High Cap rates in Chicago area?

Question

Hello Chicago Investors,

I'm Looking to Invest in Chicago, identified a Property in North Lawndale area wanted to get some Locals feedback about the area? it's 10+ units around 9 Cap rate. property is recently renovated and complete vacant. Looking it as a stable Cashflow.

1.How easy is it to fill the vacancies in the area?

2.How do i check what section 8 is paying for in this particular Neighborhood for given bed & bath?

3. I noticed High cap rates in Chicago, is high cap rates is there a lack of demand? anything to be aware of? I appreciate any Input on this. Thanks!

Crystal Smith · Answer

1. Over the past 6 months it's taken an average of 47 days to fill vacancies in Lawndale.

2. Regarding Section 8- What they will pay depends on the condition of the units. We charge market rate to Section 8 tenants.

3. Chicago is a large market & you will only find high Caps in areas where the financial risk is higher and the cost to acquire is lower. There are many sections of Chicagoland proper where the CAP Rate is below 5%. As you move South to North in Chicagoland proper the CAP RATE goes down.

What you should be aware of? Since the property is a new renovation the owner will most likely not have any rental data for you to review. So you'll have to do your own due diligence on what to expect for rent- the vacancy rate used in calculations will be higher than the average for Chicago; You'll have to take do some homework on the cost to maintain. He may have renovated the units but all the mechanical systems are the same.  The days to find a renter may be higher than other parts of Chicago (Note I provided you w/ the data as of today- average of 47 days

Tom Shallcross · Answer

@Mallikarjun Reddy Pateel - piggybacking off of @Jake Fugman's comment, management will be 8-10% on paper for something like this, and these Chicago high caps also tend to have higher turnover. This not only ups your vacancy but you'll also be giving 1/2month to 1 month rent for to your PM for every new lease along with the turnover costs of getting the units lease ready. So that true cost of turnover needs to be captured in vacancy, management...etc.

Point is, running 8-10% for management and 7% for vacancy will tend to fall well short of actuals. Doesn't mean you can't make money in this area, you just need to underwrite accordingly.

Jake Fugman · Answer

@Mallikarjun Reddy Pateel

1. If you list at market prices it should be easy to attract tenants.  5-10% total vacancy expense is appropriate in most Chicago markets (about 1 mo every 18-24 months).

2.TheCHA.org has a lot of good info related to Section 8 vouchers.  Lawndale will be an area where section 8 is typical

3. 8-9% CAP is typical for some neighborhoods on the south, west and SW side. Just make sure the figures you are looking at use accurate expenses (and projected rent in this case).  EX:  A lot of limiting offering memos will show a 5% management expense when its easily a 8-10% expense in Chicago.

Mallikarjun Reddy Pateel · Answer

Thanks everyone! that was ton if Information and insights. i decided not to pursue this deal anymore. i live in New york so try to focus on my local markets as I can see this Properties physically and get my ball rolling that way and exploring other opportunities in more certain neighborhoods(other States).

Thanks @Crystal Smith, @Henry Lazerow, @Baris Yuksel, @Jonathan Klemm

Baris Yuksel · Answer

@Mallikarjun Reddy Pateel  I would also ask for city permits signed off by every department (HVAC, electric, plumbing etc).

Maybe they did not pass the inspections and it will be too costly to do it City's way, so they are unloading it. Or maybe they did not get the proper permits? Anything is possible.

I would not buy it in North Lawndale unless you do the "night test" . You go there at night and you feel comfortable going into your building in the dark. If people are loitering and dealing and shooting fireworks in front and you are not comfortable, then your tenant won't be comfortable either. So you will only be able to rent to a certain type of tenant. Beware.

Paul De Luca · Answer

@Mallikarjun Reddy Pateel

There is a reason why cap rates are higher in some areas than others. A higher cap rate indicates that there is higher perceived risk.

Mallikarjun Reddy Pateel · Answer

@Jonathan Klemm hey Jonathan, spoke with Listing agent. looks like they recently renovated the whole building and no longer fits into sellers investment criteria. and they wanted to leave it vacant for their next buyer so they can put their ideal tenants by themselves.

Tom O. · Answer

Section 8 rents are contained in the Fair Market Rent schedule published by HUD. Google Fair Market rent and you can look up any zipcode in Chicago or anywhere else. I think North Lawndale offers opportunities but there's issues in the neighborhood. I do think gentrification tends to flow alone the El lines. Areas near the Pink Line will probably gentrify faster than areas farther away. Gentrification is well underway in South Lawndale which suggests the further south you go in North Lawndale the closer you are to the El Line the better.

Henry Lazerow · Answer

There are entire blocks in North Lawndale with abandoned "at one time high cap rate" properties. Remember high cap rate on paper does not always translate to a higher total return or even a positive return.

For high total returns on stabilized I like areas like Brighton Park, Bronzeville, East Wood Lawn, etc. or on the north side doing value adds and creating a ton of equity.  My 4 unit in Rogers Park has actually had 0% vacancy last 3 years by marketing unit in advance and having a new tenant move in next day and gone up around $300k in value post rehab/appreciation net. When I bought it looked very low cap rate.

Jonathan Klemm · Answer

@Mallikarjun Reddy Pateel - That still seems quite odd to me and is definitely a red flag, in my opinion.  Bought the property, did all the renovation work, and then decided it didn't meet their investment criteria..........

Be cautious.....

High Cap rates in Chicago area?

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