First Deal in Chicago - How did I do?

24 Replies

Hello BP Friends,

I've been strolling the site and listening to podcasts religiously and I finally have my first four flat deal-

Southwest side of Chicago - McKinley Park

-Completely rehabbed 2 years ago

-All units are the same 2bd/1b

-Fully rented, Market rate for rents apx $800.

-Prop taxes currently are $4,800 without homeowner exemption (using this number for below)

-Tenant pays own utilities

-I will be managing property

Purchase Price - $280,000

Down 3.5% and $5,000 closing costs

Rent (m/m):

Unit1 - $965 (sec 8)

Unit2 - $950 (Sec 8)

Unit3 - $700

Unit4 - $800 mkt (will live in this unit)

Total Income - $3,415

Expenses:

8% mgmt - $273

8% vac - $273

8% maint - $273

Utilities - $100 est

Prop Tax - $400

Ins & PMI - $380

Total Expenses- $1,699

NOI - $1,716

Debt Serv - $1,329

Monthly CF - $387

Yearly CF - $4,600

Cash In - $15,000

Return - $4,600

COCR - 30%

This CF has potential to increase by decreasing taxes and potential to increase rents. Speaking with the owner, tenants are very hands off and quiet, since everything has been rehabbed from wiring to high efficiency heat, roof, etc, there is not much anticipated maintenance. This is basically a turn key property, great for a first timer!

Any thoughts? Should any of my estimates change due to property condition? Are my calculations correct?

Thank you!

"Completely rehabbed 2 years ago"

Are their receipts by this owner?? A picture book or video log of all the steps and items completed?

I sure wouldn't take their word for it. It's easy and cheap to do the interior drywall and all of that. What lurking beneath, in the walls, and up in the roof can eat your returns up for a decade.

You are counting section 8 above market rents. Sometimes with section 8 their voucher program changes for what they pay for a certain unit mix. So in that case the above market rate can change to market or below market. In that case I might use the 800 number instead for cash flow to be safe.

I think CF would be closer to 271 a month. Based on using 800 rent to be safe and 50% total costs annually. I know you say building is newly rehabbed but over time of ownership costs will get higher so the average tends to be 50%.

The other key is loyalty of the tenants and turnover. Are most of these tenants newly placed?? If so I couldn't count on the income to be accurate. It's like a mortgage note that hasn't been seasoned with a payment history yet. You need to know landlord friendly or tenant friendly state when it comes to eviction. Your holdover costs can be more than 50% because if you need to evict section 8 has holdover provisions and takes longer to get them out. Your local courts also could have sympathy toward regular tenants as well. I have heard instead of 30 days some areas you will wait 4 to 6 months to get them out. That kills your bottom line and eats away lost rent and repairs to a property. Even though the place is new bad tenants can trash it quick. Look at the lease very carefully and how they were qualified and validate income, credit, criminal history etc. to see what kind of element you have for a tenant base.

Medium allworldrealtyJoel Owens, All World Realty | [email protected] | 678‑779‑2798 | http://www.AWcommercial.com | Podcast Guest on Show #47

This may not be the smartest question...but I've been wondering it for quite some time. BEFORE you purchase the property, how do you calculate the expenses? I'm talking mgmt, vacancy, utilities, PITI, PMI, maintenance. Also how did you calculate rents for each unit?

@Polina Goncharova  

Some things to consider: 

This is not cashflow positive unless you are paying for the unit you are living in, I am sure you have considered this but just want to point it out. In reality your Gross rents are 2,615 until you rent that unit out. Your NOI until this happens is $916 per month then minus your Debt service = ($413) in cash flow or your rent for your unit.

I dont see any reserve amount calculated anywhere as far as a rainy day fund is concerned you will want to account for that somewhere.

Other than these it looks like a solid deal, nice job 

I think you did really well.  Congratulations!

You are very thorough, and hey, you've got to live somewhere - why not get paid for it.  Just save as much of that cashflow as you can and build up a contingency pool.

