block by block, so I will be relying on the seller's selection of worthy neighborhoods. They select areas to operate based on the immediate proximity to schools/mass transit/churches and a general feel for the area. In this case, there is a church a block away. They have also just purchased a 2 flat two houses down, which seems encouraging and indicative of the turnkey company's belief in the neighborhood.

I can only hope that this property would perform as yours all ready have. Thanks again for your tempered advice, and congratulations on the continued success.

@Wendell De Guzman Thanks for your words of caution as well. It is the unaffected advice of people who live the work, people like you, who make this community so valuable.

My tax figures came from the County website, so I am surprised they raised as many eyebrows as they did. What would you estimate they came in at? And what is your take on the Park Manor/Greater Grand Crossing neighborhood?

It is also my understanding that the rent insurance policy you mentioned was just discontinued by AON, as of Feb 28 2014 (link below). Both of the tenants in place at this property have their housing secured through section 8, so all but $79 of the monthly income comes from the federal government. Nothing on the biannual renter's inspections has raised any alarms with these tenants, who have been living there for ~five months.

The seller reports that rents may increase to $1885 (up $150) after the next rent review, increasing the CCR. Still, you seem skeptical. Do you think I could do better while maintaining a limited level of involvement in the day to day operations from afar (California)?

Again, I completely agree: seeing is believing. I do plan to fly out, survey the property, and arrange for an independent inspection. As accessible as the data is, it represents only a portion of the neighborhood's or property's story.

http://www.aonrentprotect.com/sites/Rent/Pages/Home.aspx

[Jonathan Pliszka]

@Alex Heifetz I've included the Chicago Tribune neighborhood crime map link below. This breaks it down by community area. Thanks!

http://crime.chicagotribune.com/

[Brie Schmidt]

@Alex Heifetz - My properties are all about 2,000 - 2,400 sq feet and my taxes are just about 5k. I have always been a North Side investor so I do not know much about the South Side but I would follow @Jonathan Pliszka recommendation on the crime website. Chicago is a tenant favored city so make sure you read up about the CLTO http://www.cityofchicago.org/dam/city/depts/dcd/general/housing/RLTOEnglish.pdf

I personally do not have any problems with it but have heard that Section 8 tenants know the system better and will report you for the little things (improper security deposit receipt) that will get them 3 times the security deposit. So make sure you follow the rules.

[Mark Ainley]

60637 has a wide variety of areas good and bad. Are your tenants section 8 or market tenants? We do manage 56 units in that zip code. We are not fans of any streets in the 7000 blocks (we do have some there though)east of King Drive because the areas are rougher (sure crime maps will show that) and less quality tenants to choose from.

[Alex Heifetz]

@Mark Ainley

@Mark Ainley

@Mark Ainley

@Mark Ainley

@Mark Ainley The tenants in place are both section 8, and their share of the rent is less than $100 between both units. How was your experience with this population been? The property is on the high end of the 6000 block. Would you say the neighborhood has been getting better, getting worse, or remained unchanged in the last several years? What about its potential for long term economic growth or long term gentrification?

[Mark Ainley]

For our company CHA is the way to go and if you keep CHA tenants happy they seem to stay and they have a harder time using the system against you. On the other hand once per year CHA will do annual inspections and it will cost u a few bucks to ensure you pass not to mention if the property manager charges for the inspections which we recommend having someone there.

Our CHA turnover is minimal. It is a lot harder for a CHA tenant to up and leave and they can never just skip out on you.

[Jay Y.]

@Alex Heifetz

I have experience working with this seller in Chicago. Feel free to PM me if you want to discuss more.

[Eric Y.]

@Alex Heifetz some thoughts from a former Chicago native that had some initial business there (and in WI):

Taxes seem low. Chicago (IL as a whole) have pretty crappy tax rates. You also have a terribly tenant-friendly state--disgustingly so. Good luck evicting someone in less than 90 days, especially if they know a little about being a 'professional renter'.

Also like others have said, I'd strongly consider checking it out in person. The neighborhoods change quality quickly. Maybe I'm biased, but I personally would have that entire south side market very low on my list--even if I wanted to diversify out of state. I know there are many people making money there, one of my good college friends runs a bunch of south side multifams out there (his stories alone are plenty of reason for me to consider avoiding) but there are just a lot of places you could get an estimated 9-10% return (which is pretty low, IMO) and have a state that has a little more respect for landlords and other small business owners. Expect your taxes to continue running rampantly out of control, tons of corruption, and a lot of negative economic impacts forcing real estate prices to stagnate, lag other markets, or drop. It's not a guarantee but just things that I would consider.

