I know you hear it all the time, but is buying cheap property for sale in Chicago always a good idea? Buying investment property is always a smart thing to do, but don’t let a low price steer you towards making a bad investment. I often see rookie investors look for cheap property for sale in Chicago believing they can’t go wrong, but end up quite surprised once reality smacks them in the face.
I want to show you how to avoid making that mistake.
While budgeting is a very important step in the investment process, it shouldn’t be the main criteria you focus on when evaluating properties. So before deciding you’re buying that $30k house in the middle of the war zone, here are a few things to consider:
What are your investment goals?
Are you looking to flip or hold for rental income? If you find a cheap property for sale in Chicago, one of two statements is true – the property is in bad shape, or the property is in a rough neighborhood.
Either way, that will affect the value.
Once you make the repairs, will you keep it as a rental? On the other hand, the $30k properties in the ‘hood may not need any repairs at all. They may be ready to rent the day you close on it. Determining your goal of buying and overall strategy is where you start.
How much cash flow will it give you?
The majority of cheap properties for sale in Chicago are most likely not in an “A” area. That means you won’t be renting to tenants paying “A” rents. Let’s say we have a 3 bed/ 1-bathroom house, and you’re renting to a tenant paying $1000/month. Assume the tenants are paying their own utilities, but you’re responsible for water ($100/month), insurance ($100/month), and property taxes ($3600/year [$300/month]). The tenants are “rough” on the house too, so calculate 10% ($100) for repairs. You won’t make the repairs monthly, but it’s good to have the cushion for when it’s time.
$1000 rent – water – insurance – taxes – repairs = $400/month cash flow.
Focus on Net Operating Income, Not Gross Operating Income As There Is A major Difference
What will your cash on cash return be?
When buying cheap properties for sale in Chicago, you can almost always count on additional money out of pocket in addition to your acquisition cost. If you spend $30k on this house and you spend $20k to get it rent ready, you’re all-in for $50k. Take the expenses from above to calculate the cash-on-cash return, another important investment metric.
$400/month * 12 month = $4800/year
$4800/year / $50k purchase price ~ 9% annual return
How much of a headache will this be?
There are tons of investors that would love to get a 9% return on their money when looking at cheap property for sale in Chicago.
But, what is the mental cost to that 9%?
Again, assuming this property isn’t in the best part of the city, there may be some crime in the area. You’ll have to drive to pick up rent, and worry about what the guys on the corner are thinking about when they see you. People may break in your properties in between tenants, and steal all the copper pipes. If you don’t want to deal with this and the other day-to day duties of being a landlord, you’ll have to hire a property manager. That’s usually 10% of the monthly rent ($100). That brings your monthly cash flow to $300, annual to $3600, and cap rate to 7%. There’s a pretty good chance you can find a property with fewer headaches and get a similar return.
All things considered, the property in this example wouldn’t be an awful investment. The numbers are just estimates and could change for your benefit. You’re making $300/month and you don’t have to get off your couch – SWEET! After You’ve held the property for some time, you’ve decided to move on to other investments.
Time to call me to list and sell.
You have in your head that you spent $50k initially, and you want to walk away with some money too “Let’s list for $69k.” I list it, and we don’t get any activity in the first 2 weeks.
Price drop – $65k. One showing, but no offer.
Price drop – $59k. A few showings, and what you feel is a lowball offer of $40k. You decline.
Price drop $49k. Much more activity, and an offer close to full price that we accept. Then, the buyer backs out based on the property inspection.
You see where I’m going here?! The moral of the story cheap properties for sale in Chicago are not ALWAYS great deals because they are cheap! Talk to a Realtor familiar with the area before you buy so you’re not surprised when it’s time to sell.
Jerry Brown aka “The Real Estate Guy”