Calling all Landlords...

[The Captain]

So I've been posting from time to time about my and DH's search for our first investment property.

I've been researching the market for about 17 months, plus we live in the area and know it very well.

We've see over 45 properties, I've shadowed a current landlord with over 20 units, and I've been to a few REI meetings.

We've made about a dozen offers, of which 10 were already under contract by the time our offer was submitted, and two were rejected as too low.  The two that were rejected are still on the market over 8 months later.

According to our R/E agent the prices we offer are reasonable for the area.

We have verbal offer and acceptance on our first property and are in the process of finalizing the details.

The property is mortgage free to the current owners.  We are basically a no contingency (maybe inspection and appraisal) offer and are already pre-approved for much more than the offer price.

The current landlord has agreed to replace the roof and re-tread the stairs on the carriage house.  Otherwise the exterior is in very good shape.

The interior on all three units needs a serious refresh.  The current owner has agreed to repaint the walls and paint the wood floors and put down new vinyl where there is no hardwood in one unit and get a new tenant in before closing (the current tenant is leaving sept 1).  He will not do a kitchen or bath refresh.

The other two units are currently rented, one tenant 13+ years, the other tenant 4+ years.  


Roof less than 5 years old on the main house, newer water heaters and furnace.  Electric upgraded to 100amp circut breaker in each unit.  The house has been inspected and has an extended city rental license.

We are getting copies of current rental agreements and the schedule E for this property.  

The numbers:

Purchase price say $125K.  RE Taxes $5400 per year.  Tenants pay all utilities.

Rent Unit 1 - 3 bedroom $800
Rent Unit 2 - 2 bedroom $500 (this tenant also is responsible for mowing the grass/shoveling snow and does a fairly good job) could get $650-$700 for this unit but I'm ok with the arrangement it's a double lot so a lot of grass).
Rent Unit 3 - 3 bedroom $850 - (carriage house)

Each unit get's one off street parking space.  There are two additional spaces of which one is reserved for the landlord and the other is used by the tenant who has been there the longest.

The carriage house has a workshop under it that could be rented out if desired, but we will probably not do that but use it to store supplies for properties as we build our portfolio.

We have a lawyer who is familiar with local real estate law in case anything comes up.  We will add this property to our insurance and increase our umbrella coverage by $1M.

What am I missing?  Would you consider this a good investment?

[zibazinski]

Is this a triplex?

[zibazinski]

Those are some pretty steep taxes but I don't know the area. 

[zibazinski]

Can you make the taxes, insurance, mortgage, and have ten per cent to put aside for updates and repairs? I never cared about a profit as I used the money I didn't spend on the properties to pay more on mortgage. My goal was mortgages paid off when I retired so my goal could be different than yours.

[The Captain]

Zib,

Thanks for the questions.  The property is in an older part of town and is a large house that was converted into two legal non-corforming units.  The third unit is on the same property (and parcel ID) and is a carriage apartment above a large workshop (think apartment above a garage).  

The rents can cover taxes, insurance, mortgage, 30% for updates and repairs and still have between 20-40% (if all units are rented) to "draw" if I wish, which is NOT our desire as we want to build up cash to get the next property.

Even if only two units are rented we would still be cash flow positive after all expenses.

The taxes are a bit higher than average because is is already taxed as an investment (as opposed to owner-occupied) property plus there is a special assessment due to a recent street repaving and curb replacement.  The streets and sidewalks in this area are pretty much brand new.  However, with this in mind I still think the taxes are too high by about $800 (based on some comps I pulled) and I will protest once we own the property.

From our personal finance point of view this (and future) property is for retirement purposes only to build up alternative income streams/equity. 

[workpublic]

what area is it in where the purchase price, taxes and rents are so low?

[The Captain]

Northwest surburbs of Chicago in a cluster of surburbs which were hit very hard by the housing crisis.  Mostly blue collar working class neighborhoods where a lot of folks paid too much during the bubble.  In some areas the default rate is at 40%.

