All Forum Posts by: Daniel Baker

Hey Nathan, welcome to the world of real estate investing! With your background in finance and trading, you've already got a solid head start—especially when it comes to understanding cash flow, leverage, and risk. Are you thinking about starting with a house hack, rental property, or maybe even something more creative like BRRRR or seller financing (can be hard to find)? Also happy to help you get plugged into local investor networks if you're looking for meetups or groups. I would start by talking to a lender then a broker that specializes in house hacking! @Sarita Scherpereel has a meetup just for this!

Paying cash can definitely help you get a better deal, especially with REOs (bank-owned properties), because banks prefer quick, hassle-free sales. You might be able to negotiate a lower price or better terms since there’s no financing risk. When you drive around the city and see those signs that say “will buy your house for cash” call those guys. They are wholesalers and usually have good solid deals for people with cash. Make sure you understand what you are getting into though, they will likely need lots of work.

For finding REOs, here are some options:

• MLS: Work with an investor-friendly Realtor (I can help you connect with one if needed).
• Auction Sites: Hubzu, Auction.com, RealtyTrac, and Xome often list bank-owned properties.
• Bank Websites: Some banks (like Wells Fargo, Chase, and Bank of America) list REOs on their websites. This is hard though
• County Tax Sales: Foreclosures and tax liens can be opportunities if you do your due diligence. Make sure you talk to someone who has done this

Single-Family vs. Apartments

• Single-Family Homes: Easier to manage, lower tenant turnover, and more exit strategies (resell to homeowners or investors).
• Apartments (Multifamily): Higher cash flow potential, economies of scale (one roof, multiple units), but more management-intensive.

It depends on your goals. If you want passive income and long-term appreciation, multifamily can be stronger. If you prefer easier management and flexibility, single-family might be better.

Fannie Mae's 5% down program on up to a 4 unit is what I would use if I were you. You will have to live in the building, but if you’re serious this is the best way to utilize leverage. If you find any issues in the inspection, ask for a credit at closing, maybe 10 to $20K to cut your cash to close. Another option is to tell the seller you will pay 10K more but you want a 10K credit. So rough math, let’s say $800K 4 flat north side of Chicago. Price $800K, closing cost $23,000. Down payment $40,000+ $23,000.

Hard part will be finding a deal. I see a few a year on the MLS that work. There was a 4 unit in Albany Park a few weeks ago that was perfect for this kind of financing.

So normal cash to close with the 5% down program: $63,000

$63,000-$20,000= $43,000 cash to close depending on tax prorations assuming you live in the building.

Message me if you want to talk more about it.

Fannie Mae's 5% down program is what I would use if I were you. You’re also a broker so you will get the fee on the deal. If you find any issues in the inspection, ask for a credit at closing, maybe 10 to $20K. Another option is to tell the seller you will pay 10K more but you want a 10K credit. So rough math, let’s say $800K 4 flat north side of Chicago. Price $800K, closing cost $23,000. Down payment $40,000, Fee: (2.5% of $800K less your split) = $14K; credit $20,000.

So normal cash to close with the 5% down program: $63,000

Now let’s add in your competitive advantage as a broker.

$63,000-$14,000-$20,000= $29,000 cash to close depending on tax prorations assuming you live in the building.

Another way to think about this. If the value of the building rises 3.6% the first year you basically just made your money back.

Message me if you want to talk more about it.

Make sure you follow the CRLTO.  

https://www.chicago.gov/content/dam/city/depts/doh/RLTO/RLTO...

Under the 2020 revisions of the RLTO (“Fair Notice Ordinance”), Landlords must provide a tenant that is not in the eviction
process:
• 30 days of notice to terminate a month-to-month tenancy, decline to renew your lease or raise your rent if you have lived in
your apartment for less than six months.
• 60 days of notice for the same if you have lived in your apartment for more than six months but less than three years.
• 120 days of notice for the same if you have lived in your apartment for more than three years.

Yeah, if you mean non conforming by not standard, make sure you still tell this to your insurance agent, especially if the unit is occupied.  

Great question! This is how I always look at the deal:

1. Age/ Condition of Major Systems

• Electrical: Check for knob-and-tube wiring, aluminum wiring, or outdated panels (less than 100 amps).
• Plumbing: Galvanized pipes, old cast iron, or polybutylene pipes are red flags.
• HVAC: Systems over 15–20 years old may require replacement soon. These systems can last longer, but the no heat calls in the middle of winter are never fun!

If more than 30–40% of a major system needs replacement, it’s often more cost-effective to upgrade it all at once.  

