1st Chicago Property - How _____ did I do?

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1st Chicago Property - How _____ did I do?

Scott L.
Denver, CO · Member since 2012 · 18 posts · 3 votes

I am just getting my feet wet in real estate, and figure there is no better first post than my first deal! Below are the basics, let me know if you have questions. Just looking for some basic analysis and advice - would be great from my fellow Chicagoans. Thanks in advance :)

4 Unit Property (3 units in main house + coach house)
Price Paid: $280,000
Money Down: $56,000
Monthly Payment (Incl Ins + Tax): $1970/mo
Current Rents: $3665/mo

This is the basic breakdown without me living there. However, I plan to move into the Coach House within 60 days, after the current tenant moves out at the end of Oct, and I do some moderate renovation.

For at least the first year, I plan to be an owner-occupant, manage the property and put the proceeds directly back into proactive improvements, such as replacing a 50 year old water heater (not joking).

My goal is to hold this property for the long term, and acquire more over time, with the second being within 1 year from now.

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David Beard
Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
14y
Originally posted by Scott Leitl:
Shouldn't I be going by the the 40% rule since I plan to manage it myself, which if I remember information stated on this site correctly, subtracts the standard 10% management fees from the 50%?

NO. You should always purchase with an allowance for property management built into your numbers, even if you plan to start out self managing. You may need to use a PM at some point for a variety of reasons (you've purchased more property then you can manage yourself, you've been relocated out of the area, other job/time commitments, you suck at selecting/managing tenants, etc.).

Also, future buyers will likely factor in PM costs when they do a proforma computation of the NOI of your property, which directly impacts what they're willing to pay. So, bottom line, enjoy the "wage" you're earning by self managing for now, but build PM costs into your purchase model on the front end.

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  • Brian H.
    Real Estate Investor · Louisville, KY · Member since 2012 · 39 posts · 9 votes
    14y
    4 Unit Property (3 units in main house + coach house)
    Price Paid: $280,000
    Money Down: $56,000
    Monthly Payment (Incl Ins + Tax): $1970/mo
    Current Rents: $3665/mo

    I'm still learning the ropes of property analysis myself, but I'll take a stab at it. Your gross rents collected at the end of year one will be $3665*12 = $43980. Using the 50% rule, your net operating income (NOI) for the year will be 43980/2 = $21990. Your total payments (PITI)at the end of year one will be $1970*12 = $23640. Your cash flow is NOI minus (-)PITI, or 21990 - 23640 = -1650. You have a slight negative cash flow here, or approximately $138 loss per month ($1650 /12 months). Not necessarily a losing deal from my perspective though. Just a slight decrease in expenses and/or a small increase in rents will push you into positive territory. Doing all this on my phone so hopefully my math is right.

    0Reply
  • Account Closed
    Condo Investor · Chicago, IL · Member since 2012 · 19 posts · 2 votes
    14y

    Just curious - what neighborhood of Chicago is it in?

    0Reply
  • Andrew O.
    Real Estate Investor · San Clemente, CA · Member since 2011 · 209 posts · 47 votes
    14y

    Congrats on your first deal, it's nice to step in from the sidelines.

    Your deal wouldn't exactly have me getting excited. Your Piti is a good chunk of you gross, and I'm guessing since you have a 50 year old heater to replace, you may not be seeing profit from this place for awhile. Did you have a contractor give you a quote for what is needing to be done to this property?

    As you asked it would be good to hear from others from Chicago, these numbers may be ok for your area, I just wouldn't give them a second look personally. Have you been lurking and researching certain guiding %'s mentioned on these forums? Eg 50% guideline.

    0Reply
  • Brian H.
    Real Estate Investor · Louisville, KY · Member since 2012 · 39 posts · 9 votes
    14y

    Not 100% how your occupancy of the one unit will affect the cash flows overall. Obviously you won't be collecting as much rent but then you won't have as high expenses for that unit either, as you'll surely take better care of it than any tenant would. Hopefully someone smarter than I can chime in and give you a more thorough assessment.

