Noob from Chicago Suburbs

Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes

7y

@Austin Tondreau the single worst mistake my wife and I made was to pay off our student loans. The interest rate was less than 7% on even the worst one, and we could have bought properties in Berwyn and Forest Park that have literally doubled in value. Rents also went up to almost double what they were when we were paying off our debt (2010-2011). I would look at it mathematically and decide if you can get a better return on your money buying rentals or paying off debt (hint... rentals).

Flipping condos is not as easy as it sounds either. The margins are very low, so you will have to do all the work yourself. You could potentially do a lot better in rentals in my opinion.

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Louis A.

Investor · Chicago, IL · Member since 2015 · 70 posts · 27 votes

7y

+1 to what @John Warren said regarding repaying your student debt. it's cheap debt and is deductible to some extent on your taxes.

why not consider buying a 2-3 flat apartment building and living in one of the units? the income from the other units will surely come in handy and you'll likely get better mileage vs a condo.

I'd also recommend against getting a property management company when starting out, especially if you will be co-located in the same city. Taking a hands on approach with managing your own units provides great experience and will continue to pay dividends as you scale up with the # of properties owned. FWIW, I self-manage all of my properties in Illinois while working full-time in San Diego.

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George SkidisPro Member

Rental Property Investor · Belleville, IL · Member since 2017 · 875 posts · 529 votes

7y

How do you plan on trasnferring the rental income to your parents?

When you recieve rent the IRS considers it passive income and it is not subject to FICA, FUTA, Social Security etc.

When you pay rent you received to your parents it will be considered their self employment and subject to 15.3% self employment tax before it is taxed as income and the income tax is calculated.

Or maybe the IRS will call it a gift and charge gift tax.

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Austin Tondreau

OP

Downers Grove, IL · Member since 2019 · 15 posts · 3 votes

7y

Originally posted by @John Warren:

@Austin Tondreau the single worst mistake my wife and I made was to pay off our student loans. The interest rate was less than 7% on even the worst one, and we could have bought properties in Berwyn and Forest Park that have literally doubled in value. Rents also went up to almost double what they were when we were paying off our debt (2010-2011). I would look at it mathematically and decide if you can get a better return on your money buying rentals or paying off debt (hint... rentals).

Flipping condos is not as easy as it sounds either. The margins are very low, so you will have to do all the work yourself. You could potentially do a lot better in rentals in my opinion.

I do completely understand where you’re coming from regarding the interest rate. Currently all of mine are below 7%, but my private student loans ($65,000 worth) have a variable interest rate, which concerns me. I know I am an idiot for picking that when I refinanced them. I have looked into refinancing again but all options where over 7% and my monthly payment increased as well. My reasoning for wanting to pay them off faster was to relieving my debt-in-income ratio, along with freeing up the $1000 a month payment that goes to them. Plus I figured it would continue to become more difficult getting financing from banks with the more debt I add (Student loans/ multiple mortgages). I am fortunate enough to have a company vehicle so no car payment.

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Austin Tondreau

OP

Downers Grove, IL · Member since 2019 · 15 posts · 3 votes

7y

Originally posted by @Louis A.:

+1 to what @John Warren said regarding repaying your student debt. it's cheap debt and is deductible to some extent on your taxes.

why not consider buying a 2-3 flat apartment building and living in one of the units? the income from the other units will surely come in handy and you'll likely get better mileage vs a condo.

I'd also recommend against getting a property management company when starting out, especially if you will be co-located in the same city. Taking a hands on approach with managing your own units provides great experience and will continue to pay dividends as you scale up with the # of properties owned. FWIW, I self-manage all of my properties in Illinois while working full-time in San Diego.

I have considered multifamily homes, if I where to pull the trigger I would most likely do so in Grand Rapids. Properties are significantly cheaper over there, but the buildings are also over 120+ years old. The price on multifamily homes around Chicago-land are outrageous in my opinion price wise and most are outdated. Without a massive down payment I don’t feel I could make profit off of them.
Good to know on property management though! Have you ever used them to list a rental/ screen tenets?

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Austin Tondreau

OP

Downers Grove, IL · Member since 2019 · 15 posts · 3 votes

7y

Originally posted by @George Skidis:

How do you plan on trasnferring the rental income to your parents?

When you recieve rent the IRS considers it passive income and it is not subject to FICA, FUTA, Social Security etc.

When you pay rent you received to your parents it will be considered their self employment and subject to 15.3% self employment tax before it is taxed as income and the income tax is calculated.

Or maybe the IRS will call it a gift and charge gift tax.

As silly as it sounds (even with an accounting degree), I truthfully forgot about taxes haha. I knew I would be hit with income tax for the income provided from rent (I usually calculate 35% of my rental income will go to taxes). Ideally I figured I would collect the rent and send my parents monthly checks. Which I would assume would fall under the “gift” category. Would be easier for me just to pay a few of their bills each month? Or would this also be taxed?

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John Warren

Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes

7y

@Austin Tondreau there is a lot to comment on above. For tax purposes, most rental property comes in as a paper loss due to depreciation. I would recommend reading up more on this or speaking to a CPA, but in your situation it is unlikely that one rental will do much to your taxes.

As for Chicago pricing, Chicago is a primary MSA and is a lot more desirable to live in than most other areas of the midwest. For that reason, prices are high. The good news is that rents are higher too! In most parts of Indiana or Michigan you might rent out a 1 bedroom apartment for between 500-750 per month. In Chicago, that same apartment will rent for 850-1000. Obviously, sub markets matter and not every area of Chicago makes sense (just as not every area in Michigan makes sense). Just be careful thinking that the grass is greener on the other side... it probably isn't.

