All Forum Posts by: John Clark

Originally posted by @Phil Davies:

I've been considering property investment for a couple of years now.  I was ready to pull the trigger a year ago but then Covid hit and I feel like I've dodged a bit of a bullet with the ludicrous eviction moratoriums in place.  Does it make sense to move forward now, or should I wait to see how the eviction bans (Fed & States) pan out moving into the summer?  

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Wait, for longer than this Summer, for two reasons: First, as you say, you need to see how the eviction moratoria play out, and; Second, you want to see how the foreclosure moritoria play out.

The eviction front will put a lot of inventory on the market and rents will go down. That will give you a better idea of what you can charge for apartments and therefore what you can pay for a building. The foreclosure front will put inventory on the market as banks foreclosure. The two combined will put more inventory on the market as small scale landlords quit the business because they are fed up with being abused.

Use this time to investigate the areas and neighborhoods you want to be in, and to develop your policies and criteria for those neighborhoods. You will read a lot about people here insisting on WRITTEN screening criteria. That's nice, but investigate credit score cut offs, employment screens, pet/prison/income criteria, how to recognize necessity moves (probably stiffed the old landlord), etc. etc., and work up your own criteria, consistent with local laws. Work also on your financial models -- those will change depending on the neighborhoods you want to be in. Find examples of failed financial models and figure out why they failed. Find good models and figure out what made them good. That way, when inventory starts coming on the market you'll be able to buy at a good price properties that you know will work for you.

Finally, start small. It's important to start, not to get big quickly. Grow with experience.

I think the solution for CDC overreach is to allow evictions in states that don't have mask mandates or limits on business capacity or such.

The idea of not allowing evictions (note that I did not say the CDC moratorium) came at a time when eviction was seen as a major vector for spreading the disease. As others have said here, people are lining up, maskless, for all and sundry things. Evictions are therefore not a major vector for Covid in states without mask and capacity mandates. Have the CDC rescind the eviction moratorium for those states that refuse to have disease mandates. That will force the people, and politicians, to chose: Moratorium (popular with tenants) or mandates with compliance. 

Keep in mind that the luxury end of the Chicago market, particularly condos, is waaaaaay overbuilt, so you will have zero appreciation and possibly a capital loss for a long time.

Also, given Chicago's finances, property taxes are going to soar.

Further, the Illinois legislature just reported out of committee (so it will go to the floor and get voted on) a repeal of the current ban on rent control. Of course the bill will pass, and Chicago will immediately pass a rent control law.

Finally, how well do you know Chicago? Even if you are going to be here for several years, it might make sense to rent for a year, find some hidden gems of neighborhoods and invest there. Places like Lincoln Park, Gold Coast, Lake View, and such (Bucktown) are fully priced, so your appreciation will be limited.

I second the idea of giving your first lender a chance to match. Also check the Quicken offer for pre-payment penalties or (I'm dating myself here) computing interest according to the Rule of 78s or the Rule of 88s.

Rule of thumb: Your new payment should save you your origination and closing costs (fees, title, survey, points, etc., etc.) in three years.

Originally posted by @Travis C.:

I think the concerns of the author are missing one key ingredient for a massive bubble to burst - there is no exotic debt out there as in the mid-2000's.

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Collateralized Loan Obligations (CLOs) are the CDOs of the early 2000s.

I agree with the people who say that it all depends on what you do with the money -- to a point. People pay rent out of income, so a wrecked economy -- CLOs blowing up, etc. -- that hurts your tenant's income hurts you, too.

How about making a thorough virtual tour with a detailed floor plan available? That way you can pre-screen and if they pass that, let them have the virtual tour (they can go to the library and use the internet there if they don't have internet at home). If they are still interested, schedule a real tour. Then they can apply.

The virtual tour does NOT have to be professional, just informative. You give them the internet address for the tour post and be done with it.

Is your goal to avoid paying private mortgage insurance (PMI) on the first mortgage? You need to look at the fact that the lender(s) will look at the property as 100 percent leveraged, and will adjust both mortgages' interest rates up accordingly. There is a difference between having 20 percent cash equity in the house and having -- as far as the first mortgage holder is concerned -- 20 percent equity in the form of a subordinate note.

