Deal analysis

15 Replies


Looking at a 2 flat deal right now in Chicago. Seller has both units rented out for $950mth and there is an illegal basement unit that rents for $550 mth. There is about $100k left on the mortgage and mortgage payments run $1000 mth and taxes are $6300yr. Retail value is about $375k and I was thinking a cash offer around $250-275k. I would like to go the route of offering a couple different options to the seller, maybe something having to do with a land contract to wrap current mortgage, but not sure how to best frame it up. This would be my`first real deal, so I would appreciate any feedback!


REI Nation
Turnkey Real Estate
Wondering how to safely invest in out-of-state real estate?
This 40-page eBook is your best resource for safe, profitable, passive real estate investing.
Download Now

$275K for $1900 in legal revenue doesn't sound like a great deal to me. Unless you can somehow get the property zoned/built such that the $550 in basement rent becomes legal, this isn't something that seems like it's much of a money maker.

Where do you get the $375K retail value? If it's strictly a rental property, the value will be dictated by the income.

While I second the notion that this is a high price to pay for limited rental income. If you are out of pocket cash it isn't good. If you can get in for very limited out of pocket funds, then they CCR and IRR skyrocket.

Sub2 on the first, maybe a ton of seller financing to limit your cash outlay.

To lay out nearly 300k (barring any deferred maintenance hits) to get a gross cashflow of Legal $1,900 plus $550 illegal (2450 total) seems a bit off.

for 300k cash, where I do most of my work, I could snag 6-7 properties bringing in 900-1200/month gross cashflow each. Even the low end would be 5,400 of gross monthly. So if you are outlaying cash, I would give pause because your CCR would be extremely low.

If you are wanting to live in one, build equity, etc that is a completely different animal. But since you mentioned "wholesaling" that isn't the case here.

Like J said, I wouldn't count on that $550/month unless you know if it's possible to make that portion legal AND you factor in the costs/time to do so.

Aside from that, even at $250k, the gross rent is less than 1% of the purchase price. That's also a pretty hefty tax bill. At that price, this properly could easily be in the red if you factor in all the expenses (Property management, insurance, taxes, repair reserves, capital expenditures, lawn care/snow removal). Does the owner pay for the water/trash? (this is common in multi-unit properties). If that's the case, you're looking at even more being skimmed off the top.

This being a 2-4 unit property, you can arrive at what the "appraised" value would be by comparing it with the most recent sold comps in that area.

You could try checking to see if the units are rented below market value to see if there is some way for you to increase the rent down the road. Though currently, solely from a cash-flow (not factoring in speculating on appreciation) standpoint, I would be hesitant to take this deal even if I could assume the mortgage without having any money into the deal.

In Chicago, I would estimate at least 70% of the multi-unit buildings I see have the basement/ in-law units. No, they are not legal, but they are there and they do bring in income.

So after the advice, the only way to make this work would be to run the seller finance scenario. Should I look at something like a land-contract to wrap the existing?

Thanks again for the guidance.

@Sean B. I don't see how you can make money on this deal.

Let's look at the best case scenario.

Purchase Price - $250,000. Seller agrees to seller finance the whole amount at 5%, 30 years fixed loans. Below will be your monthly payments:

P&I - $1,342

Taxes - $525

Insurance - $100

Total outflow = $1,967

Total inflow = $1,900

Negative = ($67)

The above amount does not include any repair & maintenance, vacancies, property management or any other operating expenses like water, utilities during vacancies.

I don't rent out any illegal units in basement or attic, because of the number of properties I have and not worth the risk for the code enforcement to start inspecting all your units.

Not worth it. I would move on to the next deal.

@Sharad M. there is always a deal...I just need to uncover it.

So, I would need to be more in the $200-225K range. This should leave a little more meat on the bone to help with everything else. I am sure that throwing a low offer coupled with the seller finance would be a stretch, but you never know...

@Sean B.

Rents sound low.

I'd be glad to run you some comps both on solds and rents the last 6 mos if you want to shoot me your email.

I'm not watching west ridge like I am the other surround hoods so I can't really comment on "going" prices right now. But around $300k wouldn't surprise me with low inventory of multi units in N and NW side. Not saying that's a deal.

Landlording made easy.
Best-in-Class Platform for DIY Landlords
List unlimited units, screen tenants, draft and sign leases, and collect rent—all free.
Use Avail—Free!

@Sean B. I posted this in another thread, but feel it fits this situation.

So many people get fixated on making investments work in a given area. It is akin to fishing. If you want to catch TUNA, you have to go to where TUNA are, not attempt to make a walleye look like a TUNA.

If you currently aren't catching what you are fishing for, you either need to find another area of the lake (move your boat), move to a completely different lake, or change what you are fishing for.

Don't attempt to fit a square peg into a round hole. I do suggest you either move on, or work with @John Weidner since he was so gracious to offer his assistance.

I have several properties under contract and put in another 6 offers recently. They all make sense, and will add to the ever growing portfolio. If counter offers don't meet my needs, I don't get the property. Sometimes, I make my offer, wait for months, re-offer and get my price. In the mean, the sellers have to pay the holding costs as a fee for their stubborn ignorance.

Happy you are making a go of this, but don't push a bad position.

Hope to see you all on Wednesday night!

Originally posted by @Sean B. :
@Sharad M. there is always a deal...I just need to uncover it.

If I were to write a post about common misconceptions in real estate investing (or any type of investing), this would be in my Top 5...

There isn't always a deal, and believing that there always is can make you do things you shouldn't do. There are plenty of houses I wouldn't take for free.

Now, I'm not saying you can't make this particular property into a deal...but if I were you, I'd be focused on trying to get it at somewhere around $175K or less to make the numbers worthwhile.