A few positives would be if they can get their stuff together and really put some effort into making the state a business-friendly climate it should have some absolutely explosive growth. It is a fun city and it isn't going anywhere, you just need to hope the city attracts the right type of tenants (economically speaking) or you'll quickly erode the rather thin 9% cash on cash return you're looking at.

Again... I'm probably a little biased but just be careful. A lot of cheap-looking "honey pot" properties in a city like that for a reason.

[Mike B.]

I understand Bri not knowing about the taxes as she invests on the north side but $2,600 is 100% inline with the taxes for a 2 flat in that neighborhood.

I'm not a big fan of the area you are in but it could be worse. I've been putting my clients in South Shore. Same prices with a smidgen of hope that they may get some appreciation down the line. I will advise you just as I advise them to not get involved with the south side for appreciation. The same building you can buy for $30k today you could have bought for $30k in 1980. The south side is strictly for cash flow. If something happens to come out of an area like south shore then that is just an unexpected surprise.

[Alex Heifetz]

Thank you both @Eric Y. and @Mike B. for weighing in. Neither of you sounds hopeful on the long term appreciation prospects for the 60637 area. The prospect of a building forgotten by the rising tide (read: Mike B's line on a $30K building) is not at all encouraging. Are there other micro-markets in Chicago with similar price points and rosier long term appreciation outlooks?

Alternatively, are there any who would disagree based on your on-the-ground experience( @Mark Ainley , @Brianna S. @Wendell De Guzman @Jonathan Pliszka ) that this area is in fact posed for long term growth?

I was drawn to Chicago both for its attractive entry points (Cash flow) and its world class status (appreciation) and hope to understand your collective thoughts on eventual, long term, positive economic growth in Park Manor/Greater Grand Crossing. Thanks!

[John Weidner]

Some good advice. Keep in mind your alternative is to fork over $350K plus on a N or NW side bldg and probably come out in worse shape due to higher taxes.

These places do cash flow. If you got it managed and there are tenants in there I say go for it. I might pick it up if you decide to pass....let me know

[Andy Luick]

You have to love BP and all the great advice you can get here....from those experienced in the market. Chicago is a great city but like everyone is telling you, you aren't going to see any appreciation...which is true in most markets. You have to decide if the 9% potential return is worth the headache. There are better places for you to put $43k where you will see 20%+ returns on your funds. There are a number of turn-key marketers here where you can get the same rents and have paid cash for the property or others where you'l only be in the property for 12 months or less. Lot's of different options but you'll have to consider appreciation just a bonus if you get any.

There is good and bad to Section 8 - you can read tons about it here on BP. Is the existing management coming with the property? Have you chatted with them? Speak with a couple others who specialize in Section 8 - if they've been at it for a while, they can save you butt if the tenants tank....if they do, you're paltry 9% return will turn to a negative really fast. Once you spend you're $43k, how much more do you have in reserves? I'd proceed very carefully on this one and be looking for something that performs a bit better! Happy Investing.

[Mark Ainley]

What is the condition of the property....did the turn key operator go down to the studs, is the porch passable by code standards? I would also interview another management company on the south side. This will help you have a back up plan should your relationship with the turn key management not work out and that second management company will give you a small education on what you are up against as we are doing. We won't manage properties for 8% on the south side because it is labor intense. We do 10% of gross along with a $150.00 annual CHA fee, plus the labor & material it costs for the CHA inspection repairs. That is something people forget to take into account. Our CHA inspection costs range around a few hundred bucks on average but we have a few that cost us $800-$900 every year just because either that tenant is rougher on the property or the property has various exterior areas that need to be painted annually to pass on the chip paint rules(Lead Paint or not).

Another thing to understand is tenant portions. When a tenant has a smaller portion that means she has less income which means she doesn't work which means she is around the house all the time which means she is bored, and has people around the house a lot more with more room for management issues and unit damages. We have an easier time collecting $600 per month from the CHA tenants that work vs. the tenant with the $30.00 tenant portion.

I can go on and on....we do have 73 CHA tenants so we are very familiar so feel free to contact if you wish to discuss more. I do want CHA tenants over market tenants any day so you are on the good track there.