There was/is a glut of foreclosures on the market and repo/short sales makes up about 30% of the total inventory available for sale.  You have a lot of inexperienced flippers coming in, spending too much for the market in improvements, then wondering why they can't rent for 400-500 more for unit then what I'm listing.  In this area folks are not going to pay for brand new, state of the art ___, they just need a safe, comfortable place they can afford.  I could even tell you about the idiot who purchased in gang territory, has had the house tagged three times (that I know of), can't get it rented, and is trying to sell it for 3X what they paid for it.  Not happening.

Add to that the fact that there is a bit of a "war" going on between two cousins who used to be in business together (their company owned about 50 properties) for the section 8 market (which is very lucrative) and the rents have been driven up because the voucher values are based by county (Cook, which includes Chicago).  The prices I'm quoting for rents are kinda low, but will keep the units occupied with reasonable quality tennants.  I couldn't go higher because then I'd be competing with units that have been recently refreshed both inside and outside attempting to attract tenants holding the section 8 vouchers.  (This is one of the reasons I always go on a rant when people talk about "crappy section 8 housing")

This particular house is the last in a portfolio owned by a couple whom are retiring and moving to Arizona in three months.  We looked at this property about 6 months ago but at that time the owner did not want to budge on price.  Now that they are getting close to their drop dead date they need a buyer where the sale won't fall through and they just want to finish liquidating their portfolio.  They've also held on to this the longest because (remember, paid off mortgage) it is one of their biggest money makers.

We could buy a REO property for a lot less (which is what a lot of folks are doing) but there is usually extensive repairs needed.  We don't have the time for that since we both work and would have to pay a professional to do the work, which kinda kills the economics.

[ontrack]

Aug 19, 2013 6:36:01 GMT -5 The Captain said:

Why would you paint wood floors?  That is worse than painting brick in my opinion.  Unless someone else has already painted them and the damage is done, please don't.  Other than that, good luck with the new venture.

[The Captain]

Aug 19, 2013 9:07:00 GMT -5 ontrack said:

Aug 19, 2013 6:36:01 GMT -5 The Captain said:

Why would you paint wood floors?  That is worse than painting brick in my opinion.  Unless someone else has already painted them and the damage is done, please don't.  Other than that, good luck with the new venture.

I agree with you 100%, unfortunately the damage is already done

It really breaks my heart on some of these older homes converted into rentals.  It's cheaper to paint over wood (including beautiful trim and molding) then it is to refinish it.  Also, let's face it, tenants are not gentle on the property.

[Deleted]

What does "legal, non-conforming" mean in your neck of the woods?

In mine it means that if the property burned down you couldn't rebuild. Is that your situation? If so what can you rebuild? How would that pencil out in rents?

Unlikely but make sure you do the math.

Are you going to manage yourself or use a PM?

[The Captain]

@bonnap - and this is why I post on this board!  Good question, Thanks!

To be honest, I had not considered the implications of the legal, non conforming zoning in case of future events (fire, etc.) So I called the city code enforcement office and found out the property is actually zoned as multi-family, I asked and confirmed using the parcel ID so I'm pretty sure we are golden there.  I checked the listing and it does state multi-family on redfin, but the original printout of the listing sheet stated non-conforming so I will have to ask the agent about that.

Since it's zoned multi-family we could build up to a four-flat on the property. 

Since it's our first property I think we should() be able to manage it ourselves.  We live less than 15 minutes away and DH is very handy, as am I to a certain extent.

The interesting thing is right now it is cheaper to buy than to build in terms of pure cost per sq ft so I'm not sure how that will work out for insurance purposes.

If it takes up too much of our time we may get a PM...of course your thoughts in this area are greatly appreciated.

[Deleted]

Since it's our first property I think we should() be able to manage it ourselves. We live less than 15 minutes away and DH is very handy, as am I to a certain extent.

As long as you've taken some kind of property management course and are up to speed on deposits, notices, fair housing laws etc I agree with you. Have you set up a separate bank account for this property? I highly recommend it.

The interesting thing is right now it is cheaper to buy than to build in terms of pure cost per sq ft so I'm not sure how that will work out for insurance purposes.

Insure it for what it would cost to rebuild. I've had this happen on two of my properties; including the cabin in Idyllwild. I don't know if you read that thread but my cabin was threatened by a huge wildfire this year. The whole town had to evacuate for 5 days. Anyway, I've had to argue with agent when he first covered it because according to their source (Marshall and Swift) it shouldn't cost as much to rebuild as I estimated. But I know the area and how expensive it is to rebuild (and trust me as we're remodeling this house it's even MORE).

