Help with a Deal in Lincoln Park, Chicago

17 Replies

Being a commercial broker, a friend (he is a broker too) recently brought me this property. If this moves forward, this will be my first property. We plan on going in on the investment and operating the property using money from a couple investors that we have, but I'm curious about a few things:

  1. What posts/blog posts are best learn about this investment?
  2. What kinds of due diligence questions should I be asking to my broker friend? 
  3. We plan on doing work and have an idea of what we need to do. For anyone in Chicago, what kind of permits (if any) are necessary?
  4. We plan on using our broker fees' to reinvest in the property. Anything wrong with this?
  5. What other questions should I be asking?

Thank you!!!!!! Info below

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SALE OVERVIEW

SALE PRICE: $870,000

NUMBER OF UNITS: 3

GRM: Approximately 15

NOI: $58,129.82

LOT SIZE: 1,440 ft

BUILDING SIZE: 3,210 ft

YEAR BUILT: 1884

ZONING: RT-4

MARKET: Chicago

SUB MARKET: Lincoln Park

BUILDING:

The current building mix is three- 2 Bedroom 1 Bath apartments. All units are in good living

condition. Improvements to the properties include updated plumbing and electric. Each unit is subject to their own hot water tank. There is a laundry room with a washer and dryer

located on-site. The building is a 3,210 square ft building located on a parcel of land

zoned RT-4. 

2015 Proforma - Income/Expense - 3 Units

Income

Rents $67,800

Laundry $372.50

Fees $511.50

Lease Admin Fee $1,200

Total Income: $69,884

Expenses

Insurance $1,819

Real Estate Tax $9,660.18

Repairs/Maintenance $275

Total Expense: $11,754.18

Net Income $58,129.82

Hi @Jeremy W. , I'll let the more experienced folks answer your other questions. But in regards to the pro-forma numbers, the repairs/maintenance seems ridiculously low at $285 for the year on a hundred year old property. I don't think that would even be enough if it was a per month number.

As Michael said, that pro forma maintenance expense is ridiculous.  It should be more like 5-10%.  You are also missing:

Vacancy (usually 7-10%.)

Utilities - there will be common area electric and/or gas that you'll have to pay (especially if you have on-site coin op laundry.)

Water (tenants might pay this - do you have individual meters?)

Sewer

CapEx reserve - which you will definitely need in a building that old in Chicago.

Due diligence - you need to verify everything - rent rolls, leases, utility bills, property tax bills, recent CapEx, etc. Especially with a pro forma where the expenses are so obviously understated. How old is the roof? The water heaters? Big ticket items like that can kill your cash flow in the first couple years.

Read "What every real estate investor needs to know about cash flow" by Frank Gallinelli.

I know the 50% rule is sometimes polarizing on here, but with a gross of $70k, figure your NOI is closer to $35k and run the numbers based on that for a quick evaluation.

Hope this helps.

Your property tax seems low ($9660) for a Lincoln Park property. Are you sure that is correct ? When was the building last assessed ?

You say you will do much of the work yourself (which is good) and you ask about permits. You mention further down plumbing & electric will be needed. Yes you will need permits for that and that will involve licensed contractors.

Now I also see the number you have in for Insurance ( $1819) for a 100 yr old 3 flat in Lincoln Park. Way too low I think. If you can insure it for that price I need the name of your broker please !!

I need to agree with @Ronan M. regarding the insurance.  I just worked on a similar property that was insured for $250k, annual premium was $2500.  This was high, but just want to put into perspective the premium ranges for this type of rental property in Chicago.

By chance does the seller occupy the property as a residence?  This could drastically reduce the annual premium.  If they do not, I am not sure you will get this pricing with current market conditions.  Double check with your insurance broker.

Originally posted by @Jeremy W. :

Being a commercial broker, a friend (he is a broker too) recently brought me this property. If this moves forward, this will be my first property. We plan on going in on the investment and operating the property using money from a couple investors that we have, but I'm curious about a few things:

  1. What posts/blog posts are best learn about this investment?
  2. What kinds of due diligence questions should I be asking to my broker friend? 
  3. We plan on doing work and have an idea of what we need to do. For anyone in Chicago, what kind of permits (if any) are necessary?
  4. We plan on using our broker fees' to reinvest in the property. Anything wrong with this?
  5. What other questions should I be asking?

Your expense numbers aren't credible.  Ask the seller to provide you w/ some evidence (example:  copy of their previous year tax returns where they report income & expense to the IRS.)  Your water bill alone , which you will be responsible, will be over $1K on a building like this.  Even in a best case scenario I'd budget for $1200/door per year for repairs/maintenance.  $275 for an entire year on this type of building isn't realistic.

Check Chicago Code Violations for any past or current property violations.  The same site will provide you links to the types of permits required dependent on the work.  Dependent on the type of work you need a licensed GC.

Other questions you should ask;  Verification of rent deposits.  Are current tenants on Month To Month Leases or year leases.  Verify if the seller has deposits.

I love Lincoln Park

There is no way to make money though.

