Buying our first multi million, multi unit property in Chicago.

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Buying our first multi million, multi unit property in Chicago.

Jorge Leon
Member since 2021 · 20 posts · 8 votes

Hello all. Member of my family are cashing out on an industrial real estate investment that they held more than a decade. We will be under contract as of this week. In order to defer some of the capital gains, we are looking to reinvest in rental properties. We own several other 2-4 units in the city, and as for myself I have flipped a couple of different single family homes in the city, I also used to sell homes for an investor/flipper (without an R.E License). We are not new to the game, but the undertaking we are considering is definitely out of or real of experience, maybe even our comfort zone. Regardless, we are looking to move on this and I am in the beginning stages of mapping this monster out. What are we getting ourselves into? I am already looking into property taxes, Property management and Cap rate comparisons. Any advice and direction would be greatly appreciated.

Here are the two properties we are looking at.

https://www.loopnet.com/Listing/7329-N-Honore-St-Chicago-IL/21891991/


https://www.loopnet.com/Listing/5317-N-Hoyne-Ave-Chicago-IL/21935181/


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Nathan GesnerBusiness Member
Moderator
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
5y

My only advice for you is to consider dumping that money into a different location. Chicago is not Landlord friendly and I don't see it improving, ever.

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  • Stephen J DavisBusiness Member
    Rental Property Investor · Houston, TX · Member since 2017 · 529 posts · 467 votes
    5y

    I love the idea that you are moving up to apartments. Be sure to take the National Apartment Association classes on property management and ownership. Running apartments is nothing like running single-family or plexes. I have invested in over 4000 apartment units and the NAA classes are a great starting place.

    0Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    5y

    My only advice for you is to consider dumping that money into a different location. Chicago is not Landlord friendly and I don't see it improving, ever.

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  • John Warren
    Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
    5y

    @Jorge Leon you are on the right track for sure. Be careful as you underwrite the deals from most of the commercial brokers here in Chicago. If you see expense ratios on vintage buildings that are under 45% then you know they are fudging the numbers. This is pretty common stuff too, and I often times see expense ratios as low as 35%. 

    Chicago is a great market as long as you are correctly underwriting and as long as you are carefully evaluating property taxes and where they might go after you close. 

    2Reply
  • Jorge Leon
    OP
    Member since 2021 · 20 posts · 8 votes
    5y
    Originally posted by @John Warren:

    @Jorge Leon you are on the right track for sure. Be careful as you underwrite the deals from most of the commercial brokers here in Chicago. If you see expense ratios on vintage buildings that are under 45% then you know they are fudging the numbers. This is pretty common stuff too, and I often times see expense ratios as low as 35%. 

    Chicago is a great market as long as you are correctly underwriting and as long as you are carefully evaluating property taxes and where they might go after you close. 

    I might sound like a noobie, but what do you mean by expense ratios? Are you referring to cap rates? And elaborate on what you mean where property might go? I do know how to find current property taxes in the city’s tax website. 

    0Reply
  • Jason Albasha
    Lender · Chicago · Member since 2018 · 118 posts · 66 votes
    5y

    Operating Expense Ratio is how much is costs to run, or operate, the property. The rule of thumb is 50%. 

    @John Warren is saying that if they are saying that it costs less than 45% of the gross income, then they're cooking the books. 

    For example, 5317 N Hoyne Ave says their gross income is ~$173k; 45% of that is ~$78k. Expect to pay ~$70-85k in expenses. 

    To dig just 1 layer deeper I'll tell you this.. they say their water is $4,651/year, which can't possibly be true. I have a 4 unit that runs ~$300/month ($3,600/year) and I think there's a leak somewhere. My 5 unit is ~$250/month ($3k/year). There's no way a 26 unit is $4,651. 

    These aren't your friends, they're trying to sell to the highest bidder. I will tell you this, with the larger apartments, the big whales have already gone through the meaty stuff and you're left with the scraps. You're a big fish in an ocean of whales and sharks. 

    I've found it's better to be a big fish in a small pond. There's nothing wrong with multiple 3-4 units where you hold negotiating power over the smaller fish. The expenses may be slightly higher because of economies of scale yet the opportunity to diversify locations (as well as diversification of investments) is well worth it, in my opinion. Also worth mentioning that you are much more liquid because it's a magnitude easier to sell one or two 3-4 units than a single behemoth you linked. 

