Looking at rentals - Help please (Case study - Chicago, IL)

[vpr]

Hello Fellow Mustachians,

I've been a Mustachian for a few years now and have a decent stash of cash and hoping to buy a couple of rentals.

I was looking this morning and found this:

2 br 1 ba condo
Cost - $90K - $325 mortgage after 20% down - I wouldn't want to tie up a lot of my cash in the property, so I would do 20% down.
HOA dues - $380 (a little on the high side)
RE Taxes - $130 (but were double that in 2011 - county assessments are crazy here and often are reduced when owners appeal them. So there's a bit of volatility here)

I estimate that I could get $1200 ($1100-$1350) in rent. The condo is a 5 min walk from my place, so I know the area very well.

What do you guys think? A good buy?

[Rezdent]

Just my personal preference but I avoid condos - there's just too many rules and differing opinions plus they appear to be harder to sell if needed.
I also avoid any types of HOAs, although I might consider a rental with it if it was a spectacular deal. YMMV.

[iamlindoro]

Are you sure about those taxes?  Where, roughly speaking, is this rental located?  State + county would be fine.  There are no state taxes?

Also, what interest rate are you using to calculate that mortgage?  Bear in mind that investment properties will have higher rates than owner occupied.  I would expect it to be 4.5% at a minimum.

Condos are pretty terrible real estate investments, usually.  Even if you can make it cash flow acceptably, you're just one special assessment away from being screwed.

Taking into account the numbers you've given, 4.5% interest rate, $4K of closing costs, 10% expected vacancy, 2% annual repairs and reserves, and a property tax of $250 a year, this property cash flows $89 a month, with a $21K up front investment.  That's a 4.87% annual cash return in year one, which is terrible compared to an index fund.  One special assessment or long vacancy, or a move out of town necessitating property management, and you're negative cash flow. This one's not a winner.

[vpr]

Chicago, IL. It's entirely possible that they might re-assess the property much higher in the next tax year and my taxes might go up 50-100%.  Unfortunately, I live in Chicago and can't seem to find any reasonably priced condos/homes that I could buy and rent out. I will keep looking.

Thanks for the help, fellas!

Any tips on where I should be looking, are much appreciated!

[iamlindoro]

This seems to imply that you are looking at closer to $1500 in property taxes:

http://www.chicagonow.com/getting-real/2013/07/cook-county-chicago-property-taxes-2012/

At which point the property loses you about $15 per month.  What was the source of only $150 in annual taxes?  Or did you mean monthly?  Either way, this property is cash flow negative.

Edit to add:  Yeah, re-reading your first post, I think you've been saying $130 a month all along.  Sorry about my misunderstanding.  Yeah, this property is cash flow negative.

Since you're in Illinois, I'm sure that there are a ton of small IN, WI, and IL cities with great cash flow potential within a couple hours' drive.  Indianapolis and Milwaukee are the first couple that come to mind, but there are many, many more.