High End Neighborhoods in Chicago Condo Rentals

8 Replies

I've been reading through a few posts here and got mixed feedback about condo rentals.

I'm currently focusing on doing condo buy and holds in the most popular neighborhoods in Chicago (Gold Coast, Old Town, Lincoln Park, Lakeview). I'm willing to take the trade off of lower returns for the reduced risk where I know there will always be rental demand and typically the type of renter is better as well. Vacancy rates for the entire neighborhood are less than 5%. The condos themselves are high rises with full amenity (24hr security, gym, pool, etc).

I was wondering how much people adjust their ROI, Cap rate targets for these types of deals?

The current deal I'm looking at is as follows:

Sale price: ~$125k

Down Payment (25%): $30k

Closing Fees: ~$5k

Rehab: $20k

Rent: $1500/mo

P&I: ~$450/mo

Taxes/Ins/HOA/Vac: ~$550/mo

Monthly Cash Flow comes out to +$500/mo. ROI about 10-11% but the cap rate is a little on the lower side around 7-8%. This is with self management which I also think is a little easier with these types of condos.

For investors who go for this niche of the market, based on the cash flow alone would you go for this type of deal and how would you rate it? For buy and hold, is the cash flow more important than cap rate?

@Ruthvik B. Cap rate is a quick indicator for comparing investments but @ the end of the day on a deal like this it's irrelevant. You're not putting up $125K to purchase the condo- You're putting up $55K, including renovation & closing costs. My opinion- You should be analyzing if there are other investments that will provide you w/ >10% ROI w/ the same level of risk or less. The analysis should include the potential for appreciation of the investment. And when I say investment I mean any type of investment.

@Crystal Smith  Thanks! That is definitely the way I believe I should go about this.

@Wendell De Guzman Thanks for that analyzer, I threw in an additional 5% each for both reserves and expenses. I agree that they can occasionally come up. That took the ROI down to 7.5%.

So I guess the real question I should be asking is if other investors who are targeting these same areas are consistently finding deals that give higher returns than 7% or if this would be considered good?

Let me ask another question. You're buying for 125k and putting in 20k for rehab. What is the place going to appraise out for when you're done?

If you tell me it'll be worth 250k after the rehab, then you might get plenty of people saying they'd be interested. If you tell me it'll be worth 150k, you may be getting nobody telling you its a good deal.

To me, I always try to look at the balance of both the rental income it will generate, the LTV I'm getting in at - which also tells me equity capture, and the property characteristics itself.

I might do a deal where the cash flow is only $300/mo gross profit if the equity capture is huge (say a 180k house that I can get in for 110k?). Or on a house where its 150k house for 100k maybe I want to get 400/mo min gross profit. 

I'd also say to throw in property type. I might be willing to drop the cash flow or the gross profit if the house is newer (2000 or better). But I might require more cash flow/equity capture if its old (50's or 60's).

Just got a house under contract a couple weeks ago thats a good example. Contract price of 90k, needs 20k rehab so all in at 110k. But the taxes are pretty high so it will likely not be that great of a cash flow deal (350 to 400/mo gross profit compared to 450 to 550 I've been getting). However, it should appraise out around 170k to 175k so I'm getting some good equity. And the thing sold for 270k during the boom.   

I'm also hoping I can get the taxes reduced some since the house is assessed at 200k still which is definitely over market.  Add in the fact that this house was built in the late 90's so its relatively new and those are the reasons I was willing to take less cash flow but still liked the deal.

I'd always suggest looking at a combination of those things (and maybe you've got more of your own to add too) when determining if its a good deal or not. Cap rate alone wouldn't tell me for sure whether it would be something I would do.....

I like the numbers!! 

@Mike H. Thanks for your insight on strategy. For this particular example, I don't expect to gain too much immediate equity after doing the rehab. It's more so to get higher rents which I believe will offset the rehab costs. I can rent it as is but the rents would just be lower and so would the ROI. When you gain the equity in your homes, are you looking to do a HELOC or do you sell in short term?

I had never considered the appreciation rate too much as I know these areas are historically strong and there will always be renters. In the case that you mentioned I would probably be looking to do a flip on the property.

That being said I believe the value of the property will be rising in the next few years so that was the qualification for me.

I would be interested to hear from someone who purchased a condo in one of these areas recently and how the numbers looked on the deal.

Looks Like you have done your homework

Remember you are buying into a condo association and many have lots of rules.
Make sure you review the budget and bylaws in your due diligence period.

You will find out in Lincoln park and the Gold Coast many buildings have rent caps and or huge special assessments coming down the road. Plus there are a lot of regulations put on rehab.

My advise, take the risk and get a building

Hi @Ruthvik B.  , your numbers work. You will have to find that small unit in a building with no cap rate as @Nick Patterson  mentioned.

I have a lot of out of country buyers and people in high stressful jobs that buy condos in the hottest market for the same reason as you.  They are looking at the probability of value increase at a low risk and with very little owner involvement.

If you are willing to put the time and take more risk, then the multi-family buildings is the way to go.

Good luck to you!

Lumi Ispas, Real Estate Agent in IL (#475.113981)
773-392-2906

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