Im assuming you will be putting down 20% and getting a loan.
At $850,000 and a guess on your expenses (I'm being lazy)

$9800 Taxes
$2500 Insurance
$750 MISC monthly everything

Your monthly nut is $7411.86

The building you say only brings in what.. $5500

Net loss $1911 and thats without a vacancy.  Most tenants only rent for 1 year in the LP...

Unless you will be living in this property it makes no sense at all.
My advise concentrate on another area.

Who is doing the management of these 3 units? Assuming one of the investors or a professional management firm is going to manage. Add 8-10% of the total rent as management fee to your own expense calculations. This should be done regardless of whether you manage yourself to see if it can be profitable with a property manager in place (no one will do this for free, even if one of the investor owners chose to take on this role).

@Jeremy W. Seems that you have gotten some good advice regarding the property.

First of all it doesnt meet the 1% rule which i believe is needed in Chicago if you want to be cashflow positive. 

Secondly as stated above the taxes seem too low. I own a four unit in Albnay park (cheaper are than LP) that i bouth for 500K. my taxes are almost 9000. For yours with a purchase of 870K i would think it will be easily over 12K after reassessed.

Third in chicago the water is usually not metered separately. That will easily add another 150-200 a month to your expenses. Also repairs and maintenance on a 100+ year old building will run you A LOT more than 275 a month not to talk about in a year.

Some quick calculation

with 870K purchase

PITI is approx 5892 a month (assuming 170k down/20%) so its 70K a year.

Your gross rental income is approx 70K

So you will cover only your Principal, interest, taxes and insurance with rental income. Everything else will come out of your own pocket.

including
CAPEX 5-10%
Maintanance 5-10%
Water
Shared Utilities (Gas/ Electric)
Vacancy (at $1600 a unit average rental this can hit hard even with one month)

ETC..... You will not be able to build a reserve fund without paying into if from your own funds due to using all your money for the PITI.

This is just a highlevel 5 min overview and i would say RUN...... This is a deal for an owner occupant that is just looking to subsidize living a bit but not for a real estate investor.

@Jeremy W. Like others have said, you are missing water (sewer is included), vacancy, repair, capex, ect.

I looked up the taxes, the reason they are so cheap is the lot size is 26 x 59 so about 1/2 of a standard Chicago lot.  But you are going to be in for a BIG surprise next year when your tax bill comes if this valuation sticks - That is a 166% increase in taxes!!

2014 Taxes were $9,783 so even if the tax rate does not increase (like they say it will) your taxes would be $16,239.60 based on the new valuation

I am also trying (and learning) to dive into multifamily space and it seems that Proforma presented by the seller/listing agent is very misleading most of the time. They paint very rosy picture and you have to ask so many questions (most important question, I guess is the expense they are referring is 'actual' or 'estimated'.  Most of the time it will be 'estimated' or combination i.e. INCORRECT), and do enough research. We were about to make an offer for one of the multifamily in Glendale Heights and when asked for original receipts, bills and other documents, the seller was very selective with regard to what to share and what not to share. Many of the numbers were misrepresented and we pulled of at the right time..

I would appreciate thoughts from experienced investors with regard to 

- What due diligence questions should be asked?

-  What specific documents/bills/receipts should be asked? 

- also, they show only one of the unit (the best unit they have in the building) so is it safe to assume and rely on listing agent about the condition of other units? 

Thanks!!!

@Kumar Paj , if you were going to make a serious offer on the place you would demand to see the entire building. There is no way you would not see each and every single individual unit. Would you buy your personal home on just the kitchen?

As for pro-forma numbers, those are misleading at best and possibly outright lies in some situations. They'll make pie in the sky 'market guesses' and then expect you to pay based on those numbers. "This apartment only has 50% occupancy but you would make $X amount if it was 100% occupied. So why not pay us as if it was 100%." Yeah right.

As for documentation, a tax return would be a good start. If they had expenses you know they'll deduct that for tax purposes. Check their bank statements and see if it matches the money they should be bringing in from the rent roll. 

@Michael Le Thanks for the input.

Good to know that I can ask for tax returns and bank statements. At what stage I should ask for bank statements and tax returns? For how many months, years?  Last six months bank statements and three years tax returns? 

Also, I understand that they will eventually show all the units but the issue is they told me that they can show all the units only when I am ready to make an offer and done with all analysis. After investing my time on all research and analysis, I learned that all units were in very bad condition and need lots of work...

How do I avoid such situation? Thoughts???

@Kumar Paj , you'll have to make an offer with an inspection contingency. Similar to your concern of putting in effort to analyze the property and it not working out, consider how many tire kickers the seller has to deal with. Surely if you were in that position you would not share your financial information to just anyone that asks. You'll have to use their proforma data and any other information you can find (area rental rates, area trends, area cap rates), make some assumptions and come up with your offer. Then you'll have to pay for an inspector to walk the building with you. You can revise your offer after really look at their books. In the end, after spending time, energy, a few hundred or more it might not come to anything. Consider it the cost of doing business.

@Michael Le Thanks for the info.

Obviously all offers have inspection contingency so eventually we figure it out. My concern is about the timing but I agree with you that we have to start with proforma and need to move step-by-step...  

Thank you everyone! I am going back to the sellers' broker about taxes, water, and insurance.

For anyone from Chicago, what are your thoughts on turning this tri-plex into a residence?