Real Estate Broker · Chicago, IL · Member since 2016 · 56 posts · 23 votes
Hi all!
I've created an excel document that basically takes BiggerPockets four quadrant analysis and puts it in an excel spread sheet. However, I need to figure out what is wrong with it. Yes, I could use the BP calculators, but I wanted to try to create something on my own. Perhaps I have it all wrong, and thus I will see how awesome the BP calc actually is.
I live in Chicago and am trying to find properties that match the rents. 2bd, 1200-1400 avg. 3bd 1600 - 1900 avg.
It just isn't adding up. Obviously, there are a few expenses that may be taken out (let me know if those are completely wrong), but for the most part, I am just baffled by how anyone accomplishes cash positive flow with an FHA loan.
Thanks for any help you all can give!
Look forward to your obliteration of my spreadsheet
Realtor · Portland, ME · Member since 2015 · 654 posts · 552 votes
7y
@Evan Smeenge Just keep in mind that once you have numbers that you are comfortable with, if the numbers don't seem to work then don't force it. I feel like many investors can struggle with this sometimes. We want a deal to work so we try and tinker with the numbers until we like what we see. The numbers don't lie. Good luck!
Realtor · Portland, ME · Member since 2015 · 654 posts · 552 votes
7y
@Evan Smeenge Just keep in mind that once you have numbers that you are comfortable with, if the numbers don't seem to work then don't force it. I feel like many investors can struggle with this sometimes. We want a deal to work so we try and tinker with the numbers until we like what we see. The numbers don't lie. Good luck!
Rental Property Investor · Chicago · Member since 2018 · 612 posts · 1k+ votes
7y
@Evan Smeenge - at a quick glance the analysis seems right. In the current market, it is extremely hard to find solid cashflowing properties in what most people would consider "good" areas of Chicago. You either need to create offmarket deals or expand your area into other areas of Chicago if you want to stay in the city and find cashflow.
Also when you see the 1% rule, it doesn't necessarily work in Cook County due to the high taxes. Combined with an FHA loan, your mortgage amount (and thus payment) is higher and you're also adding a few hundred bucks of PMI. Combining all that I'm not surprised this analysis is running in the red.
Property Manager · Lombard, IL · Member since 2013 · 99 posts · 82 votes
7y
Calculations themselves look to be about right. . What are the down payment and interest right now on FHA?
Numbers don't look like a good deal though.
You are putting out $280,000 for $2800 per month in rents. Barely 1%. Most investors are looking for 2% or more.
Another quick calculation I'll do is yearly rents/2 (quick 50% rule to estimate expenses) / purchase + rehab. $2900*6/280000 = 6.2% , not great
Also since you are not rolling the $250000 rehab into your loan your cash outlay is about $33,750 (your closing costs should be part of your loan which they are not in your spreadsheet). Putting out that much cash your COC return is going to be zero or negative as well.
Your spreadsheet is on the right track, but you need to find a property with better numbers (not easy to do right now especially in IL).
How can anyone buy a duplex then. A duplex will never get over around $3000 per door in rent (thats astronomical in itself), which in essence is a 300,000 home, or less.. Am I just dumb, or is this almost finding a needle with a broken tip in a stack of perfect needles?!
The high leverage of the FHA and additonal PMI payments that @Tom Shallcross pointed out is definitely going to make a deal difficult in this market.
Have you explored getting a conventional loan and wrapping in the construction costs? It looks like after all rehab, closing costs, etc you are in for 300k. That would be 60k down which isn't much more than the capital you have to bring now and you will shave off that PMI. Smaller local lenders may consider that.
If you can do that and maybe self manage (effectively) the property then how do you feel about the numbers? They would still be a little tight but after your renovation could you bump the rents a bit? All of those things combined may get you close to where you want to be.
Real Estate Agent · Forest Park, IL · Member since 2014 · 255 posts · 141 votes
7y
You might find some opportunities if you consider adding bedrooms and/or duplexing up/down. While appraisers might not factor much for below grade space, renters do!
How can anyone buy a duplex then. A duplex will never get over around $3000 per door in rent (thats astronomical in itself), which in essence is a 300,000 home, or less.. Am I just dumb, or is this almost finding a needle with a broken tip in a stack of perfect needles?!
I would think with a duplex you would be targeting 1500/door in this example?
