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Updated almost 3 years ago, 12/10/2021
Chicago A neighborhood condo as first property
Hello,
I am 35, live in Chicago and work in the Loop for a demanding finance company. I never owned any real estate and have been renting a high rise one bedroom for $1,800 in River North with my girlfriend for the past couple years, and we love it here.
I have done well in my career and am currently sitting on a mid 7 figure liquid portfolio all invested in equity index funds, and I think diversifying a bit in real estate might be a good strategy. Thanks to my high W2 income and not having any debt, it would also be easy to get approved for some cheap 2.x% financing.
Having never owned real estate, a good way to get started would be by owning my primary residence for a while, with the intent of eventually renting it out in a few years and in the meantime seeing how I feel about maintenance and home ownership in general.
Unfortunately, the areas I am looking at are in very high demand (River North, West Loop, Fulton Market), and have prices such that I would at best barely break even with rent after taking into account HOA and taxes ($300k-500k range for 1-2 bd, HOA in the ~$500/mo).
I understand condos in downtown are generally a bad investment, but I really don’t want my quality of life to suffer by moving far just for the sake of home ownership. I take great happiness in keeping my commute to a 20 minute walk door-to-door all year round (even winter!).
Do you think I have some hope of this being a reasonable strategy, or should I just keep renting?
At this time I really do not have time for buying and renting out properties, I would basically need someone to handhold me completely through the process, and I tend to be overly cautious of scams.
Thanks!
I work with a lot of people in a similar position and also invest heavily in index funds which is how I financed my 4 unit rehab that I house hack. In terms of a condo, you can definitely find one that works from a cashflow standpoint in those areas but it may be a townhouse or a low-rise style building though. I recomend going for a 3 unit property and then rent out two of the units while living in one. You can do a nice rehab to your unit so it has your desired standard of living. The nice thing about the more expensive areas is when you do a rehab you can create a large chunk of equity/get really high rents for the rehabbed units.
P.S. Old Town/south end of Lincoln Park can be a good option as well as West Town neighborhood. Still close to downtown and more supply of multi units.
John - it depends what your goals are. Are you looking to be more active? Or do you want to be more passive? With your net worth (and likely income), you can easily do passive and achieve a potentially attractive return profile as a limited partner. I personally own one property in Chicago and it's a fine investment but there's a lot of ways to achieve financial goals. It is most certainly not passive sometimes, that's for sure. I will say being active, you will have some good stories!
You sound like a banker. Kudos for making it to 35 in finance lol.
If I were you I would find a 3-unit in really good area like Lincoln Park/Old Town like Henry said and put down only 5% at 2.X% financing. A owner occupied at 5-6 cap seems like a good deal for you and will be semi passive.
I think your best bet is syndication/limited partners. Make investor friends and I'm sure you'll start being asked to finance some deals.
Thank you for the suggestion. Indeed that would be my preference, but my network is completely outside the real estate world, so the few syndication opportunities that came my way did not convince me, I couldn’t get past the “this person must be desperate if they are asking money to me”, so I never pulled the trigger, it really just felt like giving away $100k on good faith. This heavy feeling of mistrust I have is the main reason why all my portfolio is in public index funds.
John- quick question. How would your quality of life drop if you moved to Lakeview, Roscoe, or Wicker Park? They might increase your commute but increase cashflow opportunities. If your ultimate goal is passive income then a little sacrifice now can lead to a more fulfilling life.
Originally posted by @Andy Nathan:
John- quick question. How would your quality of life drop if you moved to Lakeview, Roscoe, or Wicker Park? They might increase your commute but increase cashflow opportunities. If your ultimate goal is passive income then a little sacrifice now can lead to a more fulfilling life.
Thank you for your reply. To be honest, 30+ minutes on a dirty CTA each way is not something I’m willing to do, I work 70-80h a week (that’s my “little sacrifice” already) so it is important to keep my daily routine optimized, and walking to work from River North/West Loop is not negotiable.
That might as well mean that it’s better for me to keep renting rather than “investing” in an overpriced condo. I just wanted to hear the opinion of pros.
@John B. I can appreciate the walk to work idea. I live in uptown and before the pandemic when I had to work in an office I would consistently walk to the Fullerton of Belmont train stations to be outside and get some exercise. If that is the case then don't buy for cashflow in a condo. Buy for equity. I did that with my wife because she refused my house hacking options. That said, invest on the side. With a large portfolio you have multiple options many people wish they had. Start investing in cashflwong properties on the side after you buy your primary. That is what I would do based on what you mentioned above. Let me know what you decide to do eventually.
John,
Another way to look at it is to crack out the excel sheet and break down the financing. If you were to buy a condo in the area that you are looking, would the expenses be higher than the rent that you pay? Would the difference between the principal pay down be worth buying as opposed to renting. I think this might give you your answer on whether to buy and live in or to rent. 1800 a month sounds like a pretty sweet deal if you are comfortable there.
As far as getting exposure to investing in real estate, much of the population considers their personal home as an investment. This is never a good idea. The most hands off real estate investing is going to be a REIT in the stock market. These have many middle men which equate to many fees.
Syndication would be the next option. This is much like a reit, but you go direct to the sponsor who is managing the asset. You’ll see higher returns than a reit, but you’ll have to do more due dilligence up front and might be a little riskier.
next would be turnkey rentals. These returns will vary and you will have to hire a Propwrty manager. Level of risk increases as well as level of involvement.