I am by no ways discouraging your purchase and I spend a lot of time promoting the opportunity down there to other investors and associates that wonder why we invest there. UofC is growing in ways the public has no clue and is amassing land left and right secretly, Obama's library will end up down there, and the push to connect the South Loop with Hyde Park by the city has lots of momentum not to mention it is affordable and has a lot of room to go up and still be affordable compared to the North Side. We are in this for long term hold so who knows what will happen in next 10 years but so long as it cash flows we don't care.

Truth is I spend time every day trying to expand out portfolio into the suburbs(and we do have a few in the burbs) but it is impossible to find even as close to good cash flow as we do on the south. Before any debt service we are netting roughly $7,500.00 per unit(3 bedrooms) per year with all the associated costs but not including a reserve fund.

[John Weidner]

@Andy Luick

Care to share these 20% return opportunities? Would love some insight

@Mark Ainley

Not many PM companies willing to pick up a single 2 Flat in grand crossing for $100 and change per month. Most want a portfolio to even entertain PM'ing. Assuming also your expansion into the suburbs is South or very far (north)west?

@Alex Heifetz I guess I don't see this as a bad investment. You got me curious on this one please send me the address I may have time to do a drive by for you. I'm also a broker so if it's MLS listed I could open the door

[Jonathan Pliszka]

@Mark Ainley I too am curious about @John Weidner 's question. I've attended the CHA Symposium the last several years and would love to get my feet wet in the CHA program. Property management is among my biggest reservations as to John's point. Thanks!

[Mark Ainley]

As far as looking in the burbs I look out in the northwest suburbs and it seems as the best you can do is 8-10% return before debt service.

With management costs I am not sure what other guys charge exactly or the number of firms that will do it but we charge our handful of clients, including ourselves what I said above. I am not sure we would be able to accomplish what we accomplished without having the control of managing our own properties that is what scares me for others especially a turnkey company that has so much to benefit by getting the deal done and selling a dream.

[John Hauser]

My two cents from a South Shore investor. I think if you look you can find better numbers than a $1735 gross monthly rent for a $148,000 investment on the South Side. We're looking right now at a deal for a place that gets $1350 per month and we will pay about $65k all-in (lots of rehab). I'd recommend finding a Chicago-area wholesaler, tell him or her your criteria, and see what else is out there. Especially as a beginning investor it's easy to get tunnel vision on the deal that's right in front of you. Working with a wholesaler or broker will get you some additional familiarity with the different city areas, and you will stop thinking about "Chicago" as an investment and see that appreciation, cash flow and headaches are all very neighborhood-specific, like @Mark Ainley and everyone above has said. And you can always run any other deals by BP Nation. Good luck and let us know how it turns out either way.

John

[Shara Carlton]

Hi @Alex Heifetz, I have to agree with @John Hauser...and not just because I'm a wholesaler : ) I live on the south side of chicago, close to where your property is actually. The reason I agree with Hauser is because, I live in the greater grandcrossing area and it is not the part of "Hyde Park" that outsiders think it is. Its ok, but not worth an over 100k investment. However, between the 5000 and 6700 blocks of Cottage Grove to Lakeshore Dr., its definitely worth that type of money and will appreciate greatly. Like others said, prosperity in Chicago varies from block to block. A property on 79th and Wood can be worth significantly lesser than a property on 89th and Wood. Southshore is a great area, but on certain strips, like 71st and Jeffery, you will definitely run into some rough patches.

If you are looking in the Chicago area - southside, I can surely be of help. Don't hesitate to PM me.

Happy Investing,

ShaRa

[Michael L.]

@Alex Heifetz , curious what you ended up doing on this.  

Did you end up going for this property or did you go another route?

[Alex Heifetz]

@Michael L. 

I did not end up making a move on that property. In the end, I was uncomfortable moving forward without have seen the property or toured the neighborhood and surveyed the market first hand.

To that end, I am in the process of visiting Chicago among other cities to decide where I may be making my first investment.

Thanks again to everyone for your time and insight.

[Dooreuhn Cee]

@Alex Heifetz

1 - Hyde Park township is distinct from the Hyde Park neighborhood.  2-flats in the neighborhood would be much higher in price.  GG Crossing is block by block.

2 - 6% for vacancy and 6% for repairs is a bit low.  I use 10% for both, especially in a sec 8 scenario in which repairs can be compelled, and I agree with @Mark Ainley as to it depends on whether there was a gut rehab or "lipstick" job or in between.  This is the meat of turnkey value.  And people move from apartments more than houses.

3- Also sounds like you have 2x2.  Note that 2 BRs rentals are less popular than 3 BRs.