Rental Property #5 Search (November 26, 2013)

chicago-7

I just wanted to do a quick post to update readers on the status of Rental Property #5. At this moment in time, I am under contract for a fifth rental property which is listed at $180,000. The property is located in Chicago and is another 2-flat, similar to Rental Property #3. Each unit has 4 bedrooms and 1 bathroom.

Update

The property is currently under construction and the seller would like to start closing in December. However, because I just closed Rental Property #4 this month, realistically, I don’t think this will be possible. I need some time to build up some cash reserves, and I am very doubtful my loan file will pass through underwriting. I’m currently negotiating with the seller, and asking for an extension until January. If closing starts in January, then I most likely won’t need to come up with the 25% downpayment + closing costs (seller paid for, but lender needs me to show enough funds to also cover this) until sometime in mid-February.

Mid-February works much better for me. If we run into another glitch (like last time), I should be able file my 2013 taxes to overcome any debt-to-income problems. Rental Property #1 will be on 2 years of tax returns (2012, 2013), so I’ll be able to offset that $230,000 loan.

Numbers

I really like this property, and even stopped by to take photos of it when I was in Chicago earlier this month. It should rent out for $1200/month for each unit, bringing in gross rents of $2400/month. The cash-on-cash returns will be around 19% or so.

When running numbers, my returns are always calculated with maintenance and vacancy reserves in place. I used 5%, which I think is reasonable. Property management is 8%, also included.

Also, even though the property will return a portion of the principal with each mortgage payment, and depreciation come tax season, these gains are not included in my spreadsheet calculations. Principal paydown and depreciation are awesome, but I’m still looking for deals that return 15% cash-on-cash without factoring these benefits in.

Lastly, closing costs are not included because I’ve worked out a deal with the seller to cover all closing expenses. I will also be getting 1 year rent guarantee and a 5 year warranty on the roof.

Here are the numbers:

chicago_returns

All About the Timing

If the timing doesn’t work out, I may have to let this one go and wait for another property that’s further out from being fully completed. This property is under construction and should be fully completed (ready to rent) in another two weeks. Finding a property to close in March or April would probably be the best move (financially), otherwise I will have to stretch myself a bit to close this one. So, for now I’m under contract and the numbers are shown above. I will of course update as more details emerge. Don’t be surprised if this one falls through and I have to readjust my gameplan. This stuff is always changing and dynamic in nature.

But, you know me, I like to take risks… Good thing I have some ESPP coming down the pipeline in January. 🙂

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AJFI FighterBrentJC @ Passive-Income-PursuitCharles@gettingarichlife Recent comment authors
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Fast Weekly
Guest

Way to go FI Fighter. Just don’t spread yourself too thin. Can you give me a few pointers on how you interview and narrow down your property managers? Was this some sort of build to rent package? I was surprised to see a 1 year rental guarantee. How’s property #4 doing? Stabilized and occupied?

A 9.5 CAP on a property in that price range looks great to me! Good work
-Bryan

Martin
Guest

OK,now I understand why you are not freaking out and why you are not scared at all. It’s because I am sh*ting my pants for you when reading your stories 🙂

Well, I admire your endeavor on this and how you go for it. But this is completely beyond my guts. It would be awesome if you close this one too, but I wouldn’t do it at all.

How prepared are you for another housing crisis should one happen? During the last crisis even renting went down and many locations remained vacant. Would you survive?

Charles@gettingarichlife
Guest

Hey FI,
I have a love of real estate like you do. Is Hawaii where you want to retire? Good luck on the rental property.

JC @ Passive-Income-Pursuit
Guest

I can’t believe that 5 is already in the works. Seems like the next one is already lined up as soon as you close on one. The numbers look great here. Chicago appears to be treating you very well. Hopefully underwriting/closing goes smoother than with 4. Are you planning on having a co-signor from the start or just if they come back and say that you need to fix something. I’d always heard stories about how most underwriters just plug numbers in, instead of looking at the real picture. Your income sources have changed dramatically since you filed your taxes. Have you been going with the same lender through all of this or jumping to whichever will give you the best rate? Curious which would end up working out better, especially as you try and close on another rental.

Brent
Guest

Great find here at 19% COC return! Have you thought about scaling up by adding a multi-family property?

Also, great to see that you include property management in your numbers. So many people I talk to don’t use that in their calculations because they plan to manage it themselves. Then they are disappointed with their returns when they get burnt out and turn the property over to a property manager to handle the day-to-day.

Keep it up!

AJ
Guest
AJ

Just looking at your numbers here.. Does management company charge lease up fees? That would cut into your return.
Quick 50% rule calc
2400 rent * .5 = 1200 NOI
1200 – 708 = 492 cashflow
492*12/45k = 13% cash on cash return
If everything is freshly rehabbed, imagine getting better than 50%.
Even at 50% expenses, 13% sounds great to me.
I’m buying some new construction SFR’s in Houston, less than 10% cash on cash return but fingers crossed for the economy to keep pumping for a while.

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