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

26 Replies

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/


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.

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.

@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. 

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. 

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. 

@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. 

@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