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Old 12-09-2008, 07:58 PM
 
4 posts, read 8,507 times
Reputation: 10

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I've been looking at some properties on the south side of Chicago and something doesn't make sense. I can pick up a 2-flat in for around $50k from a company out of state that has a large portfolio of properties.

Looks like $10k in repairs at the most to make it section 8 ready. I can collect $2000-$2500 total rent from the building through section 8. 3-5 bedrooms each unit.

I figure I can buy the building and fix it up for a total cash investment of $60k. After taxes and insurance I can can net $1800-$2300. That's an insane return every year on my money. Even factoring in maintenance, it heavily cashflows.

Aside from the obvious issues of it being a really bad neighborhood, am I missing something here? Why aren't these buildings more expensive? Why isn't the rent lower, as there seems to be plenty of supply. Lots of boarded up buildings, etc. Yet there are definitely people that live in the area paying those rents. With section 8 covering the rent, it seems like a no brainer.

Is it really just a matter of people not wanting to deal with a bad area? The profits seem too tempting to keep all the investors away. Why are there so many people trying to invest in properties on the northside that CAN'T cashflow?
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Old 12-09-2008, 09:05 PM
 
1 posts, read 1,854 times
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Do you find these properties on the MLS? Whats your experience investing in RE?
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Old 12-10-2008, 12:47 AM
 
Location: Lincoln Park
838 posts, read 2,048,588 times
Reputation: 168
So is that cash flow per month or per year? if it is per year, then how is it more profitable than investing in a 5% CD or a 8% double A rated bonds?

Quote:
Originally Posted by eva01 View Post
I figure I can buy the building and fix it up for a total cash investment of $60k. After taxes and insurance I can can net $1800-$2300. That's an insane return every year on my money. Even factoring in maintenance, it heavily cashflows.
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Old 12-10-2008, 02:11 AM
 
21,730 posts, read 37,212,462 times
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Um, best guess, these are not just "bad area" these are CRAZY bad areas. Like "if you have not factored in the costs of using off-duty Cook Co Sheriffs to do ANYTHING at these building, don't tell me that they have net positive cash flow. CRAZY means "no sane explanation" -- like "is it considered a maintenance cost to have bullet holes patched? OR "I know landlords often have lots of repair services on their speed dial, but down in CRAZY LAND you need the MORGUE, the DEA, and ATF..." OR "did the tenants really think it would be OK to fill a tub with charcoal and have a barbeque or was it just all the crystal meth?" OR "the boarded up places are not competition they are used for TARGET PRACTICE"...

Honestly the CHA is NOT going to let you just take that voucher money to the bank in those neighborhoods. NO ONE has a job. The amount of damage that can happen in a blindingly quick time frame is STAGGERING. I have seem ALL the plumbing and wiring be stripped out of a place in less than a week. It like a "chop shop crew" for apartment moves through...

You are not going to get normal families. It is all drug ruined lives. If you want to be a true slum lord you may actually be good at it, but somehow I don't think that is how I would try to earn back an investment.

This is not race per se. It is a lot closer to the magic real estate location location location -- this are not area about to "pop" unless you mean with actual gunfire.
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Old 12-10-2008, 02:12 AM
 
Location: Chicago
15,589 posts, read 13,262,455 times
Reputation: 1761
Chet goes off again!
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Old 12-10-2008, 02:26 AM
 
4 posts, read 8,507 times
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lincolnparker: That's per month cash flow.

chet: So basically it just comes down to the fear factor of it. Yes I know it's a horrible area, but for that kind of cash it would be worth it. I have someone that does some work for me that rents a 2 bedroom in that area for $700 month to month. I would have thought the rents would be much lower, any idea what's propping these rental costs up?

The 2flat I'm looking at has 5 bedrooms for each unit, I believe maximum voucher is $1500 for 5 bedrooms. Even getting $1000 each unit this deal makes sense for me.

I'm considering either this or going in the opposite direction. Finding a small 1 bedroom downtown. I've seen a few reos that break even in cashflow after mortgage/assessment/insurance on a standard 20% down 6% interest mortgage. In that situation I'd be banking on appreciation from this depressed market. I can't see them going much lower, but who knows, nothing seems to be moving right now.
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Old 12-10-2008, 10:21 AM
 
21,730 posts, read 37,212,462 times
Reputation: 10719
The vouchers prop up the rents -- I know how housing vouchers are supposed to be priced, but the system is gamed. The market is supposed to functions with prospective low income tenants getting the support they need to improve and move on. A lot of Clinton-era reforms DID work, but the people they did not follow the spirit of the reforms make it bad.

People with connections routinely fudge the income and other requirements, leading to an increasingly bad situation for all.

I really cannot stress that this is A LOT more than a fear factor kind of thing. This is about lack of jobs and crime and corruption and things that cannot be turned around by any one effort.

The break-even REO is probably a lot smarter...
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Old 12-10-2008, 10:38 AM
 
2,778 posts, read 5,474,779 times
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Quote:
Originally Posted by Avengerfire View Post
Chet goes off again!
Yeah, but... What part of what he said wasn't true?
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Old 12-10-2008, 10:57 AM
 
Location: Chicago - Logan Square
3,022 posts, read 3,502,680 times
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I think if you get a real estimate you'd find that a lot more work than $10,000 would need to be done. $10,000 doesn't go nearly as far as you might think in fixing a place up. As noted above the risks in renting in many of these areas are pretty high.

I know one guy who tried to do something similar and it ended up being A LOT more work than he had anticipated. The worst was the time he showed up at the building and found the tenants gone, along with the furnace, hot water heater, and most of the fixtures.
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Old 12-10-2008, 11:36 AM
 
67 posts, read 144,337 times
Reputation: 22
The problem with these buildings is that you can't plan on just a one-time major capital investment to get the place up to snuff, then ongoing small amounts for wear-and-tear type maintenance. In all probability you will have significant intentional/malicious damage occurring on a regular basis requiring major repair outlays on an ongoing basis.
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