C class neighborhood, A+ cash flow?

Question

Hi All,

Being a 6-unit, I take it this would have to be a commercial loan (which I don't know too much about yet), but please take a look at my analysis on a 6-unit in a rougher neighborhood here in Chicago. 5/6 units are occupied; 3 of which are Section 8 voucher holders. The $5350 in gross rent is from the 5 occupied units. The 6th unit is a 4 bedroom duplex-down that needs TLC, and when rent-ready would bring in another $16-1800/month.

Anyone out there have a niche like this? I understand the pros and cons of Section 8, but this cash flow potential deserves a second look. I put in 8% for vacancy and 10% each for CapEx, Repairs and Mgmt.

Adam Meredith · Answer

@Derek Luttrell I have been buying in East Garfield Park for four years now. And exclusively rent to sec8. You can expect to turn over all of your tenants in the first 12 months. And spend at least $2000 per unit to pass sec8 inspections. You won’t get $1400-$1800 for the 4 bed. Assume $1250 from sec8. If a unit is empty. Assume that it is trashed. And will need $10-$15k spending on it. Do not believe ANY numbers that ANY agent in this neighborhood gives you. And assume that at LEAST one of your existing tenants will need evicting. So kiss goodbye to that rent check for 4 months. And say hello to a $10k rehab on that unit. Because they will trash it in their way out. Don’t get me wrong. I love east Garfield Park. But it is hard work. It will be well worth it in 5-10 years.

Adam Meredith · Answer

we are on our 3rd PM in 4 years. From what I have seen, there is no such thing as a good PM in EGP. We try to let our PMs run the show. But inevitably there are so many issues that require the owners direction, we are always managing the managers. The best PM firms won’t work here.

PJ Kolnik · Answer

@Derek Luttrell interesting analysis of this area, thanks for posting this as this was pretty helpful to learn about peoples opinions of the area and unexpected costs.

Derek Luttrell · Answer

@Henri Meli nothing was ever said about numbers being made up. The seller provided these rents, along with the costs of garbage and insurance. Tenants pay their own utilities, though I did forget to add the cost of $350/month for water (seller-provided). That brings the cash flow to $700/month with a 9.22% CoC return. Not the best, at least at full asking price. HOAs and landscaping are nonexistent. Green space in Chicago tends to be saved for the 1%.

Derek Luttrell · Answer

@Adam Meredith you are confirming all of the concerns I thought of when viewing some duplexes in the neighborhood last weekend. My findings have been that the good PMs in the vicinity stick to the comforts of Logan Square, Ukrainian, Bucktown, etc and have no reason to venture south of Chicago Ave/west of California Ave. If I could find a good PM who is well versed in the tenant pool of EGP, I would be much more interested. But that has proven to be one of the hardest parts of the process.

Derek Luttrell · Answer

@Adam Meredith thank you for bringing the harsh reality to life. The numbers on paper might be pretty as can be, but I haven't been able to meet anyone who has actually been in the trenches yet. The crazy part is that the listing agent claimed the 4 bedroom duplex down would get $2000/month after rehab. I then lowered my estimate from there. Props to you for spending all this cash on each unit and still sticking with it and making money. Do you self-manage, or have you found a great PM in the neighborhood?

Derek Luttrell · Answer

@Brie Schmidt that is great (albeit unfortunate) info. It's crazy that Garfield doesn't know what it has; any east/west street has skyline views, so many historic, classic Chicago greystones, several transportation options into the Loop...and then trash and despair in nearly all of the countless vacant lots. I'm sure it'll get figured out eventually, but that's been said for years. The tenant pool is definitely risky.

Brie Schmidt · Answer

@Derek Luttrell - I suggest searching the address in neighborhood scout - this is from a part of the neighborhood but the site breaks it down in smaller block areasThe current real estate vacancy rate here is 23.5%. This is higher than the rate of vacancies in 89.7% of all U.S. neighborhoods. In addition, most vacant housing here is vacant year round. This can sometimes be the case in neighborhoods dominated by new construction that is not yet occupied. But often neighborhoods with vacancy rates this high are places that can be plagued by a protracted vacancy problem. If you live here, you may find that a number of buildings in your neighborhood are actually empty.You need to speak with a PM who does a lot of CHA tenants. The inspections are annual and before each new tenant

Derek Luttrell · Answer

@Brie Schmidt the building is currently CHA-approved, though with those approvals needing renewed annually, I was not aware that the inspection would be a 6-week ordeal. This is in East Garfield Park. People seem to be optimistic on neighborhood forums that it is headed in the right direction, but every time I drive through there, I'll admit it's hard to envision. Has Section 8 ever been part of your portfolio?

Brie Schmidt · Answer

@Derek Luttrell - depending on the area your vacancy could be more like 30%It takes about 6 weeks for a section 8 inspection, are you accounting for that?