All Forum Posts by: Edward Kuk

@Bob Floss II thanks Bob. This unit is in old Irving Park so I assume it follows cook county rules? One of the tenants is section 8 but doesn’t live in the illegal unit. 

My biggest concern is if something happens like a fire due to the illegal unit, does insurance just ignore my claim?

Trying to assess the size of risk before we make an offer. Appreciate the help.

Hi everyone,

Hope you all are having an amazing weekend. My wife and I saw a multi unit that we really liked today. Biggest problem is that the basement unit is not legal. 

I did some research and think it’s pretty close to legal. It has an entrance and exit, high ceilings, own heat but there isn’t any ventilation / windows in the bedrooms. I assume I could make this legal but not sure how much it would cost.

That said, trying to assess the risk here. If something does happen, would my insurance pretty much be voided? If a tenant reports this, how large is the fine? Haven’t seen actual numbers here but more on the government making you remove things so it’s unrentable.

Appreciate the help!

@Dan Wallace - very helpful Dan. thanks for explaining

Ah I get it.

One more follow up question. Let's say my loan is a 7 year ARM instead of a 30 year mortgage and now something terrible happens and I'm underwater with my mortgage contract expiring.

Assuming similar numbers where the home value drops from 200k to 100k, wiping out my equity of 40K and I still hold 160K of debt to the bank. At this point, would the bank force me to pay the 60K difference to reset the mortgage at 100K (since that's the home asset value) and if I can't come up with the cash, they take the house?

What happens in that situation?

Thanks all. This is incredibly helpful. I'm trying to understand the potential downside of a bad market and this clarified a lot of the questions I had.

Two follow up questions:

1. I assume a sole-proprietor LLC won't really protect you from any of this. The impact is personal if you default.

2. @Jay Hinrichs, can you explain how the new construction exemplified the impact? Is it because so much supply hit the market that your clients weren't able to fill their units?

Hi everyone,

I'm trying to understand any risks to a mortgage during a recession and happened historically. This will help me understand how much debt I want to take on as I continue to look for opportunities. Two main questions here:

1) What happens when home value drops? Does the drop in home value hit 100% of the owner's equity or does it it split with the bank. I assume its the former as appreciation in a good market rewards the owner 100% since they hold the same mortgage. Should the risk not be the same in a bad market?

2) What happens when the home value drops wipes out the owner's equity? Can the bank call the loan or force a payment to equalize the loan to the new home value? For example, if there is a 200K home and I own 20% (40K). The home value then drops to 100k. I lose all my equity but still have a 160K loan on the table. The bank now doesn't have enough home value to cover their loan, can they call the loan? I heard what they might do is make you cover 60K and reset the loan to 100K, the new home value of the house. If you don't have the 60K on hand, property is gone.

Does this actually happen? In my situation, ask long as my rents are fine and I keep my job, I would rather continue paying off the loan and wait for a turn around. But if the bank forces a move to take my house, I might not have 60K handy, worst yet, what if it happens again.

Ah - thanks all. That is helpful. Good to see that my conclusions aren't that off. I'll start widening my search to include other areas.

Hi BP,

I currently live in Chicago and focusing on small multi-family units (2-4 units) in the surrounding areas. I'm pretty new to this and currently focusing on 1) identifying the area I'm interested in 2) understanding how the numbers work. Given my current situation at work (time-consuming), I'm focusing on B area units that are turnkey / require light rehab.

I've been running the numbers on a few properties that I've seen and with the estimates I've made, these properties are so far from cashflowing that I'm becoming skeptical if 1) I'm doing this correctly 2) there are actually cashflowing properties in these areas

My main concern is whether my expectations are too high and thus will never pull the trigger unless another '08 happens again. 

To give you an example, I'm looking at 1718 W Morse Ave in the Roger Park area. This is a duplex that is going for 459K. The total rent for both units is around $2950. 

After including all the cost estimates, the property has a -$600/month cashflow. In order for me to get a $100 / cashflow, this unit needs to go for 300K - 33% lower! I know the landlord purchased this in 2001 for 380K, so that will never happen. 

The landlords are investors themselves so the numbers for them can't be that bad. If I use 380K and remove property management (which I know they don't use), I can get a neutral cashflow but then this was 18 years ago when the area was probably a C and rents were likely lower. 

My question for the group are:

1) Is this the norm you are seeing where duds are actually that big of a dud? I've only looked in Chicago right now but how do other B areas in other cities compare?

2) Anything I'm missing when assessing these properties? Am I being too conservative?

I've attached a picture of my spreadsheet for reference.

Key assumptions:

20% down, 30 year loan at 4.5%

Property management fee estimated at 9% (includes fixed and variable)

OpEX - 5% of rent

CapEx - 6% of rent

Vacancy - 5% of rent

Insurance 0.4%

Property tax - I used 2017 numbers and bumped it up by a bit

I assumed no up front CapEx to simplified things but likely there is some work involved

@Edward Liu - Thanks Edward. That's how I'm thinking of it. I still have lots to learn but I think the best way to "complete" my learning is to go through a deal and experience it. I likely won't be comfortable getting in bed with an investor until I learn the business better and I think I need to put myself through the process to do so. Appreciate the advice.

@Frank Geiger - Thanks Frank. Totally agree that dabbling won't work. The learning curve / level of investment is high enough that dabbling will erode potential benefits (at least that's what I think).  Pace however is a different factor. I don't expect to work tremendous hours in the future (hopefully) so as I transition, I can adjust pace. 

Appreciate everyone's help in clarifying the intensity of BRRRR - it sounds like the pure BRRRR strategy is not the right strategy for me :). Good learning.

@Thomas S. thanks Thomas. It does sound like plausible approach at this time - something I will have to explore a bit more. 

I'm hoping / planning to not have to work 70+ hours a week forever :) (but who knows). But if I begin the transition, I would likely shift some of my time here. This is a 10-20 year play for me, so will take some trial and error to figure out the balance. 

If my kids liquidate my assets when I'm gone, I'll haunt them from the grave.