All Forum Posts by: Adam P

 Chicago is a good city for investing.  Not bad, but not great either (Texan cities sound like the best target at this point of the current real estate cycle).  Chicago is effectively 2 cities living side by side.  The impoverished city where crime and opportunity more closely resemble a 3rd world country (this is the side most national media portrays as Chicago, and the 2 parts Detroit), and the middle class and wealthier people live.  

Certain areas of Chicago (as in every city) are rapidly gentrifying, and this where you can still make very good returns.  Buy from populations who are cashing out and leaving, and rent to new wealthier population moving in.   Chicago is also a huge Turnkey trap city.  There are parts of Chicago that are worse than a war zone, which on paper may cashflow, but in reality would just be a money pit.  You can buy $500 houses here.  Unfortunately you may not survive the inspection.

My last 4 cash flowing property purchases were for $365k, $285k, $225k, and $210k.  Each grosses per year $65k, $66k, $51k, and $36k.   

Why do California investors assume that cash flow property automatically means $30k drug den?  The rest of the country still has doctors, Finance professionals, Technology professionals, AND emerging neighborhoods.  I hope each of these properties appreciates, however in the case of rough economic times, and they don't, I still make money from the cash flow.

Is there any relationship between the number of bigger pockets investors talking about investing for appreciation, and the top of a property cycle?

 Is this from experience, or gross generalization?  In expensive markets, many investors have to go downmarket to make real estate work.  If they get lucky, the area may improve and they make huge appreciation.  However in cheaper markets, investors can focus on higher class areas.   

Tenant headaches can be linked to the class of area you invest in.  Are C-Class properties in the New York area really less headache than B-class properties in Chicago?  I had more shootings near my home in Downtown/Lodo Denver, than I have in downtown Chicago.  Yet Chicago property yields far higher.

Too many turnkey operators in the midwest, give those cities a bad name by selling D-Class property to out of state investors.    

Here is the flip side of gambling on further appreciation.

In 2013 I was doing some work in Alberta Canada, so I purchased a condo for CAD $330k, getting a $297k CAD loan at only 2.99% with a 5 year lock.  I figured it is a low risk, low cash down investment, and the condo was purchased in an area of the city rapidly appreciating with huge government investment..  The property basically broke even at a cashflow level, but with 25 year amortized loan, I was paying down principle each month.  At the time, the Canadian dollar was almost equal to the US Dollar, and the condo was undervalued by about $20k.   Within 12 months, the market value of the condo had moved to $370k Canadian, and appeared to be a good investment.

Fast forward to today, the massive oil crash is killing the Alberta and Canadian economy.  The property market appears to be holding up, and the market value has moved to about $375k Canadian.  However the FX rate move has dropped my initial USD$330k investment to $267k.  Rents are falling, in the current economy.  The Canadian mortgage also moved down in USD, however if I cut and run, I will owe the IRS the FX Rate gain on my mortgage payoff (a $100k USD gain).

This is the worst performer in my portfolio, which I really need to maintain, hope to break even each year, and dump it if/when oil bounces back.

Investing for capital appreciation feels so much more risky than cash flow.  Cash flow doesn't have to mean turnkey, or $30k homes.

When I was making the decision to sell or not in Colorado, I really just asked myself the following question.

"After transaction expenses taken out, would I invest in this property today?".  The answer was either Yes, Maybe, or No.  Yes or Maybe, I could justify keeping it.  If No, then I should sell.

 The demand from people moving to Denver is understandable, it is a wonderful city to live in.  I just wonder how sustainable the current prices are.  Today, not a single property is available downtown/lodo for under $299k (old, new, studios.  Nothing available).   Approx 5 years ago The 42 floor Spire,  was built new in downtown Denver, at reasonable quality, where half the apartments in the building were under $300k.  Today those same condos in The Spire appear to be selling for about 80% higher than they were purchased for.  Since incomes have only risen about 10% in that time, what is to stop 20 developers building equivalent buildings as competition?  Eventually in a city like Denver, the market should reach equilibrium, unless external factors (such as government), restrict new development.  Too much land available, Denver is a long way from being built out.

In 2007, at the height of the housing boom, Denver's average home was $254k, while the average income was $60.8k (4.2x).   In 2015, the average income had increased to $69.2k, but the average home increased to $353k (5.1x).   These numbers were sourced from the demographia survey, and feels very bubbly.  Such a huge rise is only sustainable if the government shuts down new construction (ie San Francisco or Manhattan), or there is no space to build (ie LA).  I never saw either of these issues in Denver.

@Mark Ferguson 

I had considered a reverse exchange, however financing a reverse exchange appeared difficult (I am still under 10 mortgages, so can get 30 year conventional fixed).  If you have further information on making a reverse exchange work, I would be interested in hearing about it.  

You can get a property under contract prior to your sale being completed, which effectively extends up to 75 days, however I found many sellers wary of having a sales contingency in purchase contracts.  Especially since deals here only last a day or 2, so there is often competition.

@Mark Ferguson,

I have been going through exactly the same process.  I now live in Chicago, so have been slowly migrating my portfolio from Denver, since Denver prices appear unsustainable to me.  Denver salaries have not been keeping pace with property movements, my property values went up 50%, but rents went up 10% over 4 years.  Who knows when the peak will be, but Denver doesn't seem to have any land limitations, or long term Democrat stronghold, so eventually construction should catch up.

Late 2015, I sold $550k worth of property in Denver (after sales/closing costs), which I had $240k equity/ $310k financing.  I was renting the properties for $3325 per month, cash flowing about $200 a month.

I 1031 exchanged that into $860k worth of Chicago B Class property, bringing another $30k of my own money (financing $590k).  I am in the process of investing another $70k in rehab.   My monthly projected rents are in $14k - $15k range cash flowing approximately $5k per month.  I have moved from grossing 7.2% to 18.5% by leaving Denver (and upping my portfolio value, since I had equity locked up).

Now I am considering whether to liquidate my remaining Denver portfolio.  I may be burning some appreciation (or maybe not), but crossing my fingers for appreciation feels riskier than locking in big cash flow.

I wouldn't recommend selling your property unless you have a specific plan.  I had my areas within Chicago selected, and spent 12 months monitoring before I jumped.  Even then, the 45 days of 1031 selection period is very fast.