Questions about my first investment property

Frank M.

Commercial Real Estate Agent · Sudbury, MA · Member since 2014 · 118 posts · 25 votes

I see 5% vacancy. Will you rent it out (list it) yourself? A typical turnover costs an empty month and a month's rent to the listing agent. So I believe 10% is closer to reality.

I see no repairs/maintenance at all. 3 sets of appliances, plumbing, etc. Stuff breaks. 10-20% of rent according to the numbers I see here.

Terry Hegarty

OP

Involved In Real Estate · Chicago, IL · Member since 2013 · 6 posts · 1 vote

Frank, I forgot to include repairs which are probably 10K. Mostly minor cosmetic fixes. It was completely rehabbed in 2007 and well maintained since then. I've heard 10% vacancy rate is more standard. I was surprised when she only used 5%. Also she had a maintenance section but put 0%. Wouldn't 20% be too high? I should factor in at least 10% though

Brie SchmidtBusiness Member

Moderator

Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes

@Terry Hegarty the water is high. I pay about $40 a month for all my city 3 flats. Depending on the area your vacancy might be fine. I am going on 3 years without a vacancy but I have pretty good areas. Also feel free to PM or post the neighborhood or cross/ streets and if I can I will tell you if her rent is right. Our properties are all recently rehabbed and our maint is about 5% but I always estimate 8%

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Frank M.

Commercial Real Estate Agent · Sudbury, MA · Member since 2014 · 118 posts · 25 votes

Terry - There are spreadsheets here, at BP, that suggest a range of expense ratios depending on age and last full update. For you, 10% might be right, I'd rather make the numbers work estimating too high, and be happy coming in under each year, than the opposite. I'm looking at a $120K cost after rehab, and about $2250 rent. I'm not going to project swimming in cash.

Also, have you called an agent to find out what insurance will actually cost? I was surprised to find the insurance company requiring a per square foot cost that was far more than what I was paying for the house. No offense to a real estate broker, but I'd call the agent I'll buy the insurance from to verify.

Terry Hegarty

OP

Involved In Real Estate · Chicago, IL · Member since 2013 · 6 posts · 1 vote

Brianna This property is in Avondale near Elston and Addison.

Frank I'll be renting out the units myself since I have my license. So no paying a listing agent. I agree about overestimating

Also is it common to do a 30 year mortgage rather then a 15 year mortgage. I know the mortgage payments are higher with a 15 but would anyone recommend a 15 year over a 30 year mortgage. Also do I need to determine cap rate?

Brie SchmidtBusiness Member

Moderator

Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes

@Terry Hegarty we have a building at Irving and Cicero so not too far... our 1200 sq foot 2/1 that has original floors and updated kit/bath rents for $1350 and our basement 1 bed is $700 and that unit is ok

I wanted a 15 year when I first started but was advised against it because... when you go to get more loans they look at the DTI and it is more favorable to have a 30 year.

Since it is under 4 units it will be a residential loan. No cap rate or DSCR are needed. they will use DTI and your personal finances. Let me know if you need a good lender. I have a "closer" who has yet to fail me with whatever I throw at him

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Frank M.

Commercial Real Estate Agent · Sudbury, MA · Member since 2014 · 118 posts · 25 votes

I agree with Brianna, 30 year loan. On about $26K net (after vacancy) rent, the difference between 15 and 30 year payoff is nearly 20% of the rent.

Even if qualifying weren't any issue, by going 30, you can build a reserve to protect your self against the worst set of events, repairs evictions, etc, then if there's extra money decide between building up the next downpayment or paying down principal.

When I add your numbers now, taking 10% off rent, I see net of $6762. $3K to expenses? That leaves $3762, not even enough to pay the 15 yr payment. I'd really advise against the 15. I hope to hear from others on this.

Trevor K.

Investor · Wheaton, IL · Member since 2013 · 77 posts · 17 votes

I agree with the above about 15 vs. 30. With interest rates low you won't save enough to make it worth it. You can always make the 15 year amortization payment amount on a 30 year loan, and if you never get cash strapped, you will be paid off in 15. If you run into lean times, you can just pay the normal payment for the 30.

Jonathan Pliszka

Financial Advisor · Lexington, KY · Member since 2012 · 150 posts · 66 votes

@Brie Schmidt "I pay about $40 a month for all my city 3 flats."

Really?!? Are you metered? I'm close to $100 a month on my three-flat. I am not metered.

Brie SchmidtBusiness Member

Moderator

Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes

Sorry. On my phone and can't tag you. We were not metered in Chicago and added a meter. We were paying about $500-$600 every 6 months for non metered unlimited water. Then we installed meters. They guarantee that you will pay less than last year for x number of years. Our bill is now $70-$80 every other month

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1 Reply

Latrice Archer

Homeowner · Elmwood Park, IL · Member since 2013 · 53 posts · 9 votes

@Brianna! Is the $70-80 every other month per unit or for the entire building because if so, that's very good because I'm paying more than that for my single family home?

Jonathan Pliszka

Financial Advisor · Lexington, KY · Member since 2012 · 150 posts · 66 votes

Great to know, @Brie Schmidt I'm going to look into this. Thanks!