@Damon Armstrong - Expenses are a combination of actual (tax, insurance, PMI) and estimated reserves (8% for maint, vacancy, mgmt) these estimates I've gathered from BP. Rents are current rents.

@Joel Owens - Thanks for the thorough response! I shouldn'd use big words like "completely rehabbed", I understand, by what I saw and my realtor (also contractor) we were quite impressed.

Looks like I need to dig a little deeper on the tenant history, from what we got from them, they've been there the two years since rehab. The person I will be evicting is a non-section 8 tenant and we would have 2 months to do so (personal move-in). It seems that I would need more details on the tenant pay structure and their lease.


@Chris Vail - I am certainly aware that it will not be CF positive why I am living in one of the units, I am calculating the CF potential as if I rented all 4 units. I am using my maintenance reserve 8% for this fund at this point. Thank you for the response!

@Paul Danieli - Thank you Paul! I am an Accountant and being thorough is not an option. It is looking like I am still missing some key pieces but this is all a learning experience.

Polina looks can be deceiving. You need to find out if your contractor is qualified to advise you on all aspect of a building.

Looking at lipstick and words like "completely rehabbed" are throw around all the time.

My clients will look at a 100 unit property. Flyer will say completely remodeled. We get in there and they replaced some mechanicals but mostly carpet and paint with countertops etc.

It's like an old car. I can take the dents out of it, paint it to look pretty, slick the tires BUT until I look underneath it and pop the hood to see what makes it go I can't assess the real condition of the property.

Medium allworldrealtyJoel Owens, All World Realty | [email protected] | 678‑779‑2798 | http://www.AWcommercial.com | Podcast Guest on Show #47

What does CF mean

Originally posted by @Kim Book :
What does CF mean

CF= cash flow

@Polina Goncharova - as an accountant, you should know about Schedule E - look there and make sure you have allocated for all allowed deductible expenses; they're deductible because they will be incurred in the course of doing business as a landlord.

@Polina Goncharova Congratulations on your first deal. The numbers you shared look really solid to me, but I would be more conservative and use the market rate rents for income, unless they can show a 3-year history on the Schedule E for pulling in the higher rents for the Sec. 8 units.

Find a really experienced and thorough inspector to confirm the rehab work was done right. And confirm utility costs with the utility companies, don't just take the sellers word. Good luck!

Medium ccg 4John Casmon, Casmon Capital Group | 937‑361‑8072 | http://casmoncapital.com/podcast

congrats on taking action

Joel is providing excellent OPK, fyi

OPK <- other people knowledge 

Jenkins Ramon, JMWPS Ventures, LLC | [email protected]

Looks like Polina got a pretty good deal. Some concerns about the area, but no area is perfect. And I am not so sure about the sec.8. If I remember government pays 80% of the rent so 965 rent goes down to 772 and 950 rent goes down to 760. Because the remaining 20% to get from the tenant is very questionable. We all make mistakes but I think Polina is on a good start to financial success and she will be able to pull this off. Just needs to have a strategy.

By all means I am no perfect either. I bought a 3-flat about two months ago just a few blocks south of Polina's. 87th St./Pulaski/Southwest Hwy, on the border with Oak Lawn. Pretty much my first deal as well. Although I have a condo that generates about $130 a month passive income but I don't really consider it as a start.

Anyway; look at my numbers below and read explanation ...

PGI = 2470

vacancy loss = 4% 100

EGI = 2370

property tax = 309.4

homeowners ins = 156.6

utilities(common/water)= 165

repairs and maint = 10% 250

NOI = 1489

debt service: PI = 1101.6

monthly PMI 253

positive cashflow 134

Explanation:

I am pretty good with evaluating tenants, and keeping them long term. At least with my condo. This part of town in general looks stable with long term tenants. That is why I am assuming only 4% vacancy rate. In 2 of my smaller units 1b/1b I took over tenants who have been there for 11 and 5 years. Looks like they are not going anywhere. The rents are $630 and $590 .... I think they are quite below the market and can easily be $50 higher each. I will raise them as of January of 2015. My 3rd unit is bigger 3b/1b and I rented it within a week of the purchase of the property. Including a detached 2 car garage I get $1250 rent. I was getting a lot of interest in this unit but like 75% of prospects were sec. 8 . I turned them down.