    3Reply
  • Jai Reddy
    Edmond, OK · Member since 2012 · 456 posts · 270 votes
    5y

    @Jorge Leon

    All good replies above. One tip, if you post actual properties here before you have an accepted offer, other investors may scoop them up.

    0Reply
  • John Warren
    Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
    5y

    @Jorge Leon you got a great explanation from @Jason Albasha of what we see regularly from commercial brokers. As someone who also lists properties, I have come to understand the mentality a lot better though. They aren't "bad guys", they just work for the seller. All of us would want to sell our properties for the most money possible and every seller wants to maximize their returns. Here on BP we have a lot of folks looking to buy so the commercial brokers get a bad rap, but the reality is they are cooking the books so that they can make the numbers work, etc. 

    Your job as a buyer is to trust but verify. If a number is a round number or looks to good to be true then you have to dig in and build out your own pro forma for expenses. I generally look at the income numbers on broker pro formas and look for ways I can generate more income than the pro forma. The expenses side I completely ignore their numbers and put my own numbers in. 

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  • Jonathan KlemmBusiness Member
    Moderator
    Contractor · Chicago, IL · Member since 2016 · 4k+ posts · 2k+ votes
    5y

    @Jorge Leon - Congrats on you and your family's success in the industrial market, sounds like you guys had a nice ride. 

    I'd strongly suggest you link up with some top-notch commercial brokers to help you navigate all of the expense ratios and commercial multifamily lingo that others pointed out above.  I have some good friends in that space and happy to provide you some referrals.

    I am a firm believer in trust, but verify

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  • Steve Morris
    Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
    5y

    OOC - Those CapRates believable or are they "Pro Forma"?

    Know nothing about Chicago otherwise.

    0Reply
  • Crystal SmithPro Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes
    5y
    Originally posted by @Jorge Leon:

    Hello all. Member of my family are cashing out on an industrial real estate investment that they held more than a decade. We will be under contract as of this week. In order to defer some of the capital gains, we are looking to reinvest in rental properties. We own several other 2-4 units in the city, and as for myself I have flipped a couple of different single family homes in the city, I also used to sell homes for an investor/flipper (without an R.E License). We are not new to the game, but the undertaking we are considering is definitely out of or real of experience, maybe even our comfort zone. Regardless, we are looking to move on this and I am in the beginning stages of mapping this monster out. What are we getting ourselves into? I am already looking into property taxes, Property management and Cap rate comparisons. Any advice and direction would be greatly appreciated.

    Here are the two properties we are looking at.

    https://www.loopnet.com/Listing/7329-N-Honore-St-Chicago-IL/21891991/


    https://www.loopnet.com/Listing/5317-N-Hoyne-Ave-Chicago-IL/21935181/


    We found that our experience with smaill multis was very useful when we moved up to apartments. It seems scary at first, but it's not too bad. The one thing you may want to consider is learning how to syndicate. Given that your now in the position to purchase a muti million on your own, consider how many you could acquire through syndication. I like the possibilities on 5317 N Hoyne over Honore.

    312-681-7487
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  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    5y
    Originally posted by @Jorge Leon:

    Hello all. Member of my family are cashing out on an industrial real estate investment that they held more than a decade. We will be under contract as of this week. In order to defer some of the capital gains, we are looking to reinvest in rental properties. We own several other 2-4 units in the city, and as for myself I have flipped a couple of different single family homes in the city, I also used to sell homes for an investor/flipper (without an R.E License). We are not new to the game, but the undertaking we are considering is definitely out of or real of experience, maybe even our comfort zone. Regardless, we are looking to move on this and I am in the beginning stages of mapping this monster out. What are we getting ourselves into? I am already looking into property taxes, Property management and Cap rate comparisons. Any advice and direction would be greatly appreciated.

    Here are the two properties we are looking at.

    https://www.loopnet.com/Listing/7329-N-Honore-St-Chicago-IL/21891991/


    https://www.loopnet.com/Listing/5317-N-Hoyne-Ave-Chicago-IL/21935181/


    For the Hoyne property

    Current Rents
    List Price $2,000,000
    Rehab
    Monthly Rent $14,735
    Annual Rent $176,820
    Less 3% Vacancy $171,515
    Annual Taxes $17,100
    Annual Insurance $5,000
    Total $149,415
    Less 5% Repair $8,576
    Less 8% Mgt 13,721
    Less 3% Capex $5,145
    Water/Scav $9,566
    Gas/Elec $4,790
    Total $121,338
    Cap at List Price 6.07%


