Post: #1

Hi all,

I have found a one bed for sale in the northside of Chicago that I am considering making an offer on.

I used to rent in the building and had to sublease the unit I was in. As such, I know the building is of good quality and I know how much I could charge for rent.

Key points:

- $260k likely sale price w/ parking included.
- $1850/month rent with parking is achievable
- $8000/year for HOAs and taxes

= Annual return of around 5.45% before any repairs are factored.

Pros:
- I know the building. It is less than 10 years old and pretty well built.
- Desirable area and can attract reliable tennants
- Near by and I can fill it 100% of the time I am sure.

Cons:
- Not exactly lucrative return
- Housing prices are cooling. Could they drop?

Any thoughts greatly appreciated.

Post: #2

I think you'll have more expenses that will reduce the Cap Rate you suggest there. Are you planning on managing the property yourself?

A 5% Cap Rate is pretty small for the hassles that come with direct management of your rental units. (At least in my experience.)

Post: #3

Yes, I would manage it myself. I have a handy friend for any repairs, etc. though

Post: #4

That's a pretty modest return andbits best case. What happens if you have some vacancy or repairs?

Look at single family houses (no HOA) in blue collar neighborhood s. You should aim for rent equal to 1 percent of the acquisition price. Hard to find these days but more likely with the property type I described

Post: #5

(10-18-2018 01:36 PM)jbkunt2 Wrote:  Yes, I would manage it myself. I have a handy friend for any repairs, etc. though

What is your experience with managing rental units? (If I may ask...)

Post: #6

And what's your GROSS after your mortgage payment on that $260k? Are you fronting 25% of that?

Post: #7

Interest rates are increasing - will you buy this property with cash, or will you take out a mortgage? Either way the overall trend is negative for real estate prices.

Post: #8

It also depends on your goals and time frame. If you're looking at holding onto the property over the long-term then it's wise to consider the expected capital growth of the property. Over an extended period land value tends to rise.

Some properties (eg. commercial, multiple occupation) give higher rental yields but significantly lower capital gains. This also factors in for location. For example, here's a chart depicting house prices in the UK between 2004-17:

   

As you can see, London is a big winner here, more than doubling in price despite the crash in 2008. Of course, this is crude analysis as even within London there's variations.

On the other hand, if you're in for the short term, need the cash upfront, or need the leverage for further loans than high-yield rentals are the way to go.

Final point: Personally, I would be very wary of over-extending yourself with debt in the current economic climate.

Post: #9

I'd pass. There are much better returns available in US real estate at the moment that are also fully managed and guarantee tenancy or they start paying your monthly nut.

Post: #10

I rent out an apartment I own so here are a few considerations as you run the numbers. Firstly, you will pay 5 percent or more of the sale value when you buy and sell it. You will have tenants leave the place, this will require cleanups (repainting walls, deep clean floors). When your apartment is vacant, which will happen unless you get a tenant who never moves out, you won't get income but will still have reoccurring expenses during that period. You will need to factor in scheduled maintenance for ac/heating units unless your HOA covers that, also general repairs inside the unit of broken appliances. Do you want to manage it yourself? If you want it to be purely passive you will have to pay a company to manage the property for you (this makes collecting rent, dealing with maintenance and finding tenants easy for you) but you gotta pay them their fees which can be hundreds of dollars a month. What happens if in a liberal city like Chicago they decide to drastically raise property taxes after you buy it, how would that eat into your revenue?

Personally, unless you are buying near a bottom of a market or you have professional experience in the real estate market that helps you get good deals on property its a tough call to know what you can expect in property appreciation. Right now, you don't really have much of an edge as a regular guy buying into a US housing market that has already grown substantially in the last few years.

One option might be to buy a quality REIT that has a good yield, and you could even diversify by buying half a dozen quality ones. Also, you could buy a REIT ETF which gives you immense diversification by holding dozens of REITs within the ETF and it would also have a decent yield. Most REITS have been down slightly for the year so this is not a overvalued area of the stock market.

Post: #11

You're leaving out a ton of expenses.
Just doing the numbers in my head:
After 10% vacancy rate annual rent is $20K/year. Take out 8K tax/HOA, take out 0.5 insurance. Take out $3K/year minimum for repairs/maintenance, replacement of major appliances. Take out $1K/year for major upgrades every few years as fashion changes especially in terms of kitchens and baths. Leaves you 8K/year. I haven't even talked about property management. On one unit, a management company will typically take care of that for 10% of gross rent (another $2K) so you're not bothered with phone calls at 2 am about a stopped up toilet or cockroaches in the kitchen. Even if you do the management yourself, your time is worth something.
8K/year on 240K is 3.3% NOT the 5.5% you thought you were getting. Ten year Treasury bills are paying that much.
Property appreciation? It's the land that appreciates, and a condo unit owns only a tiny portion of land.
In rare cases people have been lucky to buy a condo at market bottom and done well, but that has to do with unforeseeable factors.
Consider a single family house in a blue collar neighborhood as someone has suggested. Or better yet a duplex or fourplex in which you live in one of the units.

Post: #12

Once you factor in repairs and vacancy and any other hidden costs you will most likely be making little to nothing. I would say drop the attachment to the building because you lived there and find a place that has better numbers. In Chicago a huge factor is association fees, if you can find a building with lower association it will help your bottom line.

Also consider while Chicago is a good market in the US the housing market in the US is at probably an all time high.