The building is in a pretty decent condition, but it's going to need some repairs. The seller stopped maintaining it since he decided to get out. Due to lack of experience and knowledge of repairs and replacements I am afraid I underestimated all the stuff that I will have to fix. Right now I am estimating about 250/month like you see above, but originally was lower. I think I should be able to pull of $134 monthly cashflow at least till I get the majority of repairs done. I am getting the sum pump fixed and it looks like the sum pump was the problem with a high water bill. I know the City of Chicago has been raising water rates since 2012 and all the way to 2015. But still my utility bill is too high and considering I have a meter. The guy who is going to do the work told me the sum pump is using way too much water as of right now. So I am working on it to lower that water bill which will increase my cash flow. And then rent increase on 2 of my smaller units as of January. Overall my numbers look pretty good to me as far as returns. I bought the building for 235k ... with 3.5% down. My total initial investment including the down payment was $9186. Since the seller covered all the closing cost. Cap rate comes up to 7.6% which is not great but acceptable to me. COCR assuming only $134/month in positive cash flow is 17.5%. This return is the most important to me. ROI is about 62.5%. with principal pay down $4140 in first year. I am not assuming any appreciation. I should be able to manage with this even I will have to throw 10-15k in repairs. That is one reason why I wanted to buy an apartment house with as little down as possible. Imagine buying it with 20% down which would be about 47k and still having to fix stuff up. And on the other hand what building is not going to need any repairs? They all need something. I personally don't trust even more those nicely renovated. What eyes can see mind believes. They look great at a glance but you have no idea what's beneath the surface. I have seen them. I think I may have underestimated the cost of repairs, especially looking at my condo which doesn't have much maintenance at all. With my last tenant renting it for 3 years and 8 months the cost of repairs and replacements averaged out to $35/month. With my 3-flat I need to increase monthly cash flow as quickly as possible, I can't be sitting on roughly $130/month. I think just lowering the water bill and increasing rents on small units should boost monthly cash flow to about $300/month. Strategies going forward:

- reduce the water usage to lower the utility bill,

- increase rents on small units,

- buy coin operated washer and dryer for additional income,

- possibility of renovating the basement in to a little studio apartment and get a 4th tenant,

- refi within 3-5 years and get rid of the monthly PMI.

Just a comment regarding Section 8, I had section 8 tenants. I have seen that it is a love or hate situation, either you love it or hate it with no in-betweens. Look at the tenants for your decision NOT the program. Qualify the tenants on credit as any other tenant. The Section 8 pays market rate and always on time … nice. The Amount paid by the tenant varies on the tenant income. Remember Section 8 is about the rent ONLY and you are on your own for everything else as a landlord.

@Bartek Marciniak - Thank you for such a thorough evaluation. It's great to see how small differences can really help in getting your property cash flowing.

@Edwin Cruz - I really do believe that it's a case by case basis. I had the opportunity to meet and walk through the rented apartments of Section 8 tenants and see positive qualities as far as tenant qualities go.

Originally posted by @Bartek Marciniak :
...
And I am not so sure about the sec.8. If I remember government pays 80% of the rent so 965 rent goes down to 772 and 950 rent goes down to 760. Because the remaining 20% to get from the tenant is very questionable. ...

From my understanding of Section 8 and how HUD has this set up, the info in that quote is inaccurate. HUD requires the Section 8 tenant to pay 30% of their income toward rent; if income is low enough, this will be far less than the percentages in that quote. Of course, if tenant income is sufficient, the tenant paid portion could be similar to the numbers in the quote, but that 80% (or 20%) is not how it works. And of course Section 8 rents are based on Fair Market Rents averaged for a given market; there can be some pockets in that area that get higher open market rents (so Section 8 will not pay landlord adequately) and some pockets that get lower open market rents (so landlords make out doing Section 8 there).