    Commercial properties are different than 2-4 units because deals are done broker to broker and after everyone has passed on them, then they go to LoopNet.  The cap rates posted are always ridiculous.  Take Hoyne for example, the cap rate listed doesn't take into account vacancy, repair, capex, or management.   A 6% cap rate isn't bad though for the area and I planned for a 20% tax rate increase

    It looks like 3 units are rented for $1200 a month, so it seems there is room to value add and according to the listing a lot of capex items are completed.  I assumed a $25k rehab on the remaining 11 units and all units rented for $1200

    Market Rents
    List Price $2,000,000
    Rehab $275,000
    Monthly Rent $17,070
    Annual Rent $204,840
    Less 3% Vacancy $198,695
    Annual Taxes $17,100
    Annual Insurance $5,000
    Total $176,595
    Less 5% Repair $9,935
    Less 8% Mgt 15,896
    Less 3% Capex $5,961
    Water/Scav $9,566
    Gas/Elec $4,790
    Total $146,343
    Cap at List Price 6.43%
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  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    5y

    @Jason Albasha - in residential scavenger is included in the water bill, so they are reporting $9,566 for water/scavenger or $683 per unit, which seems about right

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  • Jason Albasha
    Lender · Chicago · Member since 2018 · 118 posts · 66 votes
    5y
    Originally posted by @Brie Schmidt:

    @Jason Albasha - in residential scavenger is included in the water bill, so they are reporting $9,566 for water/scavenger or $683 per unit, which seems about right

    I'm not sure I follow your math, can you clarify? Maybe you divided by 14 units, instead of 26 units?

    They have listed ($4,915 + $4,651) = $9,566 or $368/unit.

    If average is $683 then ($683/unit * 26 units) = $17,758.

    Edit: To save everyone from whipping our their calculator, $9,566 / 14 units = $683/unit, which is why I suggested you may have divided by 14 units.

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  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    5y

    @Jason Albasha - The Hoyne property you were talking about is a 14 unit

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  • Michael K.
    Investor · Chicago, IL · Member since 2018 · 352 posts · 176 votes
    5y

    @Jorge Leon, looks like @Jason Albasha and @John Warren have already provided some great input here (and have helped educate me too!)

    I would like to point out something that no one has mentioned, one of these properties is listed at nearly 1 million dollars more than the other! So I would think 2m would feel more manageable to you than 3m. 

    I will also repeat what others have said, you need to disregard the numbers they provide and do your own due diligence. Are the rents they say they are getting realistic and sustainable for the area? Are you already familiar with one of these areas? Do you understand the area's strengths and weaknesses, potential for growth? As for cost of utilities, management, repairs, I think you should just be able to scale up the costs from what you have experienced with your 4 flats and get a reasonable estimate of what it will cost you. 

    As for the Capex needed to get the buildings running smoothly I cannot make judgement without seeing the insides of building. If they have any unique systems in the building make sure you have an inspector who knows their way around these types of large multi units.

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  • Michael K.
    Investor · Chicago, IL · Member since 2018 · 352 posts · 176 votes
    5y

    @Jorge Leon Last thing I forgot, the listed cap rates are obviously based on the list price, but maybe 6 something percent is not good enough for you. Figure out what cap rate makes the deal work for you and make an offer at that level, if they don't except then just walk away from the deal.

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  • Jorge Leon
    OP
    Member since 2021 · 20 posts · 8 votes
    5y

    I can’t express enough how much I appreciate all of your replies. Just with this info here I have enough to research for a few weeks I’m sure. I took the cap rates with a grain of salt and as many of you have said I will double check the numbers, especially the expenses and see if it makes sense. Also, as some of you mentioned, investing in smaller units has crossed my mind. Other than the mls, where could I look for better deals?

    0Reply
  • Danny Polanski
    Chicago, IL · Member since 2020 · 184 posts · 182 votes
    5y

    All i will add is know your neighborhoods. 

    Rogers park/etc is not a good hood, typically, but has been improving for decades now. 

    If you are from Chicago then no problem you know the locations. Otherwise, one would need to be careful for target tenants. 

    0Reply
  • Yizhen Su
    Investor · Charlotte, NC · Member since 2017 · 21 posts · 10 votes
    5y

    Just my 2 cents: why don't you take that money and put it somewhere without a lot of legislation to wade through, who'd be happy to have your money, that isn't a overcrowded, over searched metro area with a lot of real estate inflation.

