What do you think of this rental investment?

Question

Hi guys! Thank you for reading my post. Any advice would be greatly appreciated. I am a "learning investor" (own a rental property in FL) but it has been 4 years since I made that purchase, which I still own. Please let me know what you think about this potential investment.

I am currently looking at 2-flats in the East Garfield Park and North Lawndale area. I understand this is not the most desirable area and the crime rate is high. However, there is talk that this area could re-develop in the near future. This would be an added bonus as I am more interested in the cash flow from rent.

The current deal I am looking at

Building type: 2-flat with finished basement and 2 car garage (garage is 6 years old).

Neighborhood: North Lawndale

Listing Price: $150K with 2 car garage.

Taxes: $3600 per year est.

Building condition: turn key. Furnace/Heater/Plumbing 8 years old. Already visited unit, looks good in and out. Will do an inspection.

Rental: $1100 currently rented unit 1 (they use basement). Renters are section 8, have been living there 8 years. Unit 2 vacant, can be rented for $900-$1000.

Please let me know what you guys think, if this would make sense for an "learning" investor or if I should stay away from the area, etc. Comments are greatly appreciated!

Matthew Olszak · Answer

@Arturo Perez Be very careful buying in North Lawndale. Its an extremely block-by-block neighborhood. Also, there are a ton of buildings that are super-overbuilt for the area and marketed/sold to out of state buyers with unicorn-esque numbers and beautiful finishes that WOW you and make you think its such a great deal. Those same buildings will sit on the market for a long time, then after being broken into, gutted, and defaulted on their hard money loan go REO for 40k-60k. I don't even need to know the address or look at it, if its west of Kedzie, $150k for a 2-flat is too much in my general opinion. UNLESS, and that's a big UNLESS, its on a prime block and already being professionally managed with a positive history for at least 2 years.

I like @Jeff Burdick's recommendations. You can get a 2-flat + illegal attic and/or basement in Little Village all day for $150k. In decent shape and with good rents and very low vacancy. There are a couple sections of the neighborhood I recommend my clients stay away from (unless they get a solid discount), but overall its good. I manage a decent number of units in LV and am getting $800+ for a 2BR recently, no gov't subsidization. Drop it to $750 and you can rent it within a week.

Brighton Park is decent, but slightly lower rents than LV and about the same demographic/crime. McKinley Park is heating up, but I think you'll have a hard time staying in budget for anything in the right condition to get the rents you need.

Jeff Burdick · Answer

Hey Arturo.  My personal opinion is that these are not areas to start in.  While I do think they could eventually gentrify(EGP more so than North Lawndale), I don't think it'll happen anytime soon or very quickly unless something major occurs(IE Amazon coming to Chicago).  I'd also add that those property taxes are high for a 150K property.  EGP isn't too bad if you stay towards the northeast corner of it, IMO.  I frequent the area around the California green line stop for my W2 job and that area seems relatively decent.  If 150K or so is your budget, I'd try to find something in Little Village, McKinley Park, Brighton Park.

Clayton Mobley · Answer

@Arturo Perez Honestly, for a learning investor, I would recommend that you stay away from lower-tier rentals and Section 8. There's nothing inherently wrong with lower income renters (of course, they're people too), but there is often a lot more hassle that comes along with C/D tier properties. Statistically, you're more likely to deal with evictions (people that are one bad flu away from missing rent just can't be as consistent as people with more money, sadly), and the Section 8 program is loaded with red tape, inscrutable changes, and general headaches. When we first started, we toyed with doing C-tier rentals but quickly abandoned it because the reality is so much different from what looks like amazing 'government guaranteed' cash flow on paper. C/D rentals can work for some people, but its almost always experienced investors who live in the area and can save money by self-managing their rentals.

I'd say set your sights a little higher - it will pay off in the long run to spend a bit more on a B/B+ property with stable tenants in a good area. It will pay off in consistent income and in peace of mind. The idea that an area 'might' gentrify in the future is not something to bet on when you're just starting out. That's like someone brand new to the stock market betting big on a tech startup IPO when they know nothing about how assess its prospects. Stick to a proven entity that has a good track record and fewer risks. Buy some shares of Apple or Amazon, don't jump straight into penny stocks just because the price is so enticing.

Best of luck!

Arturo Perez · Answer

Thank you Matthew! Wow, looks like I steered clear from a potential bad investment. I visited the property and while the building itself looks very nice the block left much to be desired. There was some new construction going on next to it, in front and across but also noticed a few abandoned for sale properties, and the area looks shady. I'll look at those areas mentioned. Thanks again for your input.

Arturo Perez · Answer

Hi Jeff. Thank you for your input. I'm glad I posted the question here because it gives me some perspective. I'll continue to look in the areas you mentioned. I have not found something in that price range in Little Village but I'll try McKinley Park/Brighton Park area. Thanks a lot!

Arturo Perez · Answer

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Arturo Perez · Answer

Thank you so much for your input. I have actually been considering all  your points and a C/D property might not be the best idea for my first  investment. Considering I do not have a lot of cushion should something  go wrong early on. My other idea was to purchase a multi unit in a solid  area where I can move in and rent the other unit out. I think I am  leaning more towards this route now.

What do you think of this rental investment?

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