And the second mortgage holder is going to charge a really high interest rate because he's not going to have any cushion whatsoever.

Will the increased interest rates be less expensive than simply paying PMI on one mortgage at 100 percent of value?

"Basically, I need an elevator speech on leverage and why to use it."
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You and your girlfriend had a debate but you didn't tell us what the argument was against using leverage. What it all comes down to is this: What is your (joint) tolerance of risk?

As some have pointed out, having only one property increases the "risk" of no income coming in, but increases your ability to tolerate that "risk" by not having to make a mortgage payment each month. More properties, less "risk" of zero income but more "risk" of default and losing money.

So look at your joint risk tolerance and go from there.

Then there's the small matter of you being a rookie. I will take that to mean you have zero experience. Can you handle four or more properties "right now?" If not, move yourself down the scale to where you can manage a number of properties and start there.

A lot of people said that you could buy 4 properties with $25k down for each. But they have also said you have other expenses that reduce your net income. How about a compromise" Buy ONE property with $25k down, and see how things turn out? You might not like being a landlord. If something comes up, you'd have (hypothetically) $75k as a cushion. Then, if things work out, you can get a second property and repeat.

The important thing is to get started. It is NOT important to "go big or go home right now." Start slow, get acclimated, then move up.

So figure out the risk tolerance for the two of you, and take into account ALL of your debts, including cars, student loans, etc. If your girlfriend can tolerate those debts, then she should be willing to tolerate SOME real estate debt. Make a plan to invest and -- if things work out -- increase your holdings.

Good luck to the two of you. Just remember that there are TWO of you.

BTW, Eric, I see from your description that you are a rehab/flipper, a short-term perspective. My comment to you riposte seems to be stuck (I assume due to someone taking umbrage at my comments). The original poster stated that he was looking at buying rental properties -- a long term proposition, specifically: "My family and I are looking to invest about 3-4 million dollars in rental properties."

My question is: did you take into account the original poster's differing investment time horizon when you posted your response to me?

Eric M,

The problem I have with your analysis is that it is location fixated in my view. It is that location fixation that I warned the original poster about. He is a rookie looking to put big money in Chicago. My question was, and is, “Why Chicago?” My reason is simple: Chicago is a tough market and you can lose your shirt due to reasons unique to Chicago and Illinois.

Sing and dance all you want, but investment opportunities MUST be viewed in the context of two things: First, does it “hit your numbers” – which includes such non-numeric things as risk tolerance and goals, and; Second – and this is where you fall down in my book – what are the alternative investments that also “hit your numbers” but with less risk? Hitting your numbers without extra risk is the only way to go.

Saying that taxes (of all kinds and shapes) are high for everyone in Illinois and therefore taxes are not a factor is wrong. You assume that investments in northwest Indiana are not available to the person looking to invest in northeast Illinois. The overall tax burden is Indiana is lower than it is in Illinois. The burdens of pension debt and reckless spending are borne by Illinois investors, not Indiana investors. Your statement that taxes are irrelevant is simply wrong so long as alternative locations (NW Indiana, use of REITs) are available.That is why I said that experienced investors, e.g., John Warren, can do okay in Chicago, but rookies should not consider Illinois. The original poster is a rookie.

Penultimately, let us look at rent control, which I mentioned, not socialism, which I did not mention. Here’s a quote from the internet that sums things up nicely:

“As the economist Assar Lindbeck put it, “In many cases rent control appears to be the most efficient technique presently known to destroy a city — except for bombing.”

So strong is the evidence for this that we have that rarest of things – a consensus among economists. In 2012, economists were polled with the following question;

Local ordinances that limit rent increases for some rental housing units, such as in New York and San Francisco, have had a positive impact over the past three decades on the amount and quality of broadly affordable rental housing in cities that have used them.

81% of them disagreed.”

Source: americanexperiment.org/2018/12/81-economists-agree-rent-controls-bad-policy/

I am sure that your bona fides are as inferior to Mr. Lindbeck’s as mine are.

Lastly, you mention you came to Chicago in 1987. Nice, but irrelevant. I came to Chicago when Jane Byrne was mayor. Also irrelevant.

As I said, if one doesn’t like a comment, one is free to scroll past it. Illinois, however, and especially Chicago, is no place for rookies going big.