Your thoughts on my numbers

4 Replies

I'd like to hear other opinions on this...I'm debating if I should cash in on my 3 flat in downtown Wheaton, IL.   Any thoughts out there? 

In March 2018 I completed a three year battle with the City of Wheaton (this use to be a 4-flat with code violations from prior owners).  Now that I've cleared up the violations, I'm wondering if I should cash in and pay off the renovation debt and buy another place.

My architect is recommending me to convert it back to a single family home which will increase the property value significantly (due to comps... there are no rental comps in the area, just sfh comps).  I'm thinking of doing this conversion myself with hard money.  So here are the options I'm wanting your input on...

1. Keep as a 3 flat rental and pay off the debt slow over 10 years, but have a good / steady rental income after that.

2. Sell as is and pay off the debt now, but no good / steady rental income after that (could buy another).

3. Obtain hard money of $250k, convert back to a single family luxury home, and sell for a potential 71% Cash-on-Cash Return.

4. Something else I have not thought of??

Here are my numbers that I was going to add to my Zillow Listing (the potential investor would pay me the $450k purchase price), hopefully this makes sense to you...

Best Case Cash On Cash Return: Convert Back To Single Family Home

$450 purchase price + 250k conversation for a $700k Total Investment

Sell $1.2 million (architect's estimate)

500k Net Annual Income

500k/700k = 71% Cash On Cash Return

Current Case Cash On Cash Return: Continue As A 3 Flat Rental

$450 Purchase Price

25% down is $112,500

Annual Net Income is $12k

12k/112.5k= 10.69% Cash On Cash Return

(could be 13 to 14 % if you raise rents to market value)

Here is the actual property:  400 S. Hale St. Wheaton, IL 60187

Thanks in advance for your input!

John

@John S. Have you asked any local agents what they think it would sell for when converted to single family? I don't like the idea of taking the architects advice on the value. If an agent comes back with similar numbers, it seems pretty attractive. As far as the rental income goes, the COC return is nice but your overall CAP is terrible. I don't think its worth it to hang on as a long term rental.

It would take a long time to make 500K at 12K a year.  If you could take the 500K and the current equity and invest that at 10% cash on cash you would come out way ahead.  However you better be sure about your after repair value and the comps because you will have some costs and if the sale price is 800K and not 1.2 by time you pay holding costs and costs of sale then you probably wont have any profits or worse could have a loss.  In truth you wont likely make 500K, cost of sale at 1.2 will probably be 70K+ and you will have points and interest on the hard money loan so even if all your numbers are correct you still will likely only make 400K but assuming that is the case Id say do it sell and reinvest the 400K plus your current equity via a 1031 and get a nice 10%+ cash on cash return via 50-70% leverage.  At those numbers you should have rental income of 50K ish a year vs 12K thats a big difference over the long term.

Based on my experience in the area, not many individuals will purchase a home south of the tracks for 1.1M
601 S Wheaton Ave, Wheaton, IL 60187 is around the corner with nice finishes for 500k. 
There are many rental comps in the area- Wheaton Center and the towers should provide a good standard for market rent in downtown Wheaton. 

If you can refinance the terms of the renovation debt over the 10 years, Id keep it as a rental as the area will only attract more rentals. Get some First Trust employees to rent from you. 

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