    0Reply
  • Manuel A.
    Rehabber · Albuquerque, NM - New Mexico · Member since 2011 · 283 posts · 38 votes
    14y

    Not an expert (in anything for that matter) in rentals but I believe the "standard" is people look for their total income for rents to be 2% of the price paid which would be $5,600. You have 1.3%.

    Now you plan living in the Coach House (not sure what that is) but I'm sure that means you'll be losing one of you income streams. So when that time comes you be getting 3/4 of $3,665 which is $2784.75 which is 0.9% of purchase price. So that may be a little low.

    On here they also like to say, over time, 50% of your rental income will go to rehab which would be $1832.5/mnth. On top of your payment of $1970/mnth, you'll have left over theoretically
    -$137.5/mnth... Fully occupied that is.

    So theoretically it's a loss. But I also think 50% is conservative. Then again, it's a 4-plex... With this 50% rule it would mean $22k would be needed in repairs per year, averaged over time. I think it's sounds like over kill, but maybe it isn't. Personally I couldn't fathom $15k in repairs on a 4-plex per year, but I've never done it, so maybe someone can share.

    Anyway, if you can keep under $15k repairs/year, you should do good. Profit around $5k per year plus getting closer to paying off and owning a 4-plex! Then if all goes good and QE3 causes house prices to rise, maybe you can cash out (before the collapse) and do bigger things. So much can happen! Welcome to BP!

    Manuel

    0Reply
  • Scott L.
    OP
    Denver, CO · Member since 2012 · 18 posts · 3 votes
    14y
    Originally posted by Scott Fey:
    Just curious - what neighborhood of Chicago is it in?

    Basically on the dividing line between Bucktown and Logan Square.

    0Reply
  • Andrew O.
    Real Estate Investor · San Clemente, CA · Member since 2011 · 209 posts · 47 votes
    14y

    Brian H, your calcs are pretty good, but I'm fairly sure (I know I will vehemently corrected if wrong ;) ) the TI part of the PITI, would be considered in the 50% guideline, so you would be counting them twice here, also PM is generally costed out at 10% so his expenses would more be...

    12*1970 = 23640
    His running expenses without PM would be
    3665*40% *12 = 17592 - his tax and insurance already considered in PITI

    therefore he would be $2748+TI positive for the year.

    However he may have some deferred maintenance etc if there is a 50 year old water heater sitting in the basement.

    1Reply
  • Scott L.
    OP
    Denver, CO · Member since 2012 · 18 posts · 3 votes
    14y
    Originally posted by Andrew O.:
    Congrats on your first deal, it's nice to step in from the sidelines.

    Your deal wouldn't exactly have me getting excited. Your Piti is a good chunk of you gross, and I'm guessing since you have a 50 year old heater to replace, you may not be seeing profit from this place for awhile. Did you have a contractor give you a quote for what is needing to be done to this property?

    As you asked it would be good to hear from others from Chicago, these numbers may be ok for your area, I just wouldn't give them a second look personally. Have you been lurking and researching certain guiding %'s mentioned on these forums? Eg 50% guideline.

    I do realize the amount of work required. The place is in decent shape though as-is, but I'll probably spend 10k in the first year on the coach house alone. However, the potential for a 50% coach house rent increase with these improvements is definitely there.

    I have been lurking and researching a bit. Although it is close to break even given the 50% rule, keep in mind this will also be my home, so I won't have a personal housing expense to deal with, which is currently costing me roughly $1500/month. Rent in a good neighborhood of Chicago is NOT cheap.

    0Reply
  • Andrew O.
    Real Estate Investor · San Clemente, CA · Member since 2011 · 209 posts · 47 votes
    14y

    Hope it works out for you then, again, congratulatoons.

    0Reply
  • Scott L.
    OP
    Denver, CO · Member since 2012 · 18 posts · 3 votes
    14y
    Originally posted by Manuel Acuna:
    Not an expert (in anything for that matter) in rentals but I believe the "standard" is people look for their total income for rents to be 2% of the price paid which would be $5,600. You have 1.3%.