The agents get a little concerned because a situation like that is ripe for an "accidental" fire. But if you've got good credit and are a good customer it shouldn't be an issue.

We had a similar situation (but it wasn't questioned) for a house we own in San Diego County. I know it will cost about $200 sq.ft. to rebuild. It's insured for about $600k which is just about what I think I could sell it for. Imagine how odd it felt to be paying a bill for $600k value when the local comps were down in the $475k range.

[DVM gone riding]

I had the oppisite issue. On the property I just bought I paid 160k and wanted to insure for 180k but the insurance company wouldn't do less than 220k! Go figure.

I am amazed that they r agreeing to repairs usually with investment property you negotiate price and do your own improvements. No way would I make a new tenant part of the sale! I would much rather choose my own at my own price and contract!

[The Captain]

Aug 19, 2013 15:03:28 GMT -5 @bonnap said:

Since it's our first property I think we should() be able to manage it ourselves. We live less than 15 minutes away and DH is very handy, as am I to a certain extent.

As long as you've taken some kind of property management course and are up to speed on deposits, notices, fair housing laws etc I agree with you. Have you set up a separate bank account for this property? I highly recommend it.


I've read several "Landlord's guide..." so have a fairly decent idea.  We also have a real estate attorney on retainer if needed.  Good idea on the property management course, I'll see if I can find one online.


And yes, we are planning on a separate account for the deposits and operational account per property.

The interesting thing is right now it is cheaper to buy than to build in terms of pure cost per sq ft so I'm not sure how that will work out for insurance purposes.

Insure it for what it would cost to rebuild. I've had this happen on two of my properties; including the cabin in Idyllwild. I don't know if you read that thread but my cabin was threatened by a huge wildfire this year. The whole town had to evacuate for 5 days. Anyway, I've had to argue with agent when he first covered it because according to their source (Marshall and Swift) it shouldn't cost as much to rebuild as I estimated. But I know the area and how expensive it is to rebuild (and trust me as we're remodeling this house it's even MORE).

The agents get a little concerned because a situation like that is ripe for an "accidental" fire. But if you've got good credit and are a good customer it shouldn't be an issue.

We had a similar situation (but it wasn't questioned) for a house we own in San Diego County. I know it will cost about $200 sq.ft. to rebuild. It's insured for about $600k which is just about what I think I could sell it for. Imagine how odd it felt to be paying a bill for $600k value when the local comps were down in the $475k range.


I agree we plan to insure for what it costs to rebuild, which is the coverage on our primary residence as well.

[Deleted]

I was hesitant to chime in because I think I'm the "joke" of YM landlords LOL. 

I second, and third, Bonny's suggestion to open a separate bank account. We don't have separate accounts for each property (I think Bonny does) but at least we have a separate account for all of them together.

I think you are wise not to go after the Section 8 clientele. There was a woman in Texas with a fairly popular blog who had four rental properties, most of which (3?) were Section 8,. She just had hassle after hassle after hassle, and not necessarily from the tenants lol. She closed down her blog so it's not available anymore, but it was a great landlord blog. 

The only thing I'm wondering is why you don't want to rent out the workshop. Personally, I would. I don't see why you'd need all that space for "storage", at least right now. You can always re-evaluate later after you build a bigger RE empire LOL. 

Last thought, since you own several apts in the same place, remember that if the shite hits the fan, it may well affect at least two of those apts. Or, the carriage house and the workshop. You get the point lol. 

In any case, best of luck!

And also Zib, wow, I thought we were the only landlords whose goal was to pay them off before we retire rather than to continue acquiring more LOL!

ETA: I'm not sure how it works there but here we increase the rent every year per the COL increase for the year. Except when we forget. 

[The Captain]

Aug 19, 2013 17:09:21 GMT -5 DVM gone riding said:

I had the oppisite issue. On the property I just bought I paid 160k and wanted to insure for 180k but the insurance company wouldn't do less than 220k! Go figure.

I am amazed that they r agreeing to repairs usually with investment property you negotiate price and do your own improvements. No way would I make a new tenant part of the sale! I would much rather choose my own at my own price and contract!