    For example: Rural town that just got a med school permit.  They are building all over the country but I would like to point out that the government funds schools often with a secondary goal of stimulating the economy.  They guarantee student loans so you'll get your rent on time. (BTW Med School Tuition over 4 years is $300,000+, they're pumping that in PER student into the local economy and rarely do you get a school with less than 400 students)  When there's a "graduate" level school, the students are usually demanding in their search for better living space and are WILLING to drop up to 1k for a nice 1b1ba apartment.  There's nothing in those towns other than 1970's apartments, that's why they needed to be revitalized in the first place.  I've seen enough people make a killing just building a nice, large, gated, apartment complex in the middle of nowhere and servicing highly skilled professionals that travel there to train or work.  That's your whale of a market right there.

    1Reply
  • Michael K.
    Investor · Chicago, IL · Member since 2018 · 352 posts · 176 votes
    5y

    @Yizhen Su

    sounds like you have a horse in this race, haha. That does sound like an interesting situation but it would make more sense for someone local to the area to undertake

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  • John Warren
    Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
    5y

    @Yizhen Su sounds like you have an interesting game plan that could work well. One of the things that is nice about being in a primary market though is there is constant demand for apartments. I sold a building in Indiana last year and it was impossible to find comps for the cap rate because there were no sales. How will you value your building when you go to sell? We all sell someday either to liquidate or to trade up. In a primary market like Chicago, Phoenix, Dallas, etc there are always sales comps. 

    The other thing to think about is how nice it can be to invest in a low cap rate area. That may sound counterintuitive to so many people who are always looking for a high cap rate deal, but a low cap rate area means your forced appreciation is worth SO MUCH MORE. 

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  • Jason Albasha
    Lender · Chicago · Member since 2018 · 118 posts · 66 votes
    5y
    Originally posted by @Brie Schmidt:

    @Jason Albasha - The Hoyne property you were talking about is a 14 unit

    I must be goofing up then. I'm a bit busy to double check yet I'll take your word for it, I'm likely wrong here.

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  • Jason Albasha
    Lender · Chicago · Member since 2018 · 118 posts · 66 votes
    5y

    @Yizhen Su as @John Warren mentions, buying in a metro means much higher demand. It also means there's a higher chance of appreciation.

    To clarify his statement, low cap does not mean high appreciate yet they typically go hand in hand. In BUFU, you'll get much higher cash flow, maybe 10-15% CAP, yet that building will stay the same price for a very very long time. While here in Chicago, you can buy and sell 2 years later, and if you bought right, you could net $50-100k+ in that short amount of time.

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  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    5y
    Originally posted by @Jorge Leon:

    I can’t express enough how much I appreciate all of your replies. Just with this info here I have enough to research for a few weeks I’m sure. I took the cap rates with a grain of salt and as many of you have said I will double check the numbers, especially the expenses and see if it makes sense. Also, as some of you mentioned, investing in smaller units has crossed my mind. Other than the mls, where could I look for better deals?

     Personally, I prefer the strategy of owning multiple 2-4 unit in an area vs one large building.  I bought 28 small buildings (2-6 units) in a 2 mile radius that allowed me the economies of scale to run a profitable business and the flexibility to sell 14 of them in the last 2 years based on the profitability and equity of each one.  

    I could have afforded a bigger building, but I found that the smaller ones were more profitable.  As mentioned before, residential assets have the water and scavenger provided by the city, but commercial has to outsource their scavenger and recycling.  A lot of the expenses, like insurance, are higher as you are charged the corporate rate

    As far as finding 2-4 units, the vast majority are sold on the MLS. Being a top agent in Chicago, we have our own database to market deals to other top agents before they get listed publicly, but honestly 90% of it is condos/SFH

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  • Yizhen Su
    Investor · Charlotte, NC · Member since 2017 · 21 posts · 10 votes
    5y

    My argument is 100,000 of 2,000,000 is... 5%? NASDAQ made 30% last year, have you optimized your stock and savings options already? Are you investing to make money or investing to put your money away in a high earning CD that doesn't need to have a 6% yearly yield to make it worth it? Honest question to ask myself every time before I put money into something I may be locked into. Stock market has higher variability, yes, more tangible assets are safer, yes. My point is this: are you optimizing profit by buying large or do you need to buy smart?

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