Chicago Buy and Hold Strategy

[David Smyth]

I am newbie investor currently based in London but relocating to Chicago in the next year. At the moment I am saving up for a down payment but still undecided on whether to target single families homes or multi-family using a FHA loan. Obviously as a new investor I would struggle to purchase in the hot Chicago areas.

Can anybody give a outline of a strategy and neighborhoods which have been successful in the Chicago market for someone just entering the game.

Thanks

David

[Brie Schmidt]

@Alex Fraher and @David Smyth 

Personally, I am fiercely against condos. Your HOA fees are an unnecessary expense so while the rent to price ratio may be higher, your expenses are higher and it ends up being a lower ROI.

My other problem with condos is you have no control over the HOA. Pre crash most HOA's had bylaws banning renting out your unit or limiting the amount of units rented. During the boom, new development condos were popping up everywhere. Everyone was buying condos... then the crash happened and we had so many condos and not enough buyers. Developers that used to pre-sell the entire building were now taking 2+ years. Values plummeted and people were underwater (some still are) So the HOA's had two options:

• allow renters
• have a bunch of forclosures in their building and everyone takes a hot on their property value

They choose the former. So now many HOA's allow renters, but that won't last.

Since we basically haven't built any new condos in a few years, inventory is finally getting more balanced.  I still think it will be a year or two before they start building them again like they were, but the new problem is people can't sell their current condo.  Why?  Financing. 

Who buys a condo?  Generally a person or couple under 30, who wants to live in the city, and doesn't have kids yet.  If you are anything like me, once you pass 30 in the city your friends drop like flies because they have a baby and move to the burbs.  Most people do not want to raise kids in the city because it is so expensive and they have a family support system in the burbs.  

So your buyer pool is under 30, probably has a decent job, but just really getting started in life. They may been in their field for a few years, probably still have student loans, and have finally graduated from eating ramen every day. They don't have 20% to put down on a condo. But there is this awesome loan program called FHA where you can put 3.5% down and own your own condo. Yipee!

That is the problem. Condo buildings have to be FHA approved. And to be FHA approved they can only have 50% or less of the units rented out. So if the building has too many renters the time to sell is triple because they just dramatically reduced their buyer pool. So when you have a bunch of seller's who can't sell or be competitive in the marketplace guess what will happen? The original bylaws will get reactivated, or they will create new ones limiting renters. And they can do it anytime without your approval. So now you are stuck with a condo you can't rent.

So as the HOA's start doing this, sales will increase, developers will watch and start building again. The other problem is downtown. If you have been paying any attention to housing news in Chicago you will see a ton of articles about the over development of apartment buildings downtown. Since condos still don't sell, they are building a record number of apartment buildings. What is the difference between a condo and apartment? Not much. Many of these apartments have the mechanicals in unit and the electrical panel in unit. Why is that important? That is the building requirements for a condo. All these apartment buildings can be converted to a condo in less than 90 days. So as soon as the condo market inventory gets tight because we have not been building any for years, these new construction apartment buildings are going to convert and BOOM we have a ton of inventory again.

Now you can't rent it out because the HOA won't allow it and we built almost 11,000 new apartment units since 2013 that can be condos and flood the market.

Developers will complete another 4,500 apartment units in 2017; followed by 4,200 in 2018, according to Appraisal Research. That represents a 39 percent increase in the number of downtown apartments.

So if you are still considering buying and renting condos in Chicago, read this:

https://www.biggerpockets.com/forums/311/topics/27...