    Now you plan living in the Coach House (not sure what that is) but I'm sure that means you'll be losing one of you income streams. So when that time comes you be getting 3/4 of $3,665 which is $2784.75 which is 0.9% of purchase price. So that may be a little low.

    On here they also like to say, over time, 50% of your rental income will go to rehab which would be $1832.5/mnth. On top of your payment of $1970/mnth, you'll have left over theoretically
    -$137.5/mnth... Fully occupied that is.

    So theoretically it's a loss. But I also think 50% is conservative. Then again, it's a 4-plex... With this 50% rule it would mean $22k would be needed in repairs per year, averaged over time. I think it's sounds like over kill, but maybe it isn't. Personally I couldn't fathom $15k in repairs on a 4-plex per year, but I've never done it, so maybe someone can share.

    Anyway, if you can keep under $15k repairs/year, you should do good. Profit around $5k per year plus getting closer to paying off and owning a 4-plex! Then if all goes good and QE3 causes house prices to rise, maybe you can cash out (before the collapse) and do bigger things. So much can happen! Welcome to BP!

    Manuel

    Manuel, keep in mind that me living there will completely eliminate my current rental expense, which is closer to $1500/mo. The opportunity cost of moving into the coach house is $900 (because that's what it is currently rented for). I want to live in it for a while, and get it looking great, which will very very easily boost its value as a rental.

    Coach houses are smallish single family homes on the same lot as a larger home, and often take the place of a garage. They are highly desired as rentals in Chicago because they live like a SFH, but without the cost.

    There is no way the place will cost 15k/year in maintenance over the course of time I own it.

    Thanks for the analysis and positive outlook though (other than your predicted collapse..?). We'll see how long the party can last. ;)

    0Reply
  • Scott L.
    OP
    Denver, CO · Member since 2012 · 18 posts · 3 votes
    14y

    Shouldn't I be going by the the 40% rule since I plan to manage it myself, which if I remember information stated on this site correctly, subtracts the standard 10% management fees from the 50%?

    EDIT: @ Andrew O. - wrote this before I saw your post. Thanks!

    0Reply
  • Andrew O.
    Real Estate Investor · San Clemente, CA · Member since 2011 · 209 posts · 47 votes
    14y
    Originally posted by Andrew O.:
    ?..also PM is generally costed out at 10% so his expenses would more be...

    His running expenses without PM would be
    3665*40% *12 = 17592 - his tax and insurance already considered in PITI

    therefore he would be $2748+TI positive for the year.

    Yes.

    0Reply
  • Dave M.
    Residential Landlord · Chicago, IL · Member since 2012 · 356 posts · 81 votes
    14y

    Living free is a very good thing. What cross streets will you be at?

    0Reply
  • David Beard
    Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
    14y
    Originally posted by Scott Leitl:
    Shouldn't I be going by the the 40% rule since I plan to manage it myself, which if I remember information stated on this site correctly, subtracts the standard 10% management fees from the 50%?

    NO. You should always purchase with an allowance for property management built into your numbers, even if you plan to start out self managing. You may need to use a PM at some point for a variety of reasons (you've purchased more property then you can manage yourself, you've been relocated out of the area, other job/time commitments, you suck at selecting/managing tenants, etc.).

    Also, future buyers will likely factor in PM costs when they do a proforma computation of the NOI of your property, which directly impacts what they're willing to pay. So, bottom line, enjoy the "wage" you're earning by self managing for now, but build PM costs into your purchase model on the front end.

    2Reply
  • Jerry W.Pro Member
    Moderator
    Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
    14y

    I cannot believe how much i just learned by reading all these posts. I suddenly feel like a beginner. Thank you everyone who posted.

    0Reply
  • Scott L.
    OP
    Denver, CO · Member since 2012 · 18 posts · 3 votes
    14y

    @David Beard - Thanks for keeping things in perspective. I know I have a lot to learn this first year, which is why I want to partake in a forced learning model via self-management. I plan to take all proceeds from the first year and put them back into the property. Meanwhile, my daily job's income will produce a down payment for #2. Once I get in a better place in terms of the property's mechanicals, AND I have my second property, I may hire a manager. But that is a ways off.

