Please help evaluate a condo purchase in Chicago + timing

5 Replies

Hello everyone,

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.

good luck

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...

@Inga C.

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. 

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