As far as the repairs go, this landlord is one of the "good guys" in the area (I have a very helpful contact in the inspectors office).  Except for the stairs and roof the property was well maintained (he made several other repairs since the first time we looked at the house).  We could negotiate the price down but then we'd have to deal with hiring contractors, getting repairs made, being there for permits, inspections, ect. and  for the price I consider it a fair trade to pay a little bit more.

The tenant is something that we will work with him on and he will walk us through his process.  Credit reports, background checks etc will be run and since we are new I'd like to see his thought process in screening tenants.  This may bite us in the ass but at worst we have a bad tenant for a year and since we are brand spanking new there is no guarantee we'd do a better job than the seller.

[Deleted]

Captain,

Why is this guy selling? A lot of older landlords are "don't wanters" e.g. too much maintenance, tenant hassles, et cetera.

You can get a lot of "But X never used to do that". And often the rents are under market which makes you the bad guy for raising them. You'll need to evaluate the situation and make your own decision. I've only "inherited" one tenant over the last several years and I'm glad I sold the property rather than deal with her long-term.

[The Captain]

@bonnap

This guy used to own about 20 properties in partnership with his brother - it was their full time job.  They've did this for over 35 years.  His brother "retired" over a year ago, sold his house, and is driving around the country visiting his kids in a motorhome.  The younger brother has been selling off their portfolio since he also wants to retire and be able to travel more to visit his kids/grandkids.  He turns 62 this week and is eligible for SS.  He can't make extended trips now that his brother is gone (by extended I mean two-three months).  But since he now has guaranteed cash flow he wants to cash out and travel.

As a newbie I like the concept of a turn-key property but acknowledge that "inheriting" someone elses tenants could cause problems.  The fact that he's kept one of the tenants for 13 years and the other for 4 years seems to my inexperienced eye a good sign.  The third tenant I thought was a problem the first time we viewed the property and I take it as a good sign he choose (before reaching out to us on the price reduction) not to renew their rental agreement.  

He also did something kinda unusual for this area in that he has the tenants agree to split/pay the water bill so all utilities are paid by the tenant.  He did that after one didn't call him about a toilet constantly running and ran up a $400 water bill.  Yes, as the property owner I am ultimately responsible to the city for the water, but most of it will be covered by long term tenants.

DH and I can afford to take a few financial hits (legal fees etc) while learning the ropes, so a mistake won't break us.  I'd rather not make them but I figure when getting a new tenant in he SHOULD be better at screening than us...

As far as the rents, he's raised them $25 a month every other year or so.  For the area that is about right.

Again, I REALLY appreciate the comments and questions - they make me think!

[The Captain]

Aug 19, 2013 17:36:41 GMT -5 @debthaven2 said:

I was hesitant to chime in because I think I'm the "joke" of YM landlords LOL. 


I'm not sure why you say that, everyone's experience is relevant - especially to a greenhorn!

I second, and third, Bonny's suggestion to open a separate bank account. We don't have separate accounts for each property (I think Bonny does) but at least we have a separate account for all of them together.


It's actually a legal requirement in IL to accrue and pay interest on deposits.  I figure a separate account makes that foolproof as far as tracking.  The accountant in me wants to keep revenues/expenses for each property separate as well.

I think you are wise not to go after the Section 8 clientele. There was a woman in Texas with a fairly popular blog who had four rental properties, most of which (3?) were Section 8,. She just had hassle after hassle after hassle, and not necessarily from the tenants lol. She closed down her blog so it's not available anymore, but it was a great landlord blog. 


I agree with you. It's kinda hard though because it is VERY lucrative (this property could net at least 800-900 a month more in rents if it were section eight certified.  However, I am a landlord - not a social worker.  I can deal with some tenant issues, but sec 8 is a whole new level of needy.

The only thing I'm wondering is why you don't want to rent out the workshop. Personally, I would. I don't see why you'd need all that space for "storage", at least right now. You can always re-evaluate later after you build a bigger RE empire LOL. 


It's also a liability issue.  I could say no haz mat or flammable materials but people make their own rules all the time.  If there are kids living in the unit above I do not want to worry about what kind of fumes they may be breathing.

