1st Chicago Property - How _____ did I do?

Real Estate Deal Analysis & Advice

1st Chicago Property - How _____ did I do?

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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Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes

13y

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.

See this reply in the discussion

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Scott L.
OP
Denver, CO · Member since 2012 · 18 posts · 3 votes
13y
Steve Babiak, I actually just closed today, so here are the final numbers:
- Principal + Interest: $1090
- Taxes: $636
- Insurance: $173

And by the way, thanks setting the record straight and calling out that ridiculous post. The last thing needed is misinformation being distributed to noobies like myself, only to turn us off to RE investment. Much appreciated.
1 Reply
Scott L.
OP
Denver, CO · Member since 2012 · 18 posts · 3 votes
13y
Don Koss, I definitely understand that Cook County seems to be quite biased towards tenants, so I plan to heed that advice and be very strict with screenings, setting my criteria up front and sticking to them.

Maybe this is a random occurrence, but I just spoke with my Realtor today who mentioned he was able to evict someone within a month. An anomaly? Perhaps. But it seems it can be done quick as long as the tenant's lawyer doesn't give you the run-around.
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Brian H.
Real Estate Investor · Louisville, KY · Member since 2012 · 39 posts · 9 votes
13y

I think you're being a bit harsh. So the analysis was flawed...in my case I was tackling it as a learning experience and it certainly was that. I apologize if I ruffled feathers but a bungled post-deal analysis isn't the same as a bungled deal...no one died here and nothing anyone says on this forum changes the actual facts of the deal. I'm happy to be mistaken since I apparently wasn't given you as much credit for the deal as you deserved. Glad that's the case and not the other way around. Btw I hate to speak for Manuel but from his post it appears his intentions were the same.

Steve and Andrew O, thank you for the correction, and for the link. Won't make that mistake again!
0 Reply
Andrew O.
Real Estate Investor · San Clemente, CA · Member since 2011 · 209 posts · 47 votes
13y
A correction was warranted, but such a spirited correction? I think not.

If your going to use "rules" or as I prefer, guidelines, make sure you totally understand them before teaching them. It may be a case of the blind leading the blind.

That and we don't need Steve B's blood pressure sky rocketing, he has knowledge to disseminate!
1 Reply
Brian H.
Real Estate Investor · Louisville, KY · Member since 2012 · 39 posts · 9 votes
13y
@Steve Babiak, I actually just closed today, so here are the final numbers:
- Principal + Interest: $1090
- Taxes: $636
- Insurance: $173

So if I may try again, using the above info combined with that from the original post:

$3665 * 12 mos. = 43980 annual gross income
Using the 50% rule we arrive at $21,990 (taxes, insurance, maintenance, holding costs, vacancy, property management, other expenses...?)

$1090 * 12 mos. = $13,080 annual Principal + Interest (debt service).

Debt service plus expenses = $21,990 + $13,080 = $35,070

$43,980 gross income - $35,070 total operating costs = $8910 net profit at the end of the year, or $743 per month.

And to take it further, $8910 profit/$56000 invested ~ 16% cash on cash, approximately what Scott W came up with.

I'm ready for my browbeating but hoping this is a little more accurate than my first take.

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Andrew O.
Real Estate Investor · San Clemente, CA · Member since 2011 · 209 posts · 47 votes
13y
Edited: Wrong thread.

Your numbers look right, but nothing beats having a detailed log of expenses as ownership goes forward.
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Manuel A.
Rehabber · Albuquerque, NM - New Mexico · Member since 2011 · 283 posts · 38 votes
13y
Originally posted by Scott L.:

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. ;)

Thanks for telling me what a "coach house" is for future reference. Yeah, I couldn't fathom how one could spend $15k/yr on maintenance neither haha.

Thanks for your reply, just learning and trying to be helpful :)

Manuel
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Scott L.
OP
Denver, CO · Member since 2012 · 18 posts · 3 votes
13y
@Brian H. that seems right to me, thanks for the update. Brian, and Manuel Acuna, I also apologize if my words were perceived as a bit harsh regarding your posts, I may have been overly stressed and looking for an outlet. :(

Below I revised a few of my numbers, namely the cash I brought to closing, which ended up only being $51,700, and also adjusted assuming I successfully manage the place.

So if one were to use the 40% rule (minus 10% mgmt fee), we arrive at the following:

3665 in rents * 12 months = 43980 (Gross Profit)

43980 * .40 (40% rule = 17592 (Expenses)

1090 * 12 = 13080 (Debt Service)

(Debt Service) + (Expenses): 13080 + 17592 = 30672 (Operating Costs)

$43,980 - $30,672 = $13,308 or $1109 per month (Net Profit)

13308 (Net Profit) / 51700 (Actual cash due at closing) = ~ 24% Cash on Cash Return

Now, lets say I spend an additional $15,000 in preventative maintenance and improvements over the first year. The cash on cash return is as follows:

13308 (Net Profit) / 66700 = ~ 20% Cash on Cash Return, assuming same rents.