John Weidner

Chicago, IL · Member since 2014 · 710 posts · 200 votes

not my case....I have 1 bldg metered in Chicago and am averaging $75/month for a 2 unit.

My own house Single Family I'm averaging $40 per month

Brie SchmidtBusiness Member

Moderator

Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes

https://www.metersave.org/

@Latrice Archer - I have two 3 units and a SFH and they all are about $70-$80 every other month for the entire building. We just had a high one for our 3 flat and it was $88

@Jonathan Pliszka - I just threw away my statement yesterday on the one that was non metered and it shows the cap for the year based on what I used to pay. I think the first year we saw about 40% savings and you have a 7 year guarantee that you wont be charges more than you were paying

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David Jacques

Professional · Baltimore, MD · Member since 2014 · 93 posts · 23 votes

Originally posted by @Terry Hegarty:

NOI/ Yearly Mortgage Debt: 1.72

Two things I've never heard of NOI/ Yearly Mortgage Debt. Also she said she did not plug in a cap rate or GRM because on 2 units these numbers are not the best to use for comparing 2 unit properties one to another, as they can very so widely from property to property. I thought cap rate and GRM were important to evaluating 2-4 unit properties. Any thoughts would be appreciated.

This is what the lender will use as a quick gut check. It's otherwise referred to as a debt service coverage ratio. A ratio of 1 would entail that your NOI equals your mortgage payment (bad). A ratio of 2 would entail that your NOI is twice that of your mortgage payment (good). I would imagine that a lender would want to see a DSCR of at least 2 but I've never needed to show that metric before.

Cap rates are basically useless in residential real estate other than a quick NOI check if it's not listed. There is no way to quantify the credit rating of the mass of tenants because there is no consistency. A cap rate is useful in rating a deal with a credit tenant (like Starbucks, Walgreens, etc) where there is a reasonable expectation that they won't shut down and break your lease.

Flipper / Rehabber / Real Estate Investor · Toronto, Ontario · Member since 2012 · 392 posts · 77 votes

Traditionally a lender will want to see a debt service coverage ratio of greater than 1.25 - but that's on commercial properties. Does anyone know banks have a DSCR criteria on residential (<5 unit) properties?

Flipper / Rehabber / Real Estate Investor · Toronto, Ontario · Member since 2012 · 392 posts · 77 votes

Originally posted by @Brie Schmidt:

@Latrice Archer - I have two 3 units and a SFH and they all are about $70-$80 every other month for the entire building. We just had a high one for our 3 flat and it was $88
@Jonathan Pliszka - I just threw away my statement yesterday on the one that was non metered and it shows the cap for the year based on what I used to pay. I think the first year we saw about 40% savings and you have a 7 year guarantee that you wont be charges more than you were paying
https://www.metersave.org/

Thanks @Brie Schmidt

This is very useful. We're starting to look for rentals in Chicagoland as well as continuing with our flips on the north side of Chicago. Do you have any experience or thoughts on billing back tenants in Chicago for the water they use?

Cheers

Larry

Brie SchmidtBusiness Member

Moderator

Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes

@Larry Smet - Where were you 30 days ago? I was looking for a flipped 3 unit on the North side!

I personally do not charge for water separately, and I think the units cannot be metered individually. For me, $15 a unit per month is not really worth the hassle when I already charge pretty high rents

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Rick Ford

Real Estate Investor · Los Angeles, CA · Member since 2014 · 15 posts · 4 votes

The cap rate is for your own investment guidelines and ROI.

I usually like an 8.5 cap rate or higher for my ROI model.

Flipper / Rehabber / Real Estate Investor · Toronto, Ontario · Member since 2012 · 392 posts · 77 votes

Originally posted by @Brie Schmidt:

@Larry Smet - Where were you 30 days ago? I was looking for a flipped 3 unit on the North side!

Ha ha - we were working on 2 flips 10 minutes east of your building at Irving and Cicero! Thanks for your insights on switching to metered water.

John Hauser

Investor · Fairfax, VA · Member since 2013 · 126 posts · 28 votes

@Brie Schmidt could I have the name of your lender? You can send me a PM. Thanks!

John

John Hauser

Investor · Fairfax, VA · Member since 2013 · 126 posts · 28 votes

@Larry Smet and @Brie Schmidt and @Jonathan Pliszka we have talked to our contractor about separate water metering and he says you can do it, even if there is only one line going into a multi-unit house. It's easiest to do it at rehab time. You have to work it out with the City to do it that way. Haven't done it myself yet but if you have other questions send me a PM and I can ask my contractor more about it.

John

1 Reply

Flipper / Rehabber / Real Estate Investor · Toronto, Ontario · Member since 2012 · 392 posts · 77 votes

Thanks @John Hauser

I know for larger multi-family properties you can also add a device to the water pipe going to each unit (it's about the size of a pack of cards) which separately meters the water. I think it's several hundred each to install. I haven't heard anyone doing that on small multis though.

Larry

John Hauser

Investor · Fairfax, VA · Member since 2013 · 126 posts · 28 votes

Yes that's it. I think there is no physical reason you couldn't do it on a smaller building, it's just a function of economics and whether it's worth it.