Reflection on a Completed Project

[Myles O'Brien]

Hello all,

I wanted to share a story from a project I completed, which was my largest to date. I hope sharing this could be helpful for someone considering an investment property or in the middle of a rehab themselves. I know I could not have completed this without the mentorship and guidance of those who have done it before me.

The property I bought was a 6-unit building in the Ukrainian Village neighborhood in Chicago. It was publicly listed for 1.2m but also pending mortgage foreclosure. 1.2m was too much money for a property that was in rough condition with no reliable tenants, so I approached them offering 900k in February of 2024. I came up with that offer after touring the building with a mentor of mine and one of my subcontractors who would be responsible for a large portion of the rehab. The sellers enthusiastically rejected the offer and provided no counteroffer. The property went under contract two different times after, and I would call about once a month, reminding them of my offer and that I was a legitimate buyer. In July of 2024, they circled back to me, now running a very short timeline until foreclosure, counteracting at 1m. After negotiation, I put the building under contract for 975k in mid-July. While this price was higher than I had projected, I planned to conduct a thorough inspection. Given the owner's negligence and some indicators I observed in the building, I knew there would be areas to potentially retrade on. After a multifaceted inspection, including a full sewer scope, we ultimately agreed on a $50,000 deduction. I do not share this to encourage aggressive retrading or any type of bad faith, but rather to offer full transparency and emphasize the importance of getting a building you see value in under contract and working through the deal.

I closed on the building toward the end of July 2024. While the building was to be delivered vacant, there was a tenant who refused to leave. Knowing this, we added a clause to the purchase contract to hold back 20k in escrow, which could be used to evict or supplement rent. The occupying tenant was uncooperative and neither paid rent nor showed signs of leaving. When dealing with a tenant in this manor I do truly believe you should always try to work with them and help them. People living in defunct buildings are usually not doing so out of choice and life has not been kind to them. Do not enter a neighborhood as a disruptive and aggressive force. After a few weeks of negotiation, the squatter agreed to a 10k cash for keys agreement. I was only able to offer this due to the holdback negotiated for. During this negotiation and payment, there are a lot of specific rules and proper conduct that must be followed that require the consultation of an eviction attorney.

Finally the renovation process began. After making some exploratory holes in the floor and drywall we found that the both garden units were incredibly wet. With the moisture creating mold and rendering the units uninhabitable without remediation, we gutted both of them to find the source of the moisture. There was a large amount of concrete poured for those units that was not original to the building; however, in between the concrete slabs were wooden spacers that, over time, absorbed and dispersed water throughout the floor. The floor itself was vinyl on top of a plywood base, creating the perfect environment for trapping water.

Additionally, on the side of the building, the downspouts had been disconnected, and there was no proper drainage system. This meant every time it rained, 1000s of gallons of water would just seep under the building, causing the moisture to build up over time. We solved this by doing a lot of concrete work. We filled in the gaps between the slab and installed a full slab of concrete with linear drains throughout to manage the exterior water. After that, we kept the units wide open until we got some significant rain to be sure there wasn't any additional moisture intrusion. These garden units would be the most intensive rehabs of the building as many Chicago basements are.

Some other unglamorous but very important early renovations were upgrading the electrical service from 200amps to 600amps. The plan was to add central AC and in-unit laundry, so we wanted to make sure the units could handle this draw, along with the demanding appliances most tenants now have. After that we replaced the roof. I opted for a TPO style flat roof that is more expensive upfront but does not require the maintenance of modified bitumen. Both options have their own pros and cons, so applications will vary based on the project.

The upper 4 units in the building were in much better condition than the garden units but we still were nearly gut rehabs. The scope of work consisted of kitchen and bathroom rehab, floor refinishing, painting, replacing plumbing stack, rewiring electric, installing in-unit laundry, replacing windows, and installing central heat and AC. In these upper units the floors were mostly original pine with some oak in various rooms. I love original wood floors, so I chose to refinish and repair rather than replace. There were also originally built-in bars and consoles that I found beautiful, so I kept those as well. I also tried to keep as much of the high-quality trim and doors as possible because any replacement on the current budget would be lower quality.

I would say my biggest mistake was piecing out the demo and rebuilding. I originally planned to go unit by unit and rent them out as they were finished to generate some income and keep the project going. This approach resulted in a longer rehab time as well as some undoing of work when problems were found above or below. It is always best to open everything up to understand the building in its entirety.

The final result is something I’m proud of but leaves room for improvement. The acquisition cost of the property was $925,000, including retrading and deducting my brokerage commission from the purchase price. The total rehab cost ended up at roughly $375k and took 8 months to complete. The total rental income for the building is now $14,800, which exceeded expectations. I’m very happy I took the leap and went for this building. Starting a project like this isn’t very comforting, and I could not have done it without the support of people online and friends who had been there before. I want nothing more than to pay forward the help I’ve received. I hope someone finds this helpful. If you’re in the middle of a project or considering starting one and would like to discuss it, don’t hesitate to reach out.

[Myles O'Brien]

Quote from @John J Kelly III:

Given these numbers what is your net income cash flow from deal?  I'm assuming cash flow positive? 

 Currently cashflowing $6300 a month with a conservative maintenance budget and self-managed. I am in the process of refinancing to pull some money out of the building to start a new project. This will likely reduce my cash flow to around $4,000.