I'm not sure that sounds logical to me. I am not sure what you mean by the capital I would have to bring with $250K home and a 3.5% DP with a rolled in closing (which is not displayed in the spread sheet). The 25K renovation may get rolled in with a 203K. But the average rent is as such and cannot be bolstered to a staggering level to try to make the numbers work.
I'm from west michigan, I think I could do better in Multi-family properties there, seems the numbers and logical rent prices go together well. And easier on my wallet as conventional mortgage.
Niles, MI · Member since 2015 · 38 posts · 6 votes
7y
A few things that may shift the numbers around (good or bad):
You have 1200-1400 average rent for 2bd but then have the rent income of 1400 for both units -- I'm assuming the rehab will put it at that range but it's something to keep in mind that it may be safer to split the difference and assume 1300 rent/month.
The other thing I noticed is that you are paying for all utilities of the tenant. Is this normal practice in the area? Perhaps having a lower rent and then charging the tenant utilities may be a better option?
The CapEx rate is a little over 9% -- is this assumed based on previous experience or seasoned investor guidance for the area? Not wrong but may be another area where the number can be adjusted.
If you are looking for cash flow, you'll have to do a lot of work to make this work. A lower offer, less rehab, higher rent, etc. I like to setup a goal range of cash flow I am comfortable with and then see what numbers can be altered (reasonably) to make it work. If it doesn't come out right, just walk.
Another point is that as these markets get more and more competitive, you have to be more selective. Sure, there was a time you could get a property in a good neighborhood that cash flows well and has great equity growth but that's rare anymore. If you see this property as an equity builder, then having a negative cash flow may be warranted and may be a means of justifying the purchase.
Gotcha. You have $48,750 as total "cash" investment in the property on your spreadsheet. That made it seem like you were not using leverage on that amount and therefore was capital you would have to put into the property out of pocket.
Unless you have the amount of money for a conventional loan and are open to tying it up - in addition to the other cost saving suggestions - then you are probably going to have to look at other deals/less expensive markets.
Maybe west Michigan has some deals that make some more sense? Like you noted, the deal just doesn't pencil out.
Contractor · OK · Member since 2019 · 3 posts · 1 vote
7y
Like many people have mentioned, I use an excel sheet just like yours.
When I am evaluating a deal from a 30,000 foot view, I do the quick 50% rule and determine if the deal makes sense to even deep dive. I determine approximate amount of my own capital that I would need to make the deal happen. If those quick calculations don't make sense. I move on.
If a deal is brought to me, I do the same thing to evaluate where the property sits with what they are asking. From there I determine what MY numbers would need to be for me to be interested in the deal. Depending what the seller or representative says after determines how much due diligence I do.
I've spent and wasted so much time evaluating deals that essentially I know what a good deal looks like before I even evaluate it. This way, when "The One" comes across my desk, I jump on it and get after making it happen quickly because other experienced investors can evaluate deals just as quickly.
Property Manager · Lombard, IL · Member since 2013 · 99 posts · 82 votes
7y
@Evan Smeenge If you are in W MI I would look no further than your back door for deals. Chicago is a very competitive market, taxes are stupid expensive, rehab costs more and the landlord laws are way slanted towards the tenant. If this is Cook County you are typically looking at 6 months + for an eviction. Even surrounding counties are several months. I live in IL yet all of my investments are in other states if that tells you anything.
Los Angeles · Member since 2018 · 464 posts · 471 votes
7y
@Evan Smeenge Recognize that, especially with SFR and duplexes, the investor may not actually be looking for cash flow. He may have a high W2 income and is looking for tax advantages and appreciation. With all that going on, especially in well-off neighborhoods, prices get pushed into the stratosphere.
Property Manager · Lombard, IL · Member since 2013 · 99 posts · 82 votes
7y
If you are looking for a deal in Chicago be prepared to work extra hard to find off market deals. As @Alvin Sylvain just said above in these markets in SFR and small multi-family you are competing against investors (and a lot of undisciplined ones) that will overpay for a property hoping to make money on appreciation or just for the tax benefits.
Rental Property Investor · Idaho Falls, ID · Member since 2018 · 67 posts · 78 votes
7y
@Evan Smeenge
Not sure what taxes are there, but they seem high. But don’t know your area. May be spot on.
