I am looking at a junior studio in Chicago, Lincoln Park area. Since I'm new to this real estate market, I'm hoping to get some insight from the pros on whether this is a good deal or not.
Here are the basics:
Priced at 190K, hoping to get 185+5K in sellers concessions for net sale price of 180K. Currently it's rented out for the next 2 months (red flag?). Rent is 1300$. The place seems clean and well-kept. 4 minutes from CTA station on brown/pink line. Trader Joes 5 minutes, WF 10 minutes walk, so is a major university. Downtown within a 20 minute train ride.
Running basic numbers, the pmi+hoa+taxes come up to about 1250$. I know, I know! Not meeting the 1% rule, BUT initially I would live in it. Not sure for how long (hence primary residence loan with 20% down).
Here are my questions:
1. How good of a deal is it for Chicago area, given the shortage of inventory?
2. What am I getting in if I purchase a *leased* property?
3. During my conversation with the realtor, she gave away a vibe that a market may be flattening given the incredible appreciation rate over the last few years combined with raising interest rates. I appreciated her honesty, but it does concern me. Should wait to purchase given the current state of the market (insane appreciation; incomes not keeping up with it), as well as the fact that cash flow would be negative if I had to rent it out for some reason (i.e. if economy went down and I had to move to another state for a job)?
4. Given Chicago's potential (or lack of it), is this a good buy and hold deal? Like I said, I currently live in Chicago, enjoy it and would rather not pay rent, but don't know how long I will stay here.
Also, ideally, I'd like to hold on to my properties for 30 years until they are paid off.
Overall, I'm a bit hesitant purchasing in Cook County and would appreciate any insight. Should I run or go with it?
@Inga C. Honestly everything is relative. Really depends on your goals and exit strategy. How will you use this unit in 5 yrs? Live in or rental? Also, I found condos with less than 8 units easier to join the board of the HOA and usually isn’t professionally managed. (HOA can kill your investments). Not sure how big a building this unit is in.
1) it will take 30-60 days to close if going the tradition mortgage route. The tenant lease will be up by then.
2) think of you personal home (and rentals/flips) from an investment POV.
When you move, how much rent can you get for a studio? Based on rent now and you HOA/taxes/mortgage you won’t cash flow. If the market goes backwards you go negative.
3) if you come up north some a bit more, you can get 2 bedrooms units for the same price or less. Rent rates are about the same.
My biggest concern is whether investing in this area long-term is a good idea. Chicago has issues, and if the cash flow is zero to negative, I certainly wouldn't count on appreciation in this area.
Would you recommend I save the downpayment and use it in a better market, while renting here in Chicago?
@Inga C. Lincoln Park is a great area, one of the best in Chicago. Definitely will get appreciation, especially if you are holding for 30 yrs.
With that said, I always invest for cash flow. Some folks speculate on where the market will be in the future, but I prefer to count appreciation as gravy on top. If the rent now is $1300 and your mortgage/tax/HOA is $1250 there is no money to be made. In 5 years rent will be $1400-$1500, maybe? but your taxes and HOA will increase as well. in a downturn you go negative.
Also, do you plan to live in a studio long term? Not much room to grow. I think for the money, you can get a nice 2 bed room in a decent area and cash flow much better come rental time.
Lastly, I would suggest putting down 5%-10% for a owner occupied unit vs. 20%. Allows you to go after another investment much sooner and grow faster. let your future tenants pay down/off your residence balance. I believe the term is called "nomad investing" similar to house hacking (2-4 units), you buy 1 unit with 5-10% then wait 1-2 years and do it again and again. until you hit 4 mortgages. but by that time you have equity in 4 properties and 3 rental units.
Ibn thank you for the useful reply. It makes excellent sense.
Now, my question is about your recommendation to put 10% down. Doesn't if affect your cash flow? Good deals are so hard to come by these days that it seems that 10% downpayment may make a difference between having a positive or negative cash flow.
I'm also concerned about being overleveraged and vulnerable next time there is a correction...
The studio you're looking at is not going to cash flow. I would take @Ibn Abney suggestion, go up north and get a 2 bedroom for around the same price.
Rent out 1 bedroom, and it will help offset part of your mortgage. Besides, a 2 bedroom is more desirable to rent and/or sell when you decide to keep it as an investment.
In regards to over-leveraged and being vulnerable, you need to decide on your own financial situation.
Free eBook from BiggerPockets!
Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!
- Actionable advice for getting started,
- Discover the 10 Most Lucrative Real Estate Niches,
- Learn how to get started with or without money,
- Explore Real-Life Strategies for Building Wealth,
- And a LOT more.
Sign up below to download the eBook for FREE today!
We hate spam just as much as you
Create Lasting Wealth Through Real Estate
Join the millions of people achieving financial freedom through the power of real estate investing