Chicaco - Investing in Rental Properties – With Cash?

Question

Hi, my name's Seth, I'm new to BP and a real estate investing virgin. I'm considering trying my hand at investing in rental properties in Chicago. Looking at hypothetical investment properties on Zillow.com (just to start getting an idea of what I'm getting myself into). After doing the math formulas described by Brandon Turner of BP, It seems like the only safe way to invest in a 1-2br condo and rent it out is to pay cash for the condo, because sky high property taxes plus a mortgage would cancel out any profit.

What I'm looking to do is minimal work, so not really "house hacking" but rather using let's say $800,000 liquid cash to buy a handful of condos (possibly making small updates to counter tops/cabinets/appliances/hardwood flooring) and then renting them out.

The math I've done points to between 4.5% to 6.3% ROI, not accounting for year on year appreciation.

Anyways, my question is, how do you make a profit on rental properties in Chicago without paying cash, and in your opinions, would spending $800,000 cash on say 5 properties be an idiotic move to get going in real estate? What are the pros / cons of using a loan vs paying cash? Any and all advice welcome.

Thanks

John Warren · Answer

@Seth Coronis why aren't you looking at larger multifamily deals? You have enough capital to get your self into some attractive opportunities that would be professionally managed by top management companies, and you would have access to fannie and freddie non-recourse loans that offer some of the most attractive financing terms out there. You definitely don't want to buy condos with that kind of capital... It will be like herding cats, and will be a total waste of time.

Bob Floss II · Answer

@Seth Coronis If you are looking to invest that much cash, you should be looking at multi family opportunities. If you want to stick with condos to minimize responsibilities, there are strategies you can look at to get bigger returns. I have clients that target buildings with issues that prevent buyers from getting financing and are only available to cash buyers. You can get nice units at a discount and higher rental returns. The problem is this limits your exit strategy and you may be forced into a long game of trying to buy up the building and deconvert to an apartment building.

John Clark · Answer

@Seth Coronis :"because sky high property taxes plus a mortgage would cancel out any profit. "--------------------------------"Profit" is a misnomer, since after taxes, a corporation should be indifferent to whether it is financed by equity or by debt. Same applies to people. Depending on your appetite for risk, you make your equity/debt ratio.If you can get a better return on something else as opposed to the mortgage interest rate, then invest in that something else. If not, maybe you should be the one making the mortgages, not taking them.As was pointed out, returns on A/B properties is tough. Prices take it all in A/B neighborhoods. Try a C neighborhood and look at buying into a well-maintained 4 to 6 flat or a similar sized condominium. One of the things to look for in evaluating C neighborhoods is whether it has a niche advantage that gives you a steady stream of tenants. For example, buying within walking distance of Midway airport gets you airline and airport workers (Flight attendants, etc.). Buying in certain areas around colleges can get you students, or -- select wisely -- young professors just starting out.Chicago is tough on AirBnB because each alderman gets to set the rules for his own ward, and so what was legal yesterday is not legal today. Condo boards frown on AirBnB and its ilk also.

Michael Facchini · Answer

Agreed with all of the above. If you have that kind of capital, you should be looking at multi-family buildings. You can build the right bench to manage that property and achieve a situation where it's less hands on (which appears to be the reason why you're focusing on condos). You'll find better returns.

Jake Fugman · Answer

@Seth Coronis Welcome! You are correct that the cash flow on condos in A/B neighborhoods in Chicago is not ideal for investors. Additionally you will find at MOST condo buildings have rental restrictions built into the by laws so its very hard to scale a portfolio with condos unless you have an AirBnb angle. If you have access to cash I would recommend putting 25% down multi family properties and financing the rest. No HOA to deal with and you can control where your repair/capEx capital is applied. Additionally you wont see a lot of advantages to negotiating with condo sellers if you have cash since they typically arent in a pinch to sell and the unit doesnt have the risk of failing FHA appraisal. I would much rather leverage cash on a deal where the seller is motivated to close fast or unit(s) wont appraise. You are much more likely so see a discount for using cash in those cases.

Adrienne Curtis · Answer

@Seth Coronis curious to see what neighborhoods you're interested in.

Seth Coronis · Answer

Thanks for the responses, this helps a lot.