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Updated over 6 years ago, 06/06/2018
Worth the Investment?
A lot of the advice you are getting is for folks just trying to protect you and do your part. Ultimately, the decision is yours. You have to run the numbers, you have to do the homework, you have to make the final decision. The key questions laid out so far:
*How is the area?- seems to be doubts on if it is good or not for investment
*Chicago is tough on landlords-- do you want that to be your first go round in RE?
*Are you prepared to take on a real estate investment?- nobody is every 100% ready, but are you in the comfort zone
*The scenario you lay out sure sounds like a motivated seller, why is he/she so motivated?
The good news:
*Looks like cashflow could be really good, especially with you house hacking your own unit with a roommate.
*If you are considering it, you must be OK with living there.
*If your numbers are correct, from a pure numbers standpoint $2750 in rent on a $134,000 mortgage WHILE living there is pretty solid from a summary of numbers... obviously other items come into play.
Ultimately, do your due diligence and decide and move forward one way or another. Lots of great resources out there, but ultimately it is up to you.
#5 General Landlording & Rental Properties Contributor
- Rental Property Investor
- Erie, pa
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#5 General Landlording & Rental Properties Contributor
- Rental Property Investor
- Erie, pa
Taxes are pretty high and I think there’s some concern you should have on some of those utility prices . Ask to see the financial filings and not just go off what they say it can get . This might be a great investment but as others have said be sure you are getting true numbers .being a landlord is hard in low income tough areas . I hope your personality can handle these tenants because Your going to have to be bold and firm with people . A timid docile hobby landlord or newbie can get eaten alive in a town like Chicago. Low income city investing is Not a kids game . There will be times it may be scary for your safety . it will be confrontational and times you will have to actively force other adults to improve their conduct against their will to their face . Know this before going in .
Thank you! The area is sketchy, it's not one where many would go to but I have a motor vehicle and it makes it more secure. There are also security cameras around the perimeter of the building. This is a risk that I am willing to take and go for as long as it is valid and within reason.
A property management company will have to come into play. It's be repeated and reiterated by previous answers and think it'll be in my best interest.
I will ask my agent to see about financial filings to make sure those are true numbers. I do appreciate the words of advice, I'm still learning and taking it all in. I am from Saint Louis, Missouri. Therefore I am aware of the type of personalities, backgrounds and tenants that I will have to deal with. I'll make sure to stay on my toes if I do go that route.
Extra Post by Accident
As a few others suggested, just make sure your doing your underwriting properly.
-PITI
-sewer
-water
-electric
-gas
-maintenance/cap ex
-property management
-lawn care/snow removal.
-vacancy
Make sure your really calculating all expenses. Safer to over estimate
Depending on the area and person, some take gross rental income and subtract 25% for CapEx, vacancy, and prop management.
So if your saying 2800 in income x 75% your left with $2100
I took the expenses you said and added them up. They come out to $7850 a year or $654 a month. So subtracting that from your $2100 a month adjusted gross rental income leaves your with
$1445.00 ! Which is great. But it didn’t seem like you considered lawn and snow removal or your mortgage
I think as long as you feel comfortable self managing. And maybe dealing with some tough tenants this could be a good deal.
For the right price.....
Best of luck.
Also you didn’t consider sewer.
So figuring your principle and interest payment, sewer, and lawn and snow care.
Depending on what your putting down. I’d say your looking at more of $600-$800 per month profit.
Still not bad !
Lots of people trying to help you do due diligence on your first deal.
@Nicholas Weckstein is on point about the many different costs you need to include.
It would be more helpful for us giving advice to see an actual breakdown of your numbers. The numbers shouldn't be pro-forma based on your realtor's 'advice' but actual numbers that you can get from the financial statements from the previous seller. Ask for their trailing 12 and base your numbers on that.
In dangerous areas like Englewood, make sure you factor in a MUCH higher vacancy rate than a nice neighborhood. Nice neighborhoods you factor in 5-10% due to turnover. For bad areas like Englewood 20% is not even conservative.
Remember - numbers only work out if you can get tenants that pay, and pay on time.
The taxes and laws in your area are not friendly for landlords.
BTW, even though I'm in San Diego now, I used to live in Chi city before moving here so I'm familiar with your hood.
Henry-
The numbers you have for utilities can’t possibly be right. 250 for electricity is 20$ a month. That is basically what comed charges to keep the connection alive. It’s zero consumption.
Bigger pockets has their calculators... I suggest you run it. It feels like your numbers are all over the place. I wouldn’t trust the previous owner. Ask for paperwork to back up his numbers.
The building has security cameras? On a four plex? That should have you really concerned.
This building seems like a great opportunity in a really rough part of town. Ideally, you would have experience before taking on a tough property like this (tenant friendly state, war zone, occupancy issues) but a newbie could pull it off if they had done all their homework, read all the books etc. it kind of feels like you may not be there yet.
If you do this, I would set aside a significant contingency fund to help pay for the mistakes you make as a landlord... call it a learning curve fund.
It’s summer time so I assume you are not in class... I would also read every real estate book you could get your hands on... you could have 4-5 read by the time you close on your property
Matt Ellis
I’ll be talking with someone with the numbers today, however for everyone who has said the calculations are off. I believe they are as well.
