Real Estate Investor · Glenview, IL · Member since 2010 · 36 posts · 1 vote
Currently looking at a legal 4 unit in logan square in chicago. Seller is asking for $699k which is way off what the market would ask but the property brings in $66k/year in rental income with the opportunity to increase rent by adding in unit washer and dryer and expanding the unfinished basement and attic. The property looks turn key. Real estate taxes are $6000/yr.
Using 50% rule the property is negative cash flowing at $278, the 1% rule puts the property valued at closer to $550k. But keep in mind this is a hot market and a very trendy area. The tenants would be tenants you would want to have, a lot of working professional types. What are bp's thoughts on this "deal". Also how would i not sound rude or offensive in trying to negotiate a more reasonable price?
Let's take a go at this.... Putting 25% down, the mortgage will be $2800 month. Taxes are another $500. Maintenance and capex should be $500. Vacancy figure $250. Insurance maybe $150? Total expenses are $4200. Income is $5000. Not knowing the condition of the property you are making $800 a month on a $175,000 cash investment. That's a 5.5% return on your investment. If that's a deal for you, it's a deal. It's low for me, but everyone is different.
@Sam Lee 4 units and less are valued by other sold comps within its vicinity. The only way to try to negotiate by finding similar type buildings in the area and proving to the seller that their property is not worth X amount.
Plus you need no other buyer to offer the seller for him to even entertain you showing him comps of what his place is worth
More than likely the seller priced it fair. Like you said its a hot market and supply is really low. He will probably get an offer around his asking price.
the Seller really wouldn't care about the rules on Biggerpockets regarding the 50% rule and 1% rule :)
Properties can be sold in the North-side of Chicago can be between .5% to .8% depending on the area
unfortunately in this market and this area at this point in time the buyer does not have the leverage as if it were 2010. :(
I will give them an offer of $650k contingent on the bank's appraisal and professional inspection and hope to get more wiggle room when we are negotiating. I would love to buy at $600k
By how much can the rents go up? I'm currently engaged in a %1 deal that is fully rented knowing that when the lease is up I'll be able to turn it into a %1.5 deal.
If the deal makes enough sense at its current form (which I'll define as 150 net per unit for Chicago market), and you have the potential to bring it further up, it could be a pretty good deal. Especially if you don't have to do any work on it (turn key you said?).
I find the %50 rule a bit hard in better markets. Still important, but not the deciding factor.
rents can go up a conservative $79,200/year total when i do market research. If I spend $5k on in unit washer and dryers and update some bathroom fixtures and kitchen stuff another $7-10k, I can attract higher quality tenants or/and raise the rents another $100 each. let's see how flexible the current sellers are, but if you all know any way to negotiate a blue chip deal i am all ears
Well long before anything else, ditch all the "rules" and run the real numbers. As soon as you buy a property based on completely off-base estimates, you'll be in trouble. The "rules" should only be used to scroll through property options quickly. Once you hone in on something, use real numbers.
Also, plan to get a thorough inspection to ensure that "turnkey" part. As soon as you assume no major repairs needed, you may very quickly end up that famous creek without a paddle...
I am assuming you are already investing in the crapshoot that is Cook County. The one thing I would definitely watch out for is what appears to be an extremely low assessed value on the property. I could very easily see a true assessed value here 70% higher than the current levels, so a $4k increase in your annual tax bill.
It looks like the assessor doesn't have any clue what they are doing here, but to the potential benefit of you. I have two rentals in Cook that were just assessed at a 60% increase over 2014 levels. Each of those properties are now over assessed, so hopefully I will get them reduced.
Only reason why I mention is because it was real gut punch to literally see my cash flow will be cut in half next year. This one already being tight, I'd just encourage you to be mindful.
@Sam Lee I'll just touch on the upgrades you're looking to do. If I read this right you think if you did $5000 a unit to put in W/D and $5000 a unit in renovations you can get $100 premium a month per unit. That's quite frankly a poor ROI.
$100*12 = $1200 / $12k spent is a 10% ROI on that invested capital, so it will take 10 years before you get all your money back! Usually we look for upgrades to be 20% or higher because often times the upgrades won't last that long or it's just more likely they'll need another injection of cash.
However, if it was $12k for every unit to be upgraded, than this is great because it would be:
$400*12 = $4800 / $12k = 40% ROI or 2.5 years!
Even if it was $20k to upgrade that is still a 24% ROI.
update: I check out the place and put in an offer for $600k. everything looks turn key and the property is vacant actually. If rented the property can generate $5k/month or $60k on the conservative side. The owner spruced the place and repainted everything and fixed it all up. Let's see if there they accept