Analyze my desire to become a Chicago landlord

[younginvestor2013]

(Sorry in advance for the long post!) For those of you that don't know my background, I am 24 and live in Chicago. I currently do the "9 to 5" but eventually want to break away from the cube walls. I don't mind doing work or chores, but I can't fathom sitting behind a cube until I'm 60+. It sucks the life out of me. I think becoming a landlord would be a good thing to do on the side, and I could maybe see myself doing it full time someday.

I think becoming a landlord (esp. in popular Chicago neighborhoods) would be a good financial opportunity for me. I don't like to drop numbers, but my post is meaningless without doing so. So I will drop numbers only so I can gain your feedback.

I make about $55k a year ($60-65k after bonus). I have a net worth of about $310,000 with about $45,000 of that being in roth IRA/roth 401Ks.

I am intrigued to become a landlord because of the great cash flow potentials. I currently live in a high rise apartment managed by a PM company, but previously I had lived in a two-flat. I researched how much my landlord paid, and calculated that she made nice monthly cash flow off of us after all expenses.

I am not afraid to take the risk, but here are my concerns. I would appreciate any firsthand feedback from real estate investors, or anyone in general.

1. Most 2 or 3 flats in good Chicago neighborhoods run north of $400-500K (probably closer to $700k+). Would you advise creating a ceiling on my purchase price (assuming financing isn't an issue - read below..) so I don't have all of my assets tied up? Assuming a price of $700K, I would be looking at tying up $140K assets (assuming 20% down). This would leave me with roughly $110K in non-retirement accounts.

2. Would I even be approved for an investment property loan in the ballpark of 400k+? I have spoken briefly with mortgage bankers, and they noted that the banks will often count the yearly rental income (per the leases) on top of your W2 income. If this is the case, I am thinking I might be, but still unsure??
I have read instances of banks allowing less money down if you allow them to place a lien on your brokerage account until you reach a certain equity threshold ownership in your property. I'm not sure if banks do this anymore, but this could save me some headaches.

3. I am not handy at all. I can paint but I am not good at repairs or putting things together. I am not from Chicago originally, so finding referrals for good, trustworthy repair people might be challenging. Most (if not all) Chicago two/three flats are old. I would be worried about getting a quality inspection and possibly finding a major repair(s) that need to be done shortly after closing.

4. I do not have a car. Living in Chicago, I have been able to ditch my car to save money since I take public transit. If I were to become a landlord, I would probably have to buy a car to be able to travel easily to my property/properties to make repairs (assuming I am able to do so....!).

5. I currently rent. I don't own my own place, so If I were to buy, I would be buying an investment property before I even have my own roof over my head. I've contemplated over and over again.....and decided that I do not desire to own a condo. Therefore in the city this leaves me with a single family home or a two/three flat. I could live in one of the units and rent the other out. I'm not sure if I would want to do this (to be around my tenants all the time), so I may still rent at a close by apartment building.

6. Anything else I am not thinking of. Tax/legal implications.


At the end of the day, I am watching my net worth grow substantially for my age. This is great - but I am STILL motivated to grow it more to escape the cube walls. I net 18% of my gross salary to my 401K, but I want to use my money to make it grow even more (aside from compounding and dividends).

 

[MooreBonds]

It's great that you're thinking of pursuing