I have asked my agent to see if any any paperwork to help support these numbers and I was told there were none to give. All the numbers given are in fact the true ones.
My gut is telling me this is one I should pass on. I feel as if some expenses have been left out or underestimated in order to make it seem like “a good opportunity”.
Henry T. Maybe I misunderstood you but you’re saying they don’t have additional documentation for those water/sewer/electric numbers so it must be the correct numbers ?
That likely means the seller is showing low costs so they can offload it on a newbie investor.
Have you looked up at all the medium income for this area? My C class areas tend to be in 40-45k income type areas. If you find your area had an average income of like 30k, you probably don’t want to invest there.
Your numbers may look good on paper but if you have to evict and they trash your unit that’ll be 4K in rehab costs plus whatever legal and lost rent was.
If I lived in Chicago I’d go buy in Indiana, right across the state border. No way would I want to deal with those tenant laws and high property taxes.
The state of Illinois is essentially bankrupt. Your property taxes will only go one direction, and it’s not down.
We are forgetting your 134k FHA loan payment as well, aren’t we?
Correct yes, there are the correct numbers according to the seller. My father also asked me the same questions about sewage, lawn care and etc.
My agent mentioned something about Indiana and I have not pursued the thought of it.
Be wary, I am still new and learning more as I research and read about the real estate industry. If I went for Indiana, where would the best area(s) to look?
Sorry, I just saw a post where it said it was included. Run the numbers on the BP calculator, it will spit out a great little report and you can share it on the thread that way everyone can see ALL the expenses we are counting and not counting. The truth is, $1500 net cash flow is amazing and I said it twice now but it really is at that purchase price and with that amount of cash out of pocket. Don’t fool yourself though. It’s never best case scenario. So don’t look at the numbers and tell yourself, I don’t need capex set aside, because I’ll never have to replace the roof. You’ll for sure find yourself repairing items you didn’t even know existed, so just plan for it.
Regarding the vacant units. Do not have them fill the units for you. Absolutely not. You’ll be tied to the lease they sign and what is their motivation to find you the perfect tenant? I actually try to take all my properties over vacant, and I start fresh with my tenants, at my rate, in my leases.
On paper it looks like a “deal”. By there are intangibles with the condition of the building and the location. Both of which I can’t comment on, but both of which are the key to taking a deal “on paper” to being a deal in real life. Since your going to be living there with a roommate, you don’t have a whole lot to lose. Sure it could be a total stinker and you could need to sell within the next 6 months but it would be a valuable lesson learned for way less than a college degree.
I appreciate your suggestion, however, please do not tell me to look in another area when nothing can be presented. We all start somewhere and I found it to be on bigger pockets. I have taken the steps to educate myself but as all things, it takes time and patience.
I'll take a closer look with the individual who will further explain all factors I should include. Realistically, I will probably lose more than I gain from buying the multi-unit property.
It worries to take a risk on a property and I did not factor in other expenses such as management, roof problems, additional repairs, etc. My excitement may have swooned me over by the numbers and inability to look beyond the "deal". I do respect and admire all the thought and advice you have given.
@Henry T. I told you where I’d buy...Indiana right across the state border. Friendlier landlord laws and lower taxes.
I’m saying you should wait and educate yourself more because a lot of these questions you should know the answer to before buying anything. Is sewer included in water? I don’t know, in some of my rentals it’s not. They’re separate. What’s snow removal cost? How about lawn care?
The seller isn’t going to answer this stuff for you. Neither is BP. How old are the mechanicals? What’s the inspection report say? What’s it worth as-is today? Are you buying below market, at market or above market?
Good luck my friend, landlording can be a tough business, especially in lower income areas which is what it sounds like this could be.
Google News search on
Englewood brings up a lot of articles about drive by shootings , a delivery driver robbed at gunpoint and tied up , guy shot during home invasion , boy shot by stray bullet , man shot sitting in a car , 20 year old woman shot while driving .
These are just some from the past few weeks . always makes me wonder how many more don’t show up in the news too .
Crime in every neighborhood, A lot of shootings and murders for a neighborhood with 30,000 people or so (2010 )
Henry,
I didn't read every single post, but what I did read, no one really addressed property management. Here's the reality about rentals. I don't care where they're located. If you don't have a rock solid, high quality property manager, you might be very sorry. You can have the best deal in the country, but if you have poor property management, you have nothing. Tenants who don't pay and tenants who tear up an apartment, will cause you headaches beyond belief, not to mention a huge loss financially. This goes "double" for the Englewood area. We won't touch anything there with a 10 foot pole. There are low priced deals all over Englewood. Did you every wonder why there are so many properties for sale? You can get those same numbers in Indiana. Plus, taxes are much lower than Illinois, so your return is higher. The biggest reason to look at Indiana is that you can easily evict a tenant in less than 30 days. Believe it or not, Illinois can take well over a year, if a tenant fights it. It is definitely a tenant friendly state. Can you imagine having a tenant living in your building, that doesn't pay you rent for 10 or 12 months? Then when they leave, what if the place is trashed? I'm not being negative. I'm giving you a scenario that could very well be a reality. Best of luck to you.