Do these numbers look good? Want to make sure I'm fully grasping the concepts and calculations so that I can better analyzie future deals. Brian H. thanks for letting me borrow your analysis for mine :)
0 Reply
Manuel A.
Rehabber · Albuquerque, NM - New Mexico · Member since 2011 · 283 posts · 38 votes
13y
Originally posted by Steve Babiak:
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.

I totally understand, thanks! I'll check it and correct it as I understand. Yeah, I was like 50% maintenance seems ridiculous, haha. Thanks again for sharing and teaching!

Manuel
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Manuel A.
Rehabber · Albuquerque, NM - New Mexico · Member since 2011 · 283 posts · 38 votes
13y
Steve Babiak Okay, so 50% is for the expenses in total (like maintenance, vacancy, operating, etc...), 2% is how much you want the rent to be and this assumes some things like you wanting at least $100 per door, and a 30 year finance.

Just curious on this, and I'm talking mainly about the 50% rule part, if I got $12,000/yr with 100% occupancy, wouldn't it be better to instead assume 15% or so vacancy and apply the 50% rule to that number? Or is that pushing the overly cautiousness of my thinking?

Also, I see that the 2% rule is mainly about getting that $100 cash flow per door at least so you have to adjust for bigger and smaller purchases. Is $100 per door a good goal you would typically look for? Of course you want as much as possible but is that the baseline of what a good deal is, at least $100 per door no matter what the financing is and anything below this you pass?

Thanks again,
Manuel
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Steve Babiak
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
13y
Both 50% and 2% "rules" are intended to put about $100 per unit into your pockets per month on average, after all expenses and other costs are met.

2% is a quick approach to the 50% rule, that works when rents are roughly $500 per unit. If rents are much lower, it will take a rent that is a bigger percentage of the purchase price to have positive cash flow. If rents are higher than $500, a lower percentage will work. @Jon Holdman has some posts that go into more details; he recently got even more specific than just the $500 per door.

Again, it is per unit, so when you say $12000 per year, is that total for 1 unit or multiple units? BTW, vacancy allowance is part of the 50% of expenses. If any costs, including vacancy are excessive, then your total costs will exceed 50% - this does happen to landlords in real life, so it's not unheard of.

As I posted earlier, direct your 50% rule and 2% rule questions to those other sticky threads - you'll get more people chiming in.

And both sets of revised calculations (one with 50% expenses, the other 40%) seem to be correct (I didn't plug in numbers into a calculator, just looked at how you got the results).
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Harry M.
Real Estate Investor · Dallas, TX · Member since 2010 · 449 posts · 173 votes
13y
Scott - congratulations on your property. That is a sweet deal.
Also, after playing around with your numbers and a couple of assumptions, I think there may be some good tax benefits, too. I only have experience with how depreciation works if the property is used solely as an investment property (versus living in one of the units yourself), but it seems that for your property, the depreciation could give you a sizable paper expense to offset your gains with for tax purposes. Again, I'm not sure of the details of how living in one of the units complicates things. Ditto, the fact that by living in one of the units you are not earning a lot of the return as income, but rather as money that doesn't have to be spent on rent/mortgage on a primary residence.

I'd love to hear what some of the more experienced guys have to say regarding the tax angle, esp. regarding the effect of you living in one of the units.

Anyway, congrats again on what looks to be a great investment!
-Harry
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Brian H.
Real Estate Investor · Louisville, KY · Member since 2012 · 39 posts · 9 votes
13y
0 Reply
Dave M.
Residential Landlord · Chicago, IL · Member since 2012 · 356 posts · 81 votes
13y
Originally posted by Scott L.:

- Taxes: $636
- Insurance: $173

Your insurance seems really steep.
Taxes aren't terrible, but if you haven't already its worth appealing your assessed value:
http://www.cookcountyassessor.com/appealssublinks.aspx

Either of these thinks could help your numbers.
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Scott L.
OP
Denver, CO · Member since 2012 · 18 posts · 3 votes
13y
Originally posted by Dave Meyer:
Originally posted by Scott L.:

- Taxes: $636
- Insurance: $173

Your insurance seems really steep.
Taxes aren't terrible, but if you haven't already its worth appealing your assessed value:
http://www.cookcountyassessor.com/appealssublinks.aspx

Either of these thinks could help your numbers.

Dave Meyer - you really think insurance seems steep? I was under the impression that is a good deal for having a separate coach house on the property. Who would you recommend that could provide a more competitive quote?

Thanks for the info on appealing taxes, I will look into that.
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Dave M.
Residential Landlord · Chicago, IL · Member since 2012 · 356 posts · 81 votes
13y
Maybe the 2nd structure does add substantially to the premium, my building just has a parking pad so I have no experience.

I use John Anda @ Farmer's [REMOVED]. My monthly insurance expense is lower and I paid a fair bit more than you. I'd say, especially if you're happy living in the location you bought you got a great deal!
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Carsten Eisenbarth
Shelton, WA · Member since 2012 · 1 post · 0 votes
13y
I think the one problem I see with Scott's calculations is that he in his latest numbers still counts the 4 unit rents to make his numbers work. Once he takes the $900 put for the carriage house he will owner occupy numbers will look a little different unless he's planning on paying rent to his own corporation. And yes I do understand that he will be saving in rental cost on the other end and therefor It could be a plus/ plus deal for him.
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