2. Layout and Structural Modifications

• Are you removing walls? Structural changes usually require permits and can quickly escalate from cosmetic to full gut.
• Floor plan inefficiency? Rearranging kitchens or bathrooms often reveals plumbing and electrical work behind walls.

If you’re moving walls or reconfiguring layouts, I would do a full gut

3. Subfloor and Framing Issues

• Uneven or bouncy floors? Subfloor replacement may require opening walls and ceilings.
• Sagging or shifting support beams? Indicates structural rehab, not cosmetic.

If you open up a section and find widespread rot or framing issues, assume it's a full gut. Just had this happen actually, ha!

5. Environmental issues

• Asbestos: Often found in popcorn ceilings, old floor tiles, or pipe insulation.
• Lead Paint: Pre-1978 homes are likely to have lead-based paint.

Remediation costs can turn a cosmetic rehab into a full gut if multiple areas are affected.  Licensed Asbestos contractors are expensive!

6. Cost vs. Value of Upgrades

• Cosmetic rehabs: Focus on paint, fixtures, cabinetry, and surfaces.
• Full gut rehabs: Often double or triple the cost due to behind-the-wall issues.

If behind-the-wall expenses (mechanicals, structural, insulation) exceed 50% of your total budget, it’s essentially a full gut.

So let’s say you’re evaluating a 4-unit building from 1920. The kitchens and baths are outdated but functional. However:

• 75% of the electrical needs upgrading.
• The plumbing is a mix of galvanized and copper.
• The subfloor is uneven in multiple units.

This would likely lean towards a full gut or a heavier renovation rather than cosmetic because the systems are beyond their useful life.

The thing/issue that you’re talking about is imputed interest and Applicable Federal Rate (AFR) set by the IRS. Basically, the IRS assumes that when a property is sold with seller financing, some portion of the payments should be classified as interest. If a loan has an unreasonably low or 0% interest rate, the IRS may impute interest—meaning they treat part of the principal payments as taxable interest income for the seller.

The IRS sets a minimum interest rate called the Applicable Federal Rate (AFR), which varies based on loan length and market conditions. If the loan rate is below AFR, the IRS may do two things:

• Impute interest—tax the seller as if they received interest income at the AFR rate.
• Recharacterize part of the sale—potentially changing capital gains treatment (talk to a CPA)

Usually it is something like this- Short-term (0-3 years): 5%, Mid-term (3-9 years): 4.5%, Long-term (9+ years): 4.2%

I also watch Pace Morby and this here are a few things he does or I think he does:

• Price Adjustment: Sellers increase the sales price instead of charging interest. The total amount paid makes up for the lack of interest.
• Hybrid Structures: Some deals include small interest payments that meet AFR, while other portions are structured as deferred payments.
• Lease-Option First: Sometimes, they lease the property with an option to buy, then transition into a 0% seller finance deal.
• Deferred Interest or Balloon Payments: A balloon payment at the end can allow the seller to defer interest concerns.

Their videos make everything look so easy, it is not that easy, trust me, you really need to know what you are doing.

4. Here are examples of when 0% Interest Can Work Without Tax Issues

• If the seller has minimal capital gains tax concerns (e.g., selling at a loss or using a 1031 exchange).
• If the loan amount is small enough that the imputed interest impact is negligible.
• If the seller structures it as an "installment sale" and stays within IRS guidelines.

If you're negotiating a seller finance deal, consider offering a small AFR-compliant interest rate (1-2%) to avoid IRS scrutiny.

If you really want true 0% interest, discuss creative structuring with an attorney or CPA who understands real estate taxation. Make sure you understand seller motivation.

You have several options for handling this basement unit, this topic comes up a lot on here and at investor meetings, this is my advice (I have personally done all of these)

1. Rent It as a Standard Unit

• Since it meets key habitability requirements (ceiling height, egress, lighting, kitchen, bath, bedroom with light and closet), you can rent it out as a regular apartment.
• The main issue is the utilities, as the unit is connected to the building meter, which you currently pay.
• Options to handle utilities:
• Increase rent to account for utility costs.
• Charge a fixed fee for utilities. If they are pulling from a public meter you will have an easier time with this. If they pull from a different tenant’s meter make sure you tell the tenant what is going on and offer to pay for the extra charges. Usually when tenants call the city on a non-conforming unit it is because they just figured out they were paying someone’s utility bill.

2. Rent It as an All-Inclusive Unit

• Advertise it as an "all utilities included" rental, setting the rent at a level that covers expected utility usage.
• Ensure you adjust pricing so it’s competitive yet profitable.

