All Forum Posts by: Demetrius Davis

I’ve been able to purchase 5 deals since 2016.  2 flips, 3 rentals.  I developed the confidence to begin scaling the business toward the middle of last year, but have not been able to find good deals in the Chicago market since fall 2017.  So I’ve been sitting on my cash.  We also live below our means so we are continuing to stack additional cash which we would ordinarily use for a deal. Although we are invested in the stock market, I’m not super excited about continuing to throw a lot of money at it, because stocks are a bit overpriced, and the consensus is that the market is headed for a correction.  

At this point, I’m wondering if the next best move is to start using extra cash to pay down my 4% home mortgage.  This is essentially like getting a guaranteed 4% return on my cash.  It also gives me a new project and means to stay motivated.

When the markets provide opportunity again, I can always cease the aggressive paydown on my house and use a HELOC to gain access to the equity to pull out cash if needed.

Is anyone else considering this? What would you do?

@John Warren 10 years of cash flow is a great rule of thumb! Thanks 

I’m currently holding 3 rental properties in Chicago that I bought from 2015-17 at great prices (Under $50k each). They’re in Bronzeville, and on the Southeast side. All have great rents, and have appreciated by 20-75% in value due to renovations and market improvement. I believe we’re at the end of the cycle and am contemplating selling all or some of the units, as I don’t think there will be a significantly better time to sell in the near term. I’m wondering if other Chicagoland investors are at a similar place of considering cashing out. I have no immediate plans for the cash, but wonder if it’s foolish to not take the returns and run.

When measuring whether a market is too hot or prices appreciating at an unsustainable rate, I look at wages.  If wages are increasing at a similar rate and pace, the appreciation is sustainable.  However, if wages are flat or growing slowly, the appreciation is likely illegitimate and there will be a softening or correction.  

If people in your market are already spending 45-50% of their income on housing, don't expect that in 2 years, they'll be able to spend 55-60% on housing.  Wages must grow in order for prices to continue to grow.  

Additionally, consider that rising interest rates and property taxes will impact affordability.

@Nikki Kofkin thanks for your thoughts.  And congrats on the find! As an agent, are you feeling as confident about resale prices as you were 4 months ago?  Or are you planning for the flip to work at a price below previous comps?

@Brie Schmidt, thanks for your insight!

All, here's where I am: I've decided not to chase the market and will watch for buyer reengagement before making aggressive offers.  Additionally, I am falling back to my fall/winter 2016 pricing when looking for deals in Chicago.

My advice to fellow Chicago flippers: Going forward, make sure your flips can cash flow as rentals just in case.

@John Warren I flip in the Chicago south side condo market.

@Lumi Ispas you make some great points about what Chicago has going for it!  I believe it will remain an attractive place for high income earners despite its challenges. Thanks for reminding us of this!  @John Casmon's post speaks to exactly what I was referring to in my first post:  There's something going on in the market and it's been with us since mid-summer.  @Richard Weber's thoughts about the season change makes sense, however this slowdown happened in July and has persisted.  The concern for me as a flipper and I'm sure many flippers share this sentiment, is as we grab deals this winter, what can we reasonably expect the market to look like in the spring?  Will it return to spring 2017 norms, or will we continue the challenges of mid-summer 2017?  Answering this question wrongly can have great implications on one's real estate investment business, as our work is all about accurately estimating the margins.

And to speak a little more about the margins: I believe that due to tight inventory, many of us have been settling for tighter margins than previously.  I had made offers recently on deals that would have netted me $35K in profit.  After learning about this strange market slowdown, I realize that most of that $35K could have been eaten up in price concessions to get it resold.

@Russ Fry you make a great point!  The population decline is a very real factor.  I am very concerned about Illinois's mixture of high tax and fiscal problems.  My day job is in a Chicago charter school, the entire district is being impacted by declining enrollment due to families leaving the city or the state altogether.  A part of it is tax, the other piece is public safety, too few high quality educational options, and high rent.  Even buy and hold investors in Chicago need to be aware of this issue.  When buying, everyone should stress-test their deals to ensure they can cash flow with a rent decrease.  As more people leave Chicago, there will be less competition for rentals and prices may drop a bit.  Also, we should watch out for the major influx of luxury condos.  If there is an oversupply, they will begin offering concessions and the ripple effect could be felt down market as renters realize they can get more their money.

I think what also has to be considered is that not as many Chicago millennials will buy as we would have initially thought.  Their skepticism of home ownership is one factor, as they saw their parents lose a ton of equity or lose their home entirely.  Also, student loan debt is a factor, as it really hurts their debt to income ratio.  Lastly, people generally have to remain a lot more mobile as job opportunities arise.  Even for high income earning millennials, would they really want to purchase a home when they may be one headhunter phone call away from a dream job in another state?  More and more, I am paying attention to the big bets that have been placed on rental housing by hedge funds.  Fannie Mae and Freddie Mac have even begun backing loans to support mega (30,000+ units) and medium size landlords.