Hi, I’m new to real-estate investments, and I’m looking at a particular cash-only rental cash-flow multi-apartment deal in Chicago, possibly section-8, in, how shall I say, one of the less desirable areas of the city.
I am working with a broker and I have a sales contract I’m looking at right now and need to decide whether to sign it.
Being new and all, I’m having a hard time evaluating the deal and the contract.
Therefore, I’m looking for an investor with relevant experience (Chicago section 8), or a real-estate attorney to advise on the matter.
Time is of the essence. I’m willing to pay.
Anyone can make a recommendation (or suggest him/herself)?
I’m not in Chicago and so I can’t offer any direct assistance. But for what it’s worth, I suggest you think long and hard about dropping cash on a multi-unit in a war zone. Section 8? Very hands on and few new investors are ready for such a property.
I didn’t mention this, but I’m out-of-state and I don’t intend to manage this myself. I’m planning to use a management company which (supposedly) specializes in this type of rentals.
Hi,
I have several years of experience with section 8 and invest in low income areas of my city. Not all section 8 tenants are bad. In fact, I have some section 8 tenants that are much better overall than some of my regular paying tenants. Section 8 requires properties to meet a certain standard and conducts annual inspections of the property. I would caution you on jumping into this as your first deal since you said you’re new to REI. Management companies can be good at bleeding you dry. My wife and I manage all of our rentals ourselves. We did actually start out with a small multi-unit property far awar from where we were living at the time, but it was near my family and was mostly filled with long term tenants. That gave me a secure feeling when we started out. You could always post the numbers on here so people on here can help you evaluate the deal financially.
AJ is right that this will be a hands on deal and it’s very hard to be ready for everything that entails in the beginning.
Thanks for the input. Regarding the numbers, they are somewhat off the charts -
$110K acquisition price (incl. $5K I’m paying my broker).
Each of the three apartments is currently rented for around $1200 (needs to be verified).
This is a bank foreclosure so we won’t have access to owner’s records, and won’t know exactly the rent/standing of the renters till we sign the contract (as part of a 5 to 10 days due diligence). Building is fairly new and in reasonable condition. Probably needs around $10K repairs at most. All in all, cap rate is phenomenal. Perhaps too good to be true.
The reason I’m looking for expert advice is that I’m not sure which questions to ask or what to insist upon during the due diligence.
Any suggestion/recommendation welcome.
If each unit is renting for $1200, and you’ve got three of them, then you’re gross scheduled income is $3,600/mo or $43,200/yr. Really?
I’ll believe it when I see it.
I’ll more readily believe a $1200/mo total, or $14,400/yr, with a price at around $100k.
I think your cash price should somewhere around $50,000 to make this a bargain.
Don’t buy management intensive triplexes out of state. I don’t care it they give this thing to you for free. It’s not going to be worth the hassle.
Invest where you live.
Of course many a newbie knows better, and is the unique snowflake of an investor, with a new perspective, that somehow makes lemonade out of a rotted lemon. For the love of all that’s holy, stay close to home with high management investments. :shocked
Sagism,
Jay is a smart man and has been doing this many more years than me, so pay attention to his input and perspective. Did you mean $1200 per month for the whole building or $1200 for each unit? I also think it sounds much more reasonable from a seller’s perspective to offer something bringing in $1200/mo for 110k.
It could be like a recent conversation I had with a guy about some land. My wife and I have been looking for a decent plot of land outside of town where we can build a house and not be near people. We saw a sign for a place and called about it. It was 6.5 acres for what we thought was $39,500. Most of the other sellers in the county are asking around 5-10k per acre, so that amount sounded reasonable. When we met with the owner, he said he had other land nearby for a cheaper price per acre. I asked his price and he said $19,000 per acre. Then the light bulb turned on. We thought he wanted $39,500 for the whole plot of land, not that much per acre. So he was actually 4x higher than the most expensive sellers in the area.
Anyhow…
Let’s just look at some questions to ask about a small multi-unit property. I think one of the most important things to find out is who pays which utilities. Many small buildings don’t have the utilities split out for each unit so you as the owner may have to pay for water/sewer, trash, electricity, and gas. That can really cut into your cash flow. What do taxes cost? How much for insurance? If you know the basics of the building (how many square feet, year of construction, HVAC system, type of construction - brick or not, slab or crawlspace, etc), you can call around and get some quotes. What kind of deferred maintenance? You can always kick people out, so whether they’re current or not isn’t a huge deal if you go into it with that mindset.
There are many people who invest remotely, so it can be done. It may just not be the best way to start out. Remember, you’ll need to build a “team” in that area. You’ll need someone to show units when they’re vacant. You’ll need a plumber, electrician, and HVAC person you can call. You may also need a flooring person too to re-do things after a unit goes vacant. A management company can handle these calls for you, but will they have a reasonably priced worker go out to your place or will they just call the first number in the book?
Jay and Justin, I appreciate your advice. It does sound too good to be true, but the numbers are definitely $1200 per apartment, 3 apartments, $110K.
This is for a 5-year old brick & concrete building.
Regarding the repairs, I’ve seen many pictures of the property inside and out, and it looks in good shape. In addition, inspection will be carried out as part of the due diligence so if repairs are more expensive I’ll know before inking the deal.
What I’m trying to find out is which other questions to ask, and what to make sure is included in the contract, so that other potential show-stoppers are detected in time.
At this cap rate, there is a wide margin for error and inefficiencies in management of the property and it should still be a cash cow. Unless there’s something fishy that I’m missing, and again, this is where expert advice comes in.
If I can find an expert in Chicago Section 8, I can go over the exact details of the deal, and I’m pretty sure they can ask pertinent questions that will help me make a decision with this.
If you are that serious about the deal I would spend $250 bucks and fly out to check out the property for yourself. I have purchased property site unseen at least 100 times before yet being a rookie I would take the time and go see it.
Do you have 100% trust in the person finding you deals? I only ask because I have been in the industry a long time and have worked more then one Short Sale for an Investor that thought it seemed like a good idea at the time.
If the rent on a war zone apartment is $1200/month, that tenant needs a gross income of about 3x that, or $3600/month income. With that income, they choose to live in a LOW-INCOME neighborhood with higher crime?
Something ain’t right. Run. That’s just my 2 cents.