Last thought, since you own several apts in the same place, remember that if the shite hits the fan, it may well affect at least two of those apts. Or, the carriage house and the workshop. You get the point lol. 


Umm - I may be missing something here - if there is a fire etc I have insurance.  If the economy tanks even more my units become more desirable because they are relatively cheap in a HCOLA.  The only risk I see right now is if the economy skyrockets, in which case I may have a hard time renting out units in need of a serious cosmetic refresh - but I have the cash to do that if needed.  What may I be missing?

In any case, best of luck!   I appreciate it, thanks!

And also Zib, wow, I thought we were the only landlords whose goal was to pay them off before we retire rather than to continue acquiring more LOL!

ETA: I'm not sure how it works there but here we increase the rent every year per the COL increase for the year. Except when we forget. 

[Deleted]

Good Luck thecaptain, wishing you the best!

And wise move not going after section 8...

[Deleted]

Umm - I may be missing something here - if there is a fire etc I have insurance.

Yes, this is what I meant. If you have a fire, or water damage, it is more likely to affect two apartments at the same time. Sorry I wasn't clearer!

[Deleted]

Aug 20, 2013 9:14:27 GMT -5 @debthaven2 said:

Umm - I may be missing something here - if there is a fire etc I have insurance.

Yes, this is what I meant. If you have a fire, or water damage, it is more likely to affect two apartments at the same time. Sorry I wasn't clearer!

And I was thinking you were referring to a sewer line failure and back-up where literally the sh*t could hit the fan?

[econstudent]

It's actually a legal requirement in IL to accrue and pay interest on deposits. I figure a separate account makes that foolproof as far as tracking. The accountant in me wants to keep revenues/expenses for each property separate as well.

I rented in Illinois for several years, and I never got interest on my deposits. It's my understanding that this requirement only applies if the landlord has 25 or more units in a complex.


www.ilga.gov/legislation/ilcs/ilcs3.asp?ActID=2203&ChapterID=62

[The Captain]

Good point on the above, I only lived in multi unit complexes and assumed it was a requirement for all landlords.  Obviously I have a lot to learn.

[Deleted]

Aug 21, 2013 13:00:34 GMT -5 The Captain said:

Good point on the above, I only lived in multi unit complexes and assumed it was a requirement for all landlords.  Obviously I have a lot to learn.

And even those of us who have been doing it for a while still have a lot to learn!

Did you find out about the non-conforming use yet?

Next to zoning, the most common reason for "non-conforming" would be a parking requirement for off-street parking. As an example, if you have three small units, with todays parking requirements you might have to have 3 off street parking places whereas now there may only be one or none because of the carriage house conversion.

There could also be issues with set backs or other restrictions.

Whatever the owner or agent tells you make sure you get confirmation by the city/county. And be sure to have a chat with your insurance agent. There's usually a building code upgrade provision. Make sure it's enough to truly cover what it would cost to rebuild to current standards.

[The Captain]

@bonnap

Bonny - I called the city code enforcement section and actually confirmed the property is zoned as a multi-family, so I could rebuild up to a four flat if something drastic were to happen. 

I also found out (from the very helpful city code employee) that I could file a FOI request to find out of there were any pending code violations, liens, open permits, open code cases, fines, fees etc.    This has already been done and I'm just waiting for a response. 

My insurance agent is actually going out today to take pictures to get me a quote.

On an unrelated note I met with the mortgage broker today about the loan.  We went through the paperwork and my numbers.

The amount we would qualify for (supposedly) is 8X what I'm asking for.  Madness!  I would NEVER overleverage myself that much.

Of course I've already identified another property that I'd REALLY like to see...

[Deleted]

Right, but zoning is only one piece of the puzzle. Why is the property listed as "legal, non-conforming"?

[The Captain]

Oh, I get it - apparently the original listing sheet was in error (the one I printed out 6 months ago) and it was later updated.  The updated listing sheet states multi-family and the city confirmed this.

I asked the real estate agent and he tells me the original listing had an error.  Seeing as how we looked at houses that were listed with central A/C but had baseboard heat I could see this happening.

One house didn't even have any heat at all.  No ductwork, and the baseboard heaters had been ripped out (probably cast iron) and it would be the devil's job to find replacements that fit in this day and age.