Have you studied any of the low down payment options available to owner occupants? That is probably the best way to get started investing as long as you can live in one of the units.

Finally, I have used property managers in the past and do so currently. I find them to be on average significantly worse at every aspect of managing real estate in comparison to how I run my rentals. With that being said, if you get into larger multifamily or commercial assets my understanding is that they really know the business at that point. In addition, larger assets come with on site staff that help control/normalize your maintenance costs. Your small, local PM is really hit or miss. I am sure there are great ones out there, but I haven't found one yet!

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Atul Mohlajee

Oak Park, IL · Member since 2014 · 285 posts · 114 votes

7y

John Warren is correct. I had one daughter in college 2013-2017. I had her take student loans while I could have paid for her college fully. Instead we kept buying properties SFH's, condos, 2 flats, 3 flats, 6 unit apartment building, 5 unit commercial etc. between 2008 and 2017. There were so many foreclosures to buy it was unbelievable. I only bought MLS deals easy to find and 60-70 cents on the dollar.Not paying for her college helped us accumulate additional down payments. I was buying a property every 6-8 months as soon as previous one was ready and rented and I had down payment for the new one. Later on we helped pay most of her loans once she graduated in 2017. I am paying full college for my younger daughter 2017-2021, because there is no more great deals to be found.

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John Warren

Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes

7y

@Austin Tondreau even in this tighter market, I would still make the argument that you should look to invest instead of pay off the loans. Once you realize how much equity can be created in even an average deal, you will not want to pay down debt ever again! Obviously, there is a place for paying off debt, but if you have a nice chunk of capital (maybe 20-25k) I would not put that on your loans. If you don't have a nice nest egg though, it may make sense to go all out Dave Ramsey style and pay the loans off.

At the end of the day, you can play offense or defense. I think a great offense and an average defense is probably the best strategy.

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Crystal SmithPro Member

Moderator

Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes

7y

Originally posted by @Austin Tondreau:

Hello Everyone!

I am Austin, currently living in Naperville, IL. Currently working as a Product Manager/ Sales Engineer for a Heavy Duty Manufacturing Company out LA. I get to travel for work, and really enjoy my job. A few co-works of mine have rental properties and finally convinced me to get into the real estate business last fall. The overall goal is to provide passive income, to provide to my parents who will be retiring soon.. and then myself in the future.

I am currently working on my business plan (about half way through it). My overall goal is to slowly start acquiring properties, rehabbing them, refinancing, and then finally renting them (similar to the BRRRR method, but I am living in them). The areas I am looking around is Chicago Suburbs/ Grand Rapids, MI/ Traverse City, MI (I am from Michigan). That being said, I am currently around $80,000 in student debt (worth it). So I believe the best thing I can do is pay off my student debt before really pursuing rental properties, as it frees up my debt-to-income ratio and frees up my expenses. To help pay off these loans faster, I recently have been looking into rehabbing and selling condos.

From my limited experience, condo's are often cheaper than houses, so barriers to entry are less. They're also typically less square footage, making it easier to rehab and less time consuming than a single family home. The Chicago-Land market is incredibly high right now, properties that need to be completely torn down are attempting to be sold for $200K+. Thought process is to purchase a condo for $70-80k, put around $10-$15k into rehab costs and then selling it for a profit of $5,000-$10,000 (ideally selling it for slightly less than other listed properties in the area). I am handy so the costs might be slightly lower. The downside to condo's would be less profit, and most likely longer lead time on selling the units. I don't believe they sell as fast as single family homes. Anyone have any other thoughts regarding this?

My current Residence:
Purchased my condo last September, and almost immediately starting rehabbing it. I will admit I didn't know what I was doing most of the time when I started projects, but I am fortunate enough to have help from my parents (and the internet). Over the past 10 months I have learned a ton, and its been a fun experience.
Purchase Price: $160,000 ($152,000 after down payment)
Renovation Costs: $8500 - $9000
Total capital invested: $17,000 (Renovations + Down payment)
Expected appraisal: $175,000 - $180,000 (Based off comps.)

Depending on what I rent the unit out for, It will take me around 7.15 - 10.65 years to regain the capital I have invested into the property (providing nothing breaks... luckily everything in the condo has been replaced within the past year). I have been going back and forth on a property management company as Im still new to this, and travel a lot for work.... That may cut into profits and add onto to my "years to regain capital invested" . Looking at the numbers I believe I used a little bit too much of my own money/ over improved the property. As the years to regain capital (7-10 years) seems slight high to me. Any recommendations/ Thoughts?

(I gave up on attempting to post Before/ After pictures. Couldn't get anything to load)

A few comments on your plan:

If you consider the time value of money, it may not make sense to pay off your student loans early or wait for your student loans to be paid off before you start investing. There are some very simple Net Present Value (NPV) formulas you can apply to help you with your decision
In the example you provided of your current residence with a purchase price of $160k, renovation of $9k and an appraisal of $175k after the renovation. You would loose money if you sold it right now. You have to include closing costs to acquire and resell as part of your calculation. You also can’t refinance because the new appraised value isn’t high enough. You’ll always have a 7-10 year return with this type of strategy. My recommendation: buy a property of the new appraised value allows you to sell for a profit or refinance and pull your cash out. Then you don’t have to wait 10 years to recoup.
Planning a deal up front with only a $5k to $10k profit margin is high risk. Not to say it won’t work, but a $5 to $10k swing in the price or offer on a property happens in a heart beat. Give yourself more margin
Regarding condos- in the right location and quality renovation the time on market may not be as bad as you think.

312-681-7487

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Noob from Chicago Suburbs

Noob from Chicago Suburbs

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