Real Estate Rental Property #3 Update (May 29, 2013)

by FI Fighter on May 29, 2013

in Real Estate Updates

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I’m back from my Memorial Day Weekend trip and have got some news to report! Over the past weekend, my brother and I took a tour out to see some rental properties in Chicago and Indianapolis. After meeting the local ground teams and seeing many properties, I now have a much better feel for what each market brings to the table. I spent the weekend going over my choices, and ultimately decided to invest in Chicago.

Here is a brief summary of the pros and cons for Chicago:

Chicago Pros:

  • South side properties generate high rents ($1000+) for each side of a 2-flat.
  • Purchase prices, relative to rental income are relatively low (below $180k).
  • Properties offered are fully rehabed. The units have been stripped down to the studs and fully gutted. New electrical, plumbing, roofing, windows, countertops, cabinets, tubs, etc. You pay a premium, of course, but the rehab is very impressive and extensive. This will do a lot to reduce maintenance and repair costs over the short-term.
  • Provider also supplies the property management team.
  • Rent is hedged by having two tenants. If one flat is vacant, I still have enough to cover the mortgage.

Chicago Cons:

  • Tenant friendly laws. Difficult to evict, as the process can take up to 90+ days to complete.
  • High property taxes. Around 2% is typical in Cook County.
  • Lots of variation between neighborhoods over a small driving radius. One block may have a whole street full of boarded up homes, while the next corner will feature a wonderful, vibrant, and safe community. As a result, one needs to do their extra due diligence to make sure they aren’t buying into a “warzone”.

Overall, I walked away very impressed. I got to see many properties, and the various stages they go through before they are ready to be flipped to investors such as myself.

Here are some photos:

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Recently acquired property. Rehab had yet to start.

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Inside the property.

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Lots of work to be done.

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Different property with rehab completed.

As you can see from the above picture, the properties are completely transformed, and the end product is something to be proud of. In a neighborhood where most of the properties were built in the early 1900’s, I’m guessing it’s extremely rare to find something so “new”.

I would imagine that if I were a prospective tenant, I would be putting my name on the waiting list as soon as one of these rehabed properties hit the market. I can’t imagine it being very difficult to find a tenant. Who wouldn’t want to live in a brand spanking new building with all the fixings???

As such, I decided to secure a property prior to returning to California. That’s right, I put in a reservation form and am now in contract to purchase Rental Property #3!

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Rental Property #3

When I stop to think about it… it’s a bit surreal and hard to believe. After all, it hasn’t even been a full year since I won Rental Property #1. In less than one year, I could potentially have three rental properties under my name, and four tenants. Kind of crazy, really. The really nice thing about this new property is that the cash-on-cash returns are amazing (compared to what I was getting previously). Here is a breakdown of the numbers:

Purchase Price: $157,500
Downpayment (25%): $39,375
Loan: $118,125

Mortgage (5% Interest; 30 Years Fixed): $634.12
Property Tax: $266.67
Insurance: $100
Landscaping: $80
Utilities: $75
Property Manager: $168
Vacancy (5%): $105
Repairs (5%): $105

Monthly Payment: $1533.79
Rental Income: $2100

Monthly Net: $566.21
Cash-On-Cash Return: 17.26%

Since Rental Property #1 brings in about $450/month in semi-passive income, and Rental Property #2 brings in about $320/month, this will give me a total of ~$1230/month. If so, I’d be well on my way to reaching my original target of $1500/month. Not to mention, this would all be accomplished before executing any 1031 exchanges. I’ll probably sit tight and wait another year before going that route. Though I would love to tap into the $100k+ in capital gains! More details to come, as they arrive.

P.S. I’ll most likely be forced to sell my remaining shares in TSLA to have enough funds for the downpayment. It’s probably about time to capture the rest of the appreciation and put it to good use! Appreciation is nice, but I must remember that the month-to-month cash flow is what will help me retire early!

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{ 11 comments… read them below or add one }

1 LeighNo Gravatar May 29, 2013 at 11:04 pm

Wow, you acted quickly!! Congrats!

