Need advice on possible buy and hold

4 Replies

Hi,

I'm new and I would really appreciate advice on whether to proceed with a deal in Chicago (this is my first potential deal).  Here are the details:

  • I have the property under contract right now for $469k
    • Will take about another $20k to fix the property up
    • I'd be all in at around $115k (15% down, closing costs, repairs)
    • Cap rate is ~6%, which seems good for Chicago from what I've seen
  • It is a legal 2-flat, but currently has 4 rented units (non-legal basement and attic)
    • If I lose one unit, cap rate drops to ~4.3%
    • If I lose both non-legal units, cap rate drops to ~2.7%
  • Monthly income:
    • Current rental income is $4800/month ($1400/legal unit and $1000/non-legal unit)
    • No additional income
    • Total: $4800
  • Monthly expenses:
    • Tax: $350
    • Insurance: $175
    • Maintenance and Capital Expenses: $650
    • Utilities: ~$300 (some of the units are not separately metered so there are caps on tenant utility expenses)
    • Property Management: $500
    • Vacancy (8%): $380
    • Mortgage: $1925 (I have a pre-approval for 3.75%, with $75 PMI payment/month)
    • Total: $4280
  • Concerns:
    • I checked the city department of buildings website, and there are open violations against the property, one of which says to pull out the basement unit
      • The seller (and their lawyer) have stated that the violations have been handled, but they still appear when my lawyer checked into it
      • They've emailed me a dismissal order they got for the violations last may, but I can't really understand it.  I'm going to talk to my lawyer about it in the morning, but I don't know why they would still show as active violations if they've been dismissed
    • The housing inspector said the electrical service was at 100 amps, which is inadequate for the building. 
      • The seller says that it is at 170 amps.  I'm not sure if this is enough for 4 units, especially with 2 that have electric ranges, window A/C, and I saw space heaters as well

I'm afraid that I'll buy the property and then have an inspector come for one of the apparently open violations and I'll lose either the basement and/or the attic unit (therefore going to basically break-even or losing $750/month).  

Should I go forward with the deal?  I really appreciate any advice.

Devin

Short answer and at first look, I would stay away from it unless you negotiated in the contract to have the seller bring the electrical up to code. Then they are liable for permits, inspections etc. And if something bad goes down, like the other dwellings need to be pulled, you can walk away from the deal.

This really is stuff your real estate agent should be telling you. If they're not, you need a new agent.

Originally posted by @Devin Drowley :

Hi,

I'm new and I would really appreciate advice on whether to proceed with a deal in Chicago (this is my first potential deal).  Here are the details:

  • I have the property under contract right now for $469k
    • Will take about another $20k to fix the property up
    • I'd be all in at around $115k (15% down, closing costs, repairs)
    • Cap rate is ~6%, which seems good for Chicago from what I've seen
  • It is a legal 2-flat, but currently has 4 rented units (non-legal basement and attic)
    • If I lose one unit, cap rate drops to ~4.3%
    • If I lose both non-legal units, cap rate drops to ~2.7%
  • Monthly income:
    • Current rental income is $4800/month ($1400/legal unit and $1000/non-legal unit)
    • No additional income
    • Total: $4800
  • Monthly expenses:
    • Total: $4280
  • Concerns:
    • I checked the city department of buildings website, and there are open violations
      • The seller (and their lawyer) have stated that the violations have been handled, but they still appear when my lawyer checked into it
      • They've emailed me a dismissal order they got for the violations last may, 
    • The housing inspector said the electrical service was at 100 amps, which is inadequate for the building. 
      • The seller says that it is at 170 amps.

I'm afraid that I'll buy the property and then have an inspector come for one of the apparently open violations and I'll lose either the basement and/or the attic unit (therefore going to basically break-even or losing $750/month).  

Should I go forward with the deal?  I really appreciate any advice.

If you have to ask the question whether or not you should go forward w/ this deal then maybe....  1st your numbers- $115K Investment for maybe $6240 (($4800 minus $4280)*12 months) net cash flow/year.  Forget the CAP Rate- That's a 5.43% ROI.  If you loose the so called illegal units your gross drops to $2800/month & for the sake of argument let's say you expenses drop from $4280 to $3280.  Now you have a negative cash flow of over $400/month.  Again-Forget CAP Rate. You'll invest $115K to loose  $4800/year.   It will be even worse than that if the expense are higher.

Regarding the city of Chicago building department website- Remember it's a gov't entity & it's often not up to date.  You're attorney should be able to check the dockets to confirm if the violations have been dismissed.  

Regarding the housing inspector - Maybe you should send an electrician to the property.  

Now- Should you keep this deal or ask for a price reduction?

You can't offer on this deal based on 4 unit valuations. It is a 2 unit. If you want to make an offer as a 2 unit, do it, but at 469, it isn't a "deal".

You are making a lower return on your cash in (even with all 4 units), than you would as a simple private lender. As a private lender you wouldn't have to worry about inspections, losing units, getting fined, violations, etc.

So is this a deal.. not in any definition of the word "Deal" I have seen.

Sellers can say anything to sell a property and so do their attorneys...... : )

This property is right at one percent of rents including the 2 illegal units. Sometimes an existing owner gets grandfathered in when they fight the county, city etc. but when a transfer of sale happens that goes away.

Also if the electrical is inadequate  or plumbing etc. but it is functional then it gets grandfathered but as soon as a part goes out it all has to come up to current code. Your insurance estimate sounds low an a property like this.

This just seems like a big NO all around. 

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