    One nice thing is that I work from home, so moving is not an issue, nor is unavailability for fixing an urgent maintenance issue. I definitely need to be careful about how and what I respond to though - don't want them taking advantage of me.

    To help save time, I plan to use Buildium, which should keep me organized and allow for online rent payments, tenant screenings, among other things.

    My brother lives in Cinci btw - nice city. I really love what they've done with the downtown area.

    0Reply
  • Scott L.
    OP
    Denver, CO · Member since 2012 · 18 posts · 3 votes
    14y
    Originally posted by Andrew O.:
    Originally posted by Andrew O.:
    ?..also PM is generally costed out at 10% so his expenses would more be...

    His running expenses without PM would be
    3665*40% *12 = 17592 - his tax and insurance already considered in PITI

    therefore he would be $2748+TI positive for the year.

    Yes.

    So I am looking at $2748 + ~$7000 + $2200 = ~$11948 positive for the year. Although this may not be 100% ideal from an investors perspective, I am feeling pretty good about it!

    Thanks for all the help so far - I look forward to contributing, sharing my experiences, and building relationships. Great forum.

    1Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    14y

    "Meanwhile, my daily job's income will produce a down payment for #2."

    Don't focus on getting too big too soon. Crawl before you walk and walk before you run.

    Don't try running first or you will fall on your face and it will hurt! LOL

    Work on your first one and get that down pat.Yes over time you can minimize costs and pump up the profit numbers each year over the 50% guideline.

    When you go to sell the new buyer will be looking at a lot of deferred issues resulting in a lower price.The bathrooms and kitchens and mechanicals will need replacing at various times.

    I see this all the time where apartment owners show healthy returns over the years but when I look at it I can see huge costs in needed repairs going in.

    These repairs if you tell yourself are not a big deal will take away every ounce of future cash flow for years from your projections.

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    1Reply
  • Scott L.
    OP
    Denver, CO · Member since 2012 · 18 posts · 3 votes
    14y

    Joel Owens, Thanks for the advice. I definitely don't want to jump the gun, but at the same time need to be ready when an opportunity presents itself. I envision a second property being a fixer-upper, half the cost of this one, either a 2-flat or a SFH. A SFH in a decent area would be nice, because I would live there. Anyway, that will all come with time...must...focus...on...present.

    The property referred to in this thread definitely needs some work, but all units are very liveable as-is. I plan to be very proactive about fixing things before they are huge problems. The first year will be a bit expensive, and a great learning experience on so many fronts. I do feel strongly that if I put some extra work in during the first year, I will reap the benefits down the road.

    I'm in it for the long term income and equity growth.

    0Reply
  • Scott W.
    Real Estate Investor · chicago, IL · Member since 2012 · 1k+ posts · 231 votes
    14y

    you don't say what your principal & interest are. i guessed 4.5% 30-yr fixed, which is $1134/month.

    $3665/month market rents = $1832 using 50% rule. now add in your $1134 = $2966 total costs. $3665 - $2966 = $699/month ($174/door) x 12 months = $8388/yr $8388/$56000 down payment = 15% cash-on-cash return. pretty good.

    1 thing you don't mention is how much initial rehab is involved? if any, add that onto the purchase price.

    ignore the 2% rulle. that's for slumlords.

    @ Joel Owens has a good point. A lot of LL's ignore captial improvements & maintenance. I've found regular small maintenance can avoid bigger (& costlier) issues down the road. Be proactive on your maintenance!

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    14y
    Originally posted by Manuel Acuna:
    Not an expert (in anything for that matter) in rentals but I believe the "standard" is people look for their total income for rents to be 2% of the price paid which would be $5,600. You have 1.3%.
    ...

    The "2% rule" should be applied where rents are roughly $500 per unit; when rents are lower than $500, you will need for that percentage to be higher; conversely, when rents are higher you will be OK with a lower percentage. Rents here are clearly above $500 per unit, so being less than 2% is not necessarily terrible.