PMI is killing you. Someone else already mentioned that your closing costs are often financed and added to your loan balance rather than cash.
You have budgeted Repairs, Capex and vacancy each month which I think is excessive. Keep vacancy and repairs and get rid of Capex. That will bring you to zero per month. Still not a great deal.
Rental Property Investor · Idaho Falls, ID · Member since 2018 · 67 posts · 78 votes
7y
@Evan Smeenge
One more thing.
Find out who is wholesaling in Chicago. Call a dozen or more real estate brokers and see what they have that would meet your numbers. Ask around on this site. On or off market. Some deals can only be had for cash, but they can be crazy good. If you find them, call your grandma, uncle or friend and see if you can get some cash to buy, then refinance after.
Rental Property Investor · Idaho Falls, ID · Member since 2018 · 67 posts · 78 votes
7y
@Evan Smeenge
And one more....
If you're using FHA, I'm assuming you're going to house hack this. You'll occupy. Can't use FHA for a property you don't live in. Obviously you can also easily manage yourself and get better cash flow. But at least for some time you're planning on living there. Essentially for free because the other tenant pays your mortgage. You do the lawn care for free. If you live there for 5-10 years you can refinance out of the FHA and maybe have appreciation on the property and paid off some loan to create equity. There are lenders that will do 10% down or if you have that much equity you don't have to bring cash for down. Some also don't require PMI.
Also, can you roll some of the utility expenses to the tenants?
Residential Real Estate Broker · Fort Gratiot, MI · Member since 2016 · 9 posts · 10 votes
7y
@Evan Smeenge
Like Christian mentioned with FHA you will need to own occ one of the units. Good news is you can buy up to a 4 unit FHA.
What a great way to get into the buy and hold game! 3.5% down and you should be able to roll your closing costs into the deal as well with seller concessions. I believe up to 6%!
Keep looking at deals and crunching the numbers until one makes sense.
Flipper/Rehabber · Arlington, TX · Member since 2014 · 78 posts · 58 votes
7y
@Evan Smeenge Hopefully you are aware that FHA only guarantees "primary residence" loans. The only way around it for an investor is do what it looks like you are; buying a duplex, triplex etc. but you must occupy one of the units for at least a year. At closing, you will be signing several docs stating that this will be your primary residence…
Having said that, your numbers seem correct but, per the consensus, not doable unless you can pick up a few hundred more a month. Start by narrowing your numbers by whatever you’re rolling into the loan. And consider, is it necessary to pay all of the utilities? Maybe the tenants pay the gas? Can you charge a little more for both parking & rent? If not, then offer accordingly or walk away.
Rental Property Investor · Idaho Falls, ID · Member since 2018 · 67 posts · 78 votes
7y
@Evan Smeenge
So, here is another thought.
You’re putting down $48k on this deal cash. That’s after getting a sweet 6% down loan.
In reality, you're putting down 20% including rehab. Instead of doing that, find a turn key property and put down 20%, for the same money. Nothing to fix, can probably get something that has tenants in it. Now your monthly payment is less, no PMI. The Fannie products allow 15% down with PMI, 20% down no PMI for SFR, 25% down no PMI on MF.
Spending 6% down and 14% on remodel is a lot worse than paying 20% on down payment which reduces your monthly payment and increases cash flow and equity. The remodel money is money lost (of course can add value too).
This is something you learn by running about 100 different scenarios through your spreadsheet. I love working spreadsheets.
I built mine (sorry I won’t share it, took me like 100 hours to build) that will essentially model a ten year holding period and does all kinds of fancy stuff. I can plug in the numbers you have in 30 seconds and know everything I need. Building one, you learn a ton. Using it and adding more detail as you go and learn more makes it better and better.
And another thought (I’m full of them).
You’re already in the Midwest. Maybe you can’t find a smoking deal within 15 minutes of your area, but maybe within 2 hours drive is fine. I used to live in Milwaukee. Tons of deals there.
And within reach by car to look at personally. Probably a lot of other good areas around Chicago. I'd kill to live where you do and look for deals. Here the point: in many areas you can pay CASH for the entire SFR at $40k, which is within the same budget. No loan. And they collect $800-850 rent per month with cash flow $400-500. Sweet deal, in B and C neighborhoods. No war zones.