Deal analysis

[Sam Lee]

Im looking at a couple deals around my area in Jefferson Park Chicago. I was wondering if you could check out this deal to see if this makes sense

3 unit house in Jefferson park

Purchase price: 185,000
25% down payment
Mortgage will be 800/month
Total month's rent will be conservatively estimated at 2300 (900 for two of the units and 500 for the basement)

50% rule
2300 Rent
1150 Expenses
1150 NOI
less 800 mortgage
350/month cash flow

so what do you think of this deal? I know I can find better, but I know this neighborhood very well since I grew up here.

[David Beard]

As you're probably expecting to hear, it does sound too thin to burn $50k of your hard-earned cash on. The net yield (cap rate) is just 7%, and your cash ROI with the loan would be just 9%. And that's assuming that tenants pay their own gas/electric/heat, and that the landlord pays water/sewer/trash. If landlord pays heat, then the returns are even worse (assume 55% expenses at least in this scenario).

Honestly, you should be looking for minimum 10% net yield deals in this buyer's market, regardless of how nice the area is, and preferably 12%+.

For multis, you should pay no more than 50 times gross monthly rent (the "2% rule"), and preferably 40. I really don't know if that's realistic in your area. You may need to range farther afield.