I can’t believe those numbers! My place is worth more than double that place, but my property taxes are about $40 less per month on average. So that’s definitely a high property tax rate! $157,500, wow! So cheap, haha.

Reply

2 FI FighterNo Gravatar May 30, 2013 at 6:36 pm

Leigh,

Yeah, tell me about it. Next to Texas, Chicago has probably some of the highest property tax rates in the country. Similar to you, my more expensive properties in CA aren’t costing me as much as this property. Oh well, the returns still work out. 🙂

Reply

3 The StoicNo Gravatar May 30, 2013 at 11:51 am

I second Leigh’s comment, you moved very quickly. Have you guys been looking at this area for a long time before you visited, talking to people in the area or were you so impressed that when you arrived you were ready to make an offer?

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4 FI FighterNo Gravatar May 30, 2013 at 6:38 pm

Stoic,

I’ve been researching out-of-state properties since I closed on Rental Property #2. So, I did already have a plan to purchase one in the next year or so. I had no idea I would get into contract so soon, though.

The entire operation was really impressive, which kind of sold me. I didn’t plan on making any offers prior to taking the trip out… what really made all this possible were the gains I made on TSLA stock… This helped bring in the possibility of adding a new rental property in a few months.

Cheers!

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5 MartinNo Gravatar May 30, 2013 at 12:38 pm

Looks great. Soooo, are you buying? Looks very appealing, doesn’t it?

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6 FI FighterNo Gravatar May 30, 2013 at 6:39 pm

Martin,

It sure does look appealing! Yup, I think I’m “all in”. Hope all goes well. I’ll be sure to update as more details come along.

Take care!

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7 JC @ Passive-Income-PursuitNo Gravatar May 30, 2013 at 1:35 pm

Man, in less than a year you’ve gone from 1 rental to 3. That’s great that you can get such a cash flow positive property even after accounting for property management fees. That would be my biggest concern with owning a rental property in another city, let alone another state. Those definitely look nice. What’s your plans from here? Are you going to continue to try and build up rentals or get back to your portfolio? Congrats on Rental #3 and on getting very close to your $1,500 per month goal.

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8 FI FighterNo Gravatar May 30, 2013 at 6:42 pm

JC,

Yeah, property management is generally everyone’s biggest concern with rental properties. I felt safer knowing that the company I’m purchasing from also runs the PM. It’s a vertically integrated operations, which makes me feel good. If they stand behind their work, the returns are real, I won’t hesitate to buy more in the future.

At this point, I’d love to start buying back some dividend stocks. Unfortunately, the market just seems too pricey, so that’s one of the reasons I’ve held off. I also want to tap out all my Fannie Mae loans while I’m still can. I worry about the day I lose my W-2 income and won’t qualify for loans. Interest rates going up scare me too. So, I just want to take care of the rentals now, since those are so much more painful to have to deal with later. I kind of just feel like I can always ease back into stocks, at any time. Eventually, I’ll get back in the dividend game, I’m sure.

Cheers!

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9 OscarNo Gravatar June 2, 2013 at 7:27 pm

Which company are you using to buy your property in Chicago ?

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10 Financial IndependenceNo Gravatar June 7, 2013 at 3:44 am

Please keep me updated, we were once looking to move into Chicago, but even in good suburbs rental was something $1,300 for 1,400 sq. ft property.

What I could not realize – why do you do it in different cities? If you would have properties near by, at least you could control them and it is cheaper.
Every visit to the Windy city erase a lot of value of the rental.

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11 MaxNo Gravatar August 1, 2014 at 5:14 pm

Just re-reading this section and noticed how you went from wanting $1500/month to now wanting more than double that at around $4,000/month? I was wondering if you could expand on how that process went and what made you think you needed less before and more now.

I was also re-reading this article today: http://earlyretirementextreme.com/slaying-the-dragon.html

I’m currently planning on hoping to retire with about $1,500/month, but I’m also worried that something similar will happen to me where I’ll desire more + more. Or was the $1,500 goal number that you mentioned how far you figured you could accomplish for that year, but not the end goal?

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