    Originally posted by Manuel Acuna:
    ...
    On here they also like to say, over time, 50% of your rental income will go to rehab which would be $1832.5/mnth. On top of your payment of $1970/mnth, you'll have left over theoretically
    -$137.5/mnth... Fully occupied that is.

    So theoretically it's a loss. But I also think 50% is conservative. Then again, it's a 4-plex... With this 50% rule it would mean $22k would be needed in repairs per year, averaged over time. I think it's sounds like over kill, but maybe it isn't. Personally I couldn't fathom $15k in repairs on a 4-plex per year, but I've never done it, so maybe someone can share.

    Anyway, if you can keep under $15k repairs/year, you should do good. ...

    This part that I am quoting is TOTAL RUBBISH. Shame on any BP members who read this and did not post something pointing out the rather blatant mis-understanding of the guidelines given by the "50% rule". If my rentals required 50% of the rents to go toward rehab or repairs as mentioned in that quote - well who the heck would ever want to be a landlord if that were the case?

    Manuel Acuna - please re-read the sticky posts in the landlord forum until you gain an UNDERSTANDING of the meaning behind the "50% rule"; post questions in those threads if you don't get it. Then I invite you to come back here to this thread and correct your earlier post. Here is the link to the landlording forum:

    http://www.biggerpockets.com/forums/52-rental-property-questions-landlording-issues

    Sorry if the tone of this post upsets anybody - but I was upset upon reading that post in the first place.

    2Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    14y
    Originally posted by Brian H.:
    Originally posted by Scott L.:
    4 Unit Property (3 units in main house + coach house)
    Price Paid: $280,000
    Money Down: $56,000
    Monthly Payment (Incl Ins + Tax): $1970/mo
    Current Rents: $3665/mo

    I'm still learning the ropes of property analysis myself, but I'll take a stab at it. Your gross rents collected at the end of year one will be $3665*12 = $43980. Using the 50% rule, your net operating income (NOI) for the year will be 43980/2 = $21990. Your total payments (PITI)at the end of year one will be $1970*12 = $23640. Your cash flow is NOI minus (-)PITI, or 21990 - 23640 = -1650. You have a slight negative cash flow here, or approximately $138 loss per month ($1650 /12 months). Not necessarily a losing deal from my perspective though. Just a slight decrease in expenses and/or a small increase in rents will push you into positive territory. Doing all this on my phone so hopefully my math is right.

    Although the math is correct in that the numbers used compute to the numbers being shown - this post also suffers from mis-understanding of the "50% rule". Namely, the mortgage payment was given as PITI - but the TI part of that is counted within the one part of the 50%, and the PI part is counted within the other 50% (along with expected profit / proceeds / cash flow). So without taking the TI out of the payment, it makes the deal look far worse than it really is. My suggestion to Brian H. is the same as I gave to Manuel in the preceding post - read those sticky threads until you UNDERSTAND them, and ask questions there until you grasp everything clearly.

    1Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    14y

    Now if Scott L. could give the taxes and insurance numbers, the "50% rule" can be used to give a "feel" for what might happen with cash flow.

    0Reply
  • Michael D.
    Investor · San Jose, CA · Member since 2011 · 355 posts · 90 votes
    14y

    Just to call out succinctly what Steve just said:

    Taxes and Insurance should be on the EXPENSES side and figured into the NOI - not lumped in with your debt payments.

    0Reply
  • Don Koss
    Investor · Fox River Grove, IL · Member since 2011 · 28 posts · 10 votes
    14y

    Scott L. ,

    I put your #'s into my analysis spread sheet I've been using for years (with estimates for unknowns) and it looks like your deal is pretty good. Make sure you screen your tenants real well - as it is harder than re-enforced concrete to evict someone in Cook County. For that reason, I've been sticking to DuPage, McHenry and DeKalb counties. Don't want to scare you - because the City is great place to live - just be tough on your tenant screening.

    Best Regards,

    donko

    1Reply
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