Chicago south suburbs SFH rental expenses

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Chicago south suburbs SFH rental expenses

Robert Smith
Carpentersville, IL · Member since 2016 · 8 posts · 4 votes

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!

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Crystal SmithPro Member
Moderator
Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes
6y
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. 

312-681-7487
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  • Tom Shallcross
    Rental Property Investor · Chicago · Member since 2018 · 612 posts · 1k+ votes
    6y

    @Robert Smith - for what it's worth, my underwriting aligns with you and this is way too skinny for the area/risk.  I own in Cook County (not in these burbs) and I'm def ware that my taxes can continue to jump, there's negative net migration, no/minimal appreciation play, and a tenant not paying can lead to a 6 month process of no rental income unless you do cash-for-keys.  

    There is still money to be made, but you need the appropriate cashflow and equity spread to offset these risks and this deal doesn't have it. 

    If flipping is in your repertoire and you feel the rehab and ARV numbers are true, you can look to go that route if it hits your desired margin.

    1Reply
  • Robert Smith
    OP
    Carpentersville, IL · Member since 2016 · 8 posts · 4 votes
    6y

    Thanks @Tom Shallcross for the feedback. I was encouraged when I saw this deal until I actually ran the numbers. The two criteria I've been using are: 

    1. 1) >$200 cash flow after all expenses as shown above and 
    2. 2) >10% cash on cash ROI.

    But deals that fit this criteria appear to be pretty rare on the MLS. I must be either looking in the wrong market, have unrealistic expectations on returns or have unrealistic expectations on what is available on the MLS these days.

    Are folks finding workable buy-and-hold deals through their agents in the burbs these days?

    0Reply
  • Tom Shallcross
    Rental Property Investor · Chicago · Member since 2018 · 612 posts · 1k+ votes
    6y

    There are a lot of people looking for these homes so yes MLS will be few/far between and in the current market it is not reliable for steady deal flow. The luck I have had on MLS has been things like spotting a 2 bed that can be a 3 or I also send back-up notes to listing agents who have deals contingent deals under contract.

    "Hey I saw you have 123 main st under contract, congrats!  If anything were to fall through I'm a cash buyer and can close quickly so you and the seller don't have to start the process over.  Please reach out if anything happens that causes the existing buyer to hesitate."  

    I've gotten 2 separate deals with that note (admittedly out of a good amount of attempts, but that's going to be the same story with any marketing effort).

    0Reply
  • Crystal SmithPro Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes
    6y
    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. 

    312-681-7487
    1Reply
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