Next I would say is buy a turnkey small multi family in your city. Again returns are higher and risk is higher along with more involvement.
Last would be the value add/ fixer. This one is where a lot of people are making money quickly in real estate. You can pick something up that needs work, raise the rents and kick existing tenants out. This involves a lot of oversight and is even more risky than above. But if someone is willing to put time and effort and have the resolve to make it work, generally this option is the most profitable.
There is a ratio of returns vs time spent and that is going to depend on how you want to spend your time.
Originally posted by @John B.:
Hello,
I am 35, live in Chicago and work in the Loop for a demanding finance company. I never owned any real estate and have been renting a high rise one bedroom for $1,800 in River North with my girlfriend for the past couple years, and we love it here.
I have done well in my career and am currently sitting on a mid 7 figure liquid portfolio all invested in equity index funds, and I think diversifying a bit in real estate might be a good strategy. Thanks to my high W2 income and not having any debt, it would also be easy to get approved for some cheap 2.x% financing.
Having never owned real estate, a good way to get started would be by owning my primary residence for a while, with the intent of eventually renting it out in a few years and in the meantime seeing how I feel about maintenance and home ownership in general.
Unfortunately, the areas I am looking at are in very high demand (River North, West Loop, Fulton Market), and have prices such that I would at best barely break even with rent after taking into account HOA and taxes ($300k-500k range for 1-2 bd, HOA in the ~$500/mo).
I understand condos in downtown are generally a bad investment, but I really don’t want my quality of life to suffer by moving far just for the sake of home ownership. I take great happiness in keeping my commute to a 20 minute walk door-to-door all year round (even winter!).
Do you think I have some hope of this being a reasonable strategy, or should I just keep renting?
At this time I really do not have time for buying and renting out properties, I would basically need someone to handhold me completely through the process, and I tend to be overly cautious of scams.
Thanks!
Just reading between the lines here- It seems to me that you should be looking to purchase the home or condo that you like where you like independently & then passively investing in real estate through a REIT; Syndication, Crowd Sourcing, or maybe a company like Roofstock. After doing your due diligence on the company they would then do the buying, renting,...... Your portfolio would be diversified and your lifestyle stays the same.
@John B.
Since you are a finance guy… Can you please give me some tips what indexes to buy and which brokerage house! I have a Finacial A whom I’m not intersted to work with paying 1% commission w one of big boxes. I’m interested in Vanguard bc of low fees… I also like to have control if the market dips be able to sell right away since these brokerage houses once they mange your portfolio don’t put a trail stop on your portfolio. You can privately advise me.. I REALLY appreciate.
Originally posted by @Farzan Setayesh:
@John B.
Since you are a finance guy… Can you please give me some tips what indexes to buy and which brokerage house! I have a Finacial A whom I’m not intersted to work with paying 1% commission w one of big boxes. I’m interested in Vanguard bc of low fees… I also like to have control if the market dips be able to sell right away since these brokerage houses once they mange your portfolio don’t put a trail stop on your portfolio. You can privately advise me.. I REALLY appreciate.
Haha just open an account with Vanguard and invest in VTI + VXUS, and some QQQ if you want to take more risk. That's all you need, with 0.0x% of expenses, and extreme tax efficiency.
@John B.
Condos are not great investments from cash flow standpoint in the city. I own one that I rent out that's completely paid off. For the 500 g equity I have in it after taxes and hoa I net $1600 a month. Compare that to the 3 flat I own where I have 250 equity in it and the tenants pay the mortgage and taxes and I net $2000 a month. Now the 3 flat has a ton more management and upkeep but it's a better investment numbers wise. I bought the condo with my wife to live in and we held onto it after moving to a sfh And rent it to a friend. You could buy a condo and live in it and enjoy it and then sell when your ready to move or pay it off and do a 1031 exchange upon sale into a multi family. I still believe ownership is better than renting but to each their own.
@John B.
Thank you for the info. Why Vanguard is tax efficient? Don’t I need to have bone ETF as well? If market tanks, Bonds will go up. Don’t I need to manage the risk by having 50% equity ETF and 50% bond ETF?
Thank you in advance.
The biggest challenge in your target community areas is going to be HOA associations barring or being able to bar LTR and STR. If you find a building that allows STR/Airbnb then that could be well worth it.
If a 20-minute commute by bike or the L is not an option for you, then you should certainly explore partnering with others in your target area to purchase an entire building.
I was in a similar situation as you, for 10 years I had to live within a 15-minute walk of my office. I ended up buying a 4-unit in Lincoln Park and accepting a 25-minute commute. For me, going from 700 sq ft to 1700 sq ft and having my Principal, Interest, Taxes, and Insurance paid by rents was worth the move.
@John B. - First off I think you should buy. Are you specifically talking about a primary resistance or investment property?
Even if the rent doesn't cover perfectly when you move out, that's fine. With your high income, you can just take some losses for a year or two until rent catches up. Plus the long-term appreciation in the areas will always be going up over 5+ years.
There are 4 ways to make money with real estate, so even if cash flow is low you'll make your money using the other 3 and not have to sacrifice your current lifestyle.
1. Cash flow
2. Appreciation
3. Depreciation
4. Tax benefits
And some might say leverage.
Feel free to reach out happy to connect and talk more about your situation.
- Jonathan Klemm
- [email protected]
