All Forum Posts by: John Clark

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.

"I am looking for the best possible deal on a mortgage (leaning towards higher credits as I plan to fix and flip) on a 5 percent down mortgage payment. I've looked at a lot of banks, but am curious, does anyone in the Chicagoland area have recommendations with regards to interest rates/credits?

Updated 2 days ago

Note: this is our first home, so we can get a traditional mortgage on this"

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You've gotten a lot of good advice, but I have to ask: Why present the house to the bank/credit union as a fix and flip? You said you were going to live in it (that's how I interpret "out first home"), so why not buy a two flat, fix it while living in it (with a reasonable mortgage and use your $500k for down payment and renovation), and THEN sell and buy another that you can THEN present to the bank as a fix and flip, showing that you have some experience under your belt? Variation -- cash out refinance and buy second property --presented to bank as fix and flip. Give the bank some experience to go on. Chasing that extra quarter point in interest savings for a short-term holding just doesn't seem worth it. Consider it the cost of gaining experience you can prove. Getting started is more important than getting a rock bottom rate.

As others have said here in many ways, it's a question of bureaucracy and individual tenant character for most people who don't take Section 8. Section 8 only guaranties a set sum of money if certain conditions are met. It does not replace the need to screen tenants (there is a HUGE difference between employed Section 8 tenants and unemployed Section 8 tenants) and verify that they have 3X rent in income, not just 3X their portion of rent in income. As for bureaucracy, you have to match the safety of the income to the hoops you have to go through (and time, including the lost rent) to get that safety.

So the question of "why aren't you taking Section 8 tenants" is misdirected; Section 8 is an income program. not a type-of-tenant program. How well does the local housing authority function, and how good are the tenants under your WRITTEN,WRITTEN,WRITTEN, screening criteria?