3. Convert It to a Legal ADU (Accessory Dwelling Unit)

• Chicago's Additional Dwelling Unit (ADU) ordinance allows for legalizing basement units in some areas.
• This could increase property value and make it a long-term rental option.
• Check Chicago zoning laws and apply for the program if your area qualifies.
• This is hard to do

4. Short-Term or Mid-Term Rental (Furnished Option)

• Use it as an Airbnb, or rent to traveling professionals, nurses, or students.
• This could help offset the utility issue since short-term rentals often include utilities in the price.
• Check Chicago short-term rental regulations if going this route.
• This is a good option

5. House Hack / Personal Use

• If you or a family member could use the space, it could function as a private suite or guest unit.
• If you live in the building, it could also serve as an office, rec room, or storage space.

I used these methods to get to build a personal portfolio on Chicago Northside. FHA is a little harder now that rates have gone up, but the new 5% programs are awesome. Leveraging low-money-down lending programs is one of the best ways to build a real estate portfolio with minimal upfront capital. By strategically using owner-occupied financing, creative financing strategies, and refinancing options, you can scale your investments while preserving liquidit y. Happy to talk through these, DM me. Thx!

1. House Hacking with Owner-Occupied Loans

One of the most effective ways to start with low money down is by purchasing a 1-4 unit property using owner-occupied loan programs. These allow you to live in one unit while renting out the others to offset your mortgage.

Low-Down-Payment Loan Options:

• FHA Loan (3.5% Down) – Great for multifamily (up to 4 units), allows lower credit scores, and can be refinanced into a conventional loan later.
• Conventional 5% Down (for Duplexes) – Some lenders allow as little as 5% down for a duplex if you live in one unit.
• VA Loan (0% Down) – For eligible veterans and active-duty military; no mortgage insurance required.
• USDA Loan (0% Down) – For properties in eligible rural areas (not common in Chicago but useful in some suburban/exurban areas).

House Hacking Benefits:

• Lower upfront capital requirement.
• You will learn a lot by living in the unit
• Rental income covers (or exceeds) mortgage expenses.
• Ability to refinance after 1-2 years and reinvest in another property.

2. BRRRR Method (Buy, Rehab, Rent, Refinance, Repeat)

The BRRRR strategy allows you to recycle your capital by using financing to acquire a property, improving it to add value, and then refinancing to pull your money back out for the next deal.

How BRRRR Works:

1. Buy – Find an undervalued or distressed property (potentially off-market or through wholesalers).
2. Rehab – Renovate to increase property value and rental income potential.
3. Rent – Lease the property at market rate to stabilize cash flow.
4. Refinance – Use a cash-out refinance to recover your initial investment.
5. Repeat – Deploy the pulled-out capital to acquire another property.

Best Loan Options for BRRRR:

• Hard Money Loans – Short-term loans for purchasing distressed properties (high interest but faster closing).
• FHA 203(k) Loan – Allows financing for both purchase and rehab with just 3.5% down.
• DSCR Loans – Debt Service Coverage Ratio loans qualify based on property income, not personal debt-to-income ratio.

3. Seller Financing & Creative Financing Strategies

You don’t always need a bank to finance a deal. If you find a seller willing to be flexible, you can negotiate creative terms.

Creative Financing Options:

• Seller Financing – The seller acts as the bank, allowing you to buy with a lower down payment and flexible terms.
• Subject-To Financing – Take over the seller’s existing mortgage payments (good for deals with low interest rates).
• Lease Options (Rent-to-Own) – Rent with the ability to buy later, sometimes with rent credits applied to the purchase price.
• HELOC or 401(k) Loan – Use equity from an existing property or borrow against your retirement to fund a down payment.

4. Scaling by Refinancing & Leveraging Equity

Once you’ve built up equity in your properties, you can refinance and reinvest into additional deals.

Key Refinancing Strategies:

• Cash-Out Refinance – Pull equity out of a property and reinvest it into another deal.
• HELOC (Home Equity Line of Credit) – Use your primary residence or another property's equity to fund new investments.
• Rate & Term Refinance – Lower your interest rate and improve cash flow to boost reinvestment opportunities.

Final Thoughts: Start Small & Scale Smart

• Begin with house hacking to get a property with low money down.
• Use BRRRR to recycle capital and grow quickly.
• Explore creative financing to minimize cash out-of-pocket.
• Refinance & leverage equity to scale.
• Consider partnerships & joint ventures to expand your reach.