All Forum Posts by: Justin Ericsson

 The best strategy I have here in chicago is buying with hard money lender 15% down on project cost to bankroll purchase and rehab. You need to be at 70% all-in on appraised value so you can refinance with b2rfinance.com after 90 days of seasoning. They will loan 75% loan to value which gets you 100% financing. Here is example ...

Single family home worth $200k appraised value that you buy for net purchase of $100k that needs $40k in rehab. Let's assume your finance cost for 3 months is $6k using hard money and you have $4k refinance costs with b2r. That puts your total cost at $150k for a $200k home. $200k x 75% = $150k therefore you get 100% financing on the refi to hold long term. The only bad part in this equation is btr has $300k min loan so you have to do 2 at the same time. The interest rate will be higher around 6.5% but you do get 100% financing in this example. 

Now to the question of little money down ... My hard money lenders require 15% down on the total cost short term which in this case is 15% x $140k which equals $21k that I get back in roughly four months when i refinance. Therefore I can easily buy 3 to 4 houses per year to get 100% financing with the same $21k investment repeating the cycle every quarter. 

To compare to buying a finished house for $200k your down payment conventionally stuck in the house for 30 years would be 20% down or $40k and you can only buy one house vs 3 to 4 per year with half the cash using creative financing. 

These are the tricks I teach to my clients to jazz up their portfolio returns using as little cash as possible. 

looks nice!

welcome Sandy... Let me know if you need any assistance in the chicago market. 

Hi Marc... I'm in your back yard let's connect I will show you my operations so you can see first hand how we do the RE fun :)

Jay ... In glenview overall class is A but it also has lower end neighborhoods meaning he prices are under $300k that support section 8. The point is section 8 families get the opportunity to send their kids to my kids schools which offers diversity in the market. We know many of these families and they are hard working honest people that want a better life for their children. These families service government / retail / construction low paying jobs in the village and we welcome them gladly to our market. 

The guarantee is real they pay their tenant portion just like market rate tenants the myth that section 8 tenants don't work is simply not true here in chicago. 85% of my HUD tenants are in fact employed and just need financial assistance to live in these areas as the cost of living is high here.

Jay I respect your opinion so I'm just stating each market is different for HUD tenants so Oregon is probably different than chicago you would know better than me on this point. Take care!

Blake... regarding lower quality tenants i have both. In the nicer areas i screen the tenants and make sure they are employed. If the tenant is employed they have nicer furnishings, pay their utility bills, maintain the house, and pay their tenant portion timely. These tenants make on average about $45k per year and get 80% of their rents subsidized. I also get a higher rent determination if they are employed which increases the gross rent to the maximum for the area. For B- and C locations we still screen the tenants but will accept with references unemployed tenants (however 90% are in fact employed or retired in our portfolio). Over a 1,000 rental pool of HUD tenants about 3% cause significant damage to the building. When i say significant i mean more than $1,000 but less than $3,000 in damage. We almost always repaint our apartments when we turn them over so the extra damage is holes in the walls, damaged doors, pet damage, missing fixtures, water damage, damaged cabinets, etc. Each time i sell a house i sell insure my clients for these losses by assigning $250 per unit as a slush fund for unexpected damage that i subsidize the repairs. For example if a tenant causes $2,500 in damage and we normally would spend $800, i would apply $1,700 from this self-insurance fund so the client doesn't get hurt financially. There is another factor which is time of occupancy. If the tenant lived in this building for 3 years i would pay less because the client needs to reserve at least 4% of gross rents each year for these expenses. So we basically factor depreciation, normal wear and tear, and reserves to determine how much we subsidize in the cost. I have hundreds of tradesman that work under our umbrella so we can usually keep the costs down long term. We bring all of our buildings back to new status so the maintenance costs stay about the same on every 5 year cycle until you own the building 15 years. After 15 years of ownership we recommend selling and replacing (even at a higher cost) so you get the new roof, mechancials, etc that cost bigger money to repair or replace. For example the average roof in Chicago lasts about 20 years and with routine maintenance 25 years. The average roof cost is $7,000 to replace (at my cost) so every 10 years the roof costs $3,500. Averaging out maintenance you need to reserve 0% year 1 (full warranty on house), 2% year 2, 3% year 4, 4% year 5, and 6% years 6 to 10, and 8% past year 10 to cover the deferred maintenance items such as roof, porches, mechanicals, exterior. This is my opinion of course but works well for me.

Blake... Chicago has the second largest HUD housing program behind New York City. There are many variations of HUD programs including Section 8 (disability, veterans, etc). Yes most of buildings are Section 8 or County Voucher tenants. I live in Glenview IL and our village is about to start accepting Section 8 vouchers. The median price of homes in Glenview is $500,000 ($150k average income) and has one of the best school systems in the country. I buy townhomes, condos, and SFR's in this market and i'm about to lease to CHA tenants in this city. Glenview is considered by all standards an A location. So the myth that all Section 8 housing is in C or lower areas is simply not true. There are substantial zip codes in just cook county that are considered A locations that offer Section 8 or County vouchers and even more B zip codes. So the answer is i buy A, B, and C location properties and put HUD tenants in the buildings with guaranteed rental income that generate high CAP rates (see example below). Yes our property taxes are higher here but the income is also very high compared to the rest of the country.

As far as appreciation the A & B locations do have awesome appreciation potential however i don't bank on that. I rely the net operating income as the sole basis for my investments and use the rental income to pay down my debt service which creates a nice cushion when i sell the house. Let me give you an example of a south suburb property with a county voucher using all cash to not complicate the ROI's using leverage.

