Based on the current economy, what would you do?
Based on the current economy with rising taxes and a slow exodus, what would your investment strategy be and why? Is it still a good opportunity for rentals or should we be looking to get in and get out (flips) as fast as possible? I know the play is different in the city vs rural areas, but I'm curious where everyone thinks Illinois is going.
What is some advice you guys can offer to a new comer like myself about buying a rental property here in Illinois? I'm 23 years of age and know nothing really about the ins and out of rental property. Anyone willing to mentor?
This is my favorite real estate economic blog:
Great for big data information. He even predicted the housing bubble!!!
Interesting replies from everyone, great topic! I am okay with changing plans along the way. Purchased first rental with intent to flip within a year ended up with over 10% ROI first tax year and close to 15% second tax year so the question became, where the hell else am I going to make a this high of return this easy. 3 years later my default rental is worth double what I paid for it, so I say be flexible bend with the wind and be willing to admit your original plan might not have been the best, no matter how thing play out. Full disclosure I spent way too much time searching for my first flip/rental, and would have been far better off financially investing that time in other business activities.
@Account Closed what caused your initial strategy on this property to change? Did you recalculate the numbers or did something else happen to turn it into a rental?
My initial intent was to rent it for a year and put up for sale at end of lease. Finding other properties I wanted to purchase was way to time consuming, took to much time off work, in the interum rental outperformed all my expectations. Still have the same tenant since the day I closed on property, find him very easy to get along with. He initially thought I was a complete azzhole. People often warm up to me over time.
Originally posted by @Casey Wohl:
Based on the current economy with rising taxes and a slow exodus, what would your investment strategy be and why? Is it still a good opportunity for rentals or should we be looking to get in and get out (flips) as fast as possible? I know the play is different in the city vs rural areas, but I'm curious where everyone thinks Illinois is going.
I think Illinois has MAJOR issues. I think this last budget and increased property taxes merely punted the situation down the road. The state would likely default if there is another downturn. Unless I had a place near a really trendy area, I would get out of Illinois all together.
Chicago is the only metro area of the top 25 that lost population.
If I was going to do anything, I would look to NW Indiana, lake or porter county.
Current economy - Buy deep and know my market
Post crash - Buy deep and know my market
John Kraakevik from Wheaton, IL
@Account Closed
have a HELOC on my primary residence and substantial equity on my rental, my former residence 20 years ago. Because nearly all my depreciation is gone, I am looking to the next step. With the last subject to with 225,00 and taking over the loan with the existing loan, won't most deals end up with a higher existing payment and higher liability? I'm not sure how that works.
Thanks for your understanding. I'm completely new to BP and the financial end. Ideally, I'd like to take a HELOC on my rental or do a 1031exchange to avoid the taxes on capital gains. Thoughts?
Thanks
Originally posted by @John Kraakevik:
John Kraakevik from Wheaton, IL
@Account Closed
have a HELOC on my primary residence and substantial equity on my rental, my former residence 20 years ago. Because nearly all my depreciation is gone, I am looking to the next step. With the last subject to with 225,00 and taking over the loan with the existing loan, won't most deals end up with a higher existing payment and higher liability? I'm not sure how that works.
Thanks for your understanding. I'm completely new to BP and the financial end. Ideally, I'd like to take a HELOC on my rental or do a 1031exchange to avoid the taxes on capital gains. Thoughts?
Thanks
If you like the property, have you thought about either refinancing it to lower the interest rate or refinancing it to pull out equity to make another investment?
@John Kraakevik Hi John. This is only generalized info since general economic conditions, income, being self employed vs W2, experience, knowledge, spouse, risk tolerance, amounts owed on properties, reserves, interest rates, terms, equity & goals and so on, all play a role in the moving parts world of real estate investing.
I don't like putting my residence at risk, so I don't. I think HELOCs are putting properties at risk. Most HELOCS can be closed or called on short notice. It typically happens when you need it most. So, I would plan my investing as though the HELOC wasn't there, and since it is there in your case, I would use it sparingly.
When buying Subject To, you are taking over the interest rate of the existing loan. If the loan was taken out at 3.75%, that is what you are paying. If the loan was 8% (as it often would be when I first started some twenty years ago) then that is the rate you are paying. Generally, going to a mortgage broker and refinancing a loan, costs you more than you save when using Subject To and it defeats the whole purpose of Subject To anyway. A refinance pays off the Subject To.
Depending on the specifics of your rental, actual cash flow, what it would sell for etc, my inclination would be to sell it (or maybe refinance the rental) and take the equity and buy several other properties using Subject To, selling them to Tenant Buyers who would each give me $10,000 to $25,000 down to buy the properties from me. I tend to cash flow my Subject To's on average, at about $500 per month after making the underlying mortgage payment that I took over in the Subject To plus I get to keep the $10,000 to $25,000 down payment and I reinvest that into additional properties (or I can spend it ;-). I know that is packed information, but you get the general idea.
Not changing my strategy at all. If the economy collapses people are still going to need a place to live.
Buy/hold investing will always be around. Trends will change but the principals will not.
@Account Closed - I'm still learning Subject To so please bear with me. Are you holding the Note for the new buyer? If so, how extensive are you with vetting the new buyer? What happens if they can eventually refinance and buy you out? How does that process look?
@Casey Wohl Those are all good questions. PM me for details, but here is how it generally looks. When I buy SubJect To I make the payment on the seller's note. I have disclosures and authorization and all of that. Then, I mark up the property and create a new note for a new amount. When I sell to a Tenant Buyer, I do a Dodd-Frank compliance check, they make a down payment or option payment to me, I get to keep that money, and I increase the monthly payment to reflect the note I've created (actually my attorney does the paperwork) and I get to keep the difference. If they refinance or sell, the original seller's loan gets paid off out of that money and I get paid off my equity with the remaining, all at escrow.
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Originally posted by @Account Closed:
@Casey Wohl Sure.
Here is a list. I have a spread sheet as well. When you buy a house conventionally, you put 20% down so a $200,000 house means you are into it for $40,000 plus closing costs and carrying costs.
When I buy a $200,000 house with Subject To, I am into to it $100 down, maybe $5,000 to the seller for "walking money" and some closing costs. I'd much rather rather risk about $7,000 than $40,000 etc.,
OPTION 1: OPTION 2: When Seller Uses RE Agent & Your’e Using Property For a Rental When Buying Subject To & Selling to Tenant Buyer Pro: Doesn't require specialized knowledge Pro: Little competition "Adequate" cash flow - Nothing Exciting Can be little $ down You get appreciation if property goes up Can do Unlimited number Can Get Started Much Sooner Get down payment (Cash $) back immediately Great Cash Flow No Bank Approval Needed No Maintenance or Repairs Con: Have To Have $45,000 Cash for Down Payment Con: Have To Have $15,000 Cash For Reserves (just in Case) Have To Have $15,000 Cash for Closing & Carrying Costs Due on Sale Clause Have to Get Bank Approval Must learn the technique Can only do 4 -10 properties depending on bank Competing with everyone else Requires 20% Down & other requirements If AC breaks - you fix it If roof needs replacing - you pay for it If toilet clogs - it's on you If house gets trashed - you un-trash it You take loss if property goes down in Value Tenant Can Trash The House
VERY interesting....
Looking more into rentals vs flipping now
@Alex Bok - Why change your approach? Isn't flipping a better short term play in an unstable market? I understand the long term hold strategy but if you're into flipping, I would think you're more into the get in, get out approach.