Chicago south suburbs SFH rental expenses

[Robert Smith]

Hey BP, 

I recently started working with an agent who works in the south suburbs of Chicago (Homewood, Hazel Crest, Matteson, Lansing, etc). We are still feeling each other out but I can tell he knows way more about investing than all of the other agents I've spoken with. In order to get an idea of what I want, he gave me an example of a house he help a client of his close on. Here are the details:

• purchase price: $85k + $3k closing costs = $88k acquisition
• rehab: $25k
• ARV: $150k
• annual taxes: $6k (it's Cook county)

After it's rehabbed, he says it will likely rent to a section 8 tenant for $1687/month. And his investor client will be able to pull all of his money out leaving only 20% in equity (BRRR method).

Now, I ran these numbers with financing terms  I'm able to get (hard money) while accounting for expenses in the following way:

• 5% for vacancy ($85)
• 5% for repairs ($85)
• 5% for CapEx ($85)
• $125 for management (he works with a management company)
• $100 for insurance (just a guess)

After including these expenses and assuming 75% LTV after refinance, I end up with a right around $50 cash flow. This seems like a very thin deal to me even though I would be able to pull all of my money out. My agent says his investors generally only require that the Principal + Interest + Taxes + Insurance be no more than 75% of the rent in order to make it work.

The numbers on this deal are way better than most of the deals I've been analyzing. But even so, it looks thin when I use my method. Am I simply being too conservative? I do actually think this agent knows what he's talking about, but ... we are all driven by self-interest, right?

I'd love to hear some thoughts. Thanks in advance!

[Crystal Smith]

Originally posted by @Robert Smith:

Hey BP, 

I recently started working with an agent who works in the south suburbs of Chicago (Homewood, Hazel Crest, Matteson, Lansing, etc). We are still feeling each other out but I can tell he knows way more about investing than all of the other agents I've spoken with. In order to get an idea of what I want, he gave me an example of a house he help a client of his close on. Here are the details:

• purchase price: $85k + $3k closing costs = $88k acquisition
• rehab: $25k
• ARV: $150k
• annual taxes: $6k (it's Cook county)

After it's rehabbed, he says it will likely rent to a section 8 tenant for $1687/month. And his investor client will be able to pull all of his money out leaving only 20% in equity (BRRR method).

Now, I ran these numbers with financing terms  I'm able to get (hard money) while accounting for expenses in the following way:

• 5% for vacancy ($85)
• 5% for repairs ($85)
• 5% for CapEx ($85)
• $125 for management (he works with a management company)
• $100 for insurance (just a guess)

After including these expenses and assuming 75% LTV after refinance, I end up with a right around $50 cash flow. This seems like a very thin deal to me even though I would be able to pull all of my money out. My agent says his investors generally only require that the Principal + Interest + Taxes + Insurance be no more than 75% of the rent in order to make it work.

The numbers on this deal are way better than most of the deals I've been analyzing. But even so, it looks thin when I use my method. Am I simply being too conservative? I do actually think this agent knows what he's talking about, but ... we are all driven by self-interest, right?

I'd love to hear some thoughts. Thanks in advance!

My thought- The deal is too skinny & one step away from a negative cash flow every month. The only reason to invest in a skinny deal w/ potentially negative cash flow is if you're betting on appreciation. With the exception of Homewood, the areas you've identified aren't areas that I expect to see large appreciation.