South Holland, IL Ranch SFR 4 bed 2 bath 2 car garage 1,800 SQFT

Purchase Price From Stabilization Trust: $55,000 (distressed)

Rehab Costs: $45,000 (result is over improved rental highly sought after in this market)

Overhead: $10,000 (i have $1.5MM in overhead for salaried employees / business operating expenses so i charge $10k to each house i buy)

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Total Cost: $110,000

County Voucher: $1,900 per month (HUD's zip code pricing matrix pays $2125 gross for 4 bed voucher tenant minus utilities $150 per month (tenant pays) minus tenant qualification variations is around $1,900 per month voucher

$1,900 x 12 = $22,800 gross income

-$1,824 Property Management Fee (8%)

-$900 Sewer / Trash / Misc (tenant pays water, electric, gas, landscaping)

-$4,500 Property Taxes

-$1,000 Property Insurance

-$1,140 (5%) Vacancy

-$1,358 (6%) Maintenance

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-$10,732 Total Expenses

$22,800 Gross - $10,732 Operating Expenses = $12,068 Positive Cash Flow

$12,068 divided by $110,000 cost = 10.90% CAP Rate

My positive cash flow each month is $1,000 after 11% reserves (now remember i have HUD guaranteed income and most of my tenants stay 3+ years and the house is freshly rehabbed so my CAP rate for the first three years is really $12,068 + $1,832 as i don't spend my reserves on vacancy and maintenance which equals $13,900 NOI divided by $110,000 = 12.63% CAP rate.

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I sell these houses in my business for $150,000 on average so let's assume i keep the building for 5 years before i sell it to calculate the total profit.

$150,000 sales price (no appreciation on today's price)

-$10,000 closing costs / fees

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$140,000 Seller Proceeds

-$110,000 cost basis

-$5,000 upgrades / repairs after tenant leaves to sell to local home owner highly upgraded (remember 5 years earlier i did a major rehab so not much to do on this upgrade)

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$25,000 Net profit + $13,900 NOI x 3 years + $12,068 NOI x 2 years = $90,836 Total Profit in 5 years

$90,836 divided by $110,000 investment = 82.67% ROI divided by 5 years = 16.53% IRR (with leverage my returns are sky high). These numbers factor in $0.00 for appreciation in this market. This is money in the bank each year and if a recession hits i have almost no impact in my portfolio as i will just keep the building until the values adjust to my target sales price ($150k in this example). If the housing prices go up i just make more money on my investment.

While i'm on this topic i will post to another comment in this forum about turnkey operators keeping their inventory.  The answer is they should and I do.  To manage hundreds of properties for hundreds of investors we need both business models to protect and manage the global portfolio.  I buy every house with the intention of keeping it as my own investment property.  I sell turnkey many of my houses to bring in substantial cash flow to keep a large staff of professionals to manage both my personal portfolio and all of my clients portfolios.  Turnkey operators provide a niche which is a diversification of risk over a large portfolio which protects profits far better than an individual owner with 1 to 5 rental units.  I can give you one specific example is windows for houses.  I buy windows in such high volume that my pricing is less than half what the average person buys windows for even with a contractor discount and my windows are custom built to size.  When a window breaks or needs replacement my owners don't want to pay $300 for a window.  Now multiply this over one hundred similar categories both labor and material and you will understand the true value of a turnkey operator.  Should investors do it on their own in their backyards without turnkey operators?  Absolutely if you can afford the time and money on your own you should do it.  It's a lot of fun and can be very rewarding.  For those of you that can't do it or don't have the time use turnkey operators or local professionals to do it for you.  The biggest risk in this business is doing nothing meaning your biggest risk is buying nothing and making no money.  Everything else is manageable once you make the jump.  I had to make the same decision when i started and i can't imagine what my life would have been like if i didn't buy my first investment property!!!

CK,

I have to admit I do both sides high yield rentals and big zero's deals. Within the Chicagoland market I bought last week sfr for $543k that I'm doing major renovations to sell for $1.35mm... My profit is $250,000 on 6 month project in glenview, il where I live. So I have the ability to do A,B, and C markets here which is rare in the U.S. I'm not throwing all my California BP members under the bus saying Cali sucks for investments... I'm saying if you are buying B and C in Cali for cash flow don't do it there are better markets that cash flow better. If you got the big $$$ to make lots of zero's do it don't fuss with $800 net income checks each month. I think most BP members can't afford to go after the big zero's so look elsewhere like chicago!

Thomas,

Where is this building located? Do not finish off the basement you will regret it. Keeping water out is very difficult and expensive. The real cost to do a basement apartment is more like $30k putting in French drain system, sump pumps, etc

California median home price is around $450k. The median rent is $2,300 per month. If I buy a house in B market in chicago for $150k that gets $2,000 gross rent my purchasing power in chicago is 3x meaning I can spend $450k in chicago and get $6,000 a month in gross rent approximately. My property taxes are lower, I pay same management and maintenance expenses (percentages of gross) as California, and my rents are guaranteed by Hud. So I'm saying why would anyone want to buy California investment property that is 3x less profitable or 3x more expensive hoping for appreciation? The appreciation rate per year must be tremendous in California to catch up to what you get day one here in chicago! I don't need any appreciation whatsoever to make 3x so my point is buy something that cash flows well day 1 and hope for appreciation but don't bank on it. It's a bonus if i get appreciation and I probably will just slower than California but still gets me 3x+ annually on the return. This is why I have so many Californian investors buying in the Midwest the numbers work and work well in chicago!!! 

http://www.zillow.com/ca/home-values/