Originally posted by @Polina Goncharova :
@Damon Armstrong - Expenses are a combination of actual (tax, insurance, PMI) and estimated reserves (8% for maint, vacancy, mgmt) these estimates I've gathered from BP. Rents are current rents.

@Joel Owens - Thanks for the thorough response! I shouldn'd use big words like "completely rehabbed", I understand, by what I saw and my realtor (also contractor) we were quite impressed.

Looks like I need to dig a little deeper on the tenant history, from what we got from them, they've been there the two years since rehab. The person I will be evicting is a non-section 8 tenant and we would have 2 months to do so (personal move-in). It seems that I would need more details on the tenant pay structure and their lease.


Hi Polina

First off - congrats on finding a deal and I hope it works out for you! I just wanted to comment on one thing - you mention that you'd have 2 months to evict a tenant until you have to move in (if I'm interpreting it correctly). In Chicago evictions can take a LONG time!! Check this thread out for a number of recent experiences with the long wait time to get tenants out:

http://www.biggerpockets.com/forums/81/topics/122507-eviction-time-in-cook-county

I wouldn't count on any particular time line for getting a tenant out - it can take far, far longer than you would ever expect.

Also wanted to comment on what subsidy Section 8 tenants get - I don't believe it's a set percentage, it completely varies based on their situation. For example, for one building I was just looking at in Chicago the rent roll indicated that CHA subsidies were anywhere from 61-94% of the total rent for the three Section 8 tenants.

Thanks for sharing Polina and good luck.

Larry

Medium logo 01Larry Smet, Boomerang Capital Group | 1‑800‑266‑6345 | http://www.boomerangcapitalgroup.com

@Larry Smet Thank you! I am excited and overwhelmed at the same time. The learning here is great and I'm excited moving forward. Just finished with the inspection which was great to witness myself.

I actually spoke with the tenant that needs to be leaving and they are on a month to month and he was completely understanding. He even asked when he needs to be out! So that was a relief, no need for evictions, hooray! As far as Section 8, I know one of the tenants pays $70 out of the $950, the other i am not sure.

On a separate note, I am a little lost with the insurance piece - Should the amount of coverage be on the sale price or rebuild price of the home? What is a safe medium? Is sewer backup insurance of $10,000 worth the additional $350/year?

Best,

Polina

@John Weidner Hello and Thank you! This was an MLS deal and i'm happy to hear that you like McKinley Park. I did not know the area but its growing on me and I think it would be a good fit. I am seeing a lot of long term tenant potential here.

I will ask you the same question about Insurance - what value of coverage would I put on my property? Current sale price or rebuild value? Also is sewer backup coverage a necessity?

Best,

Polina

Hi @Polina Goncharova

Your insurance agent is a pretty important member of your team - I'd get a professional to explain the difference and provide a recommendation.

I'm guessing that in the case of a catastrophic loss the 2 schools of thought are to either (1) get out of it at least what you put in (including paying off any debts and paying for holding costs) OR (2) be able to replace the property and cover any holding costs.

Don't forget liability insurance - that's critical for rental properties.

Regards,

Larry

Medium logo 01Larry Smet, Boomerang Capital Group | 1‑800‑266‑6345 | http://www.boomerangcapitalgroup.com

@Polina Goncharova

Usually the insurance company determines the value. One advice I will have is don't skimp on Insurance. When you need it...you need it. If you have tenants in the basement I probably would add a basement coverage to cover sewer backup. Was any flooding disclosed on the disclosures?

I can put you in touch with an insurance agent who I've been pretty happy with if you want.

Also recommend consulting with an attorney going into the lease situation buying a building rented. Make sure you get any security deposits documented before close. I would probably talk to the tenants prior to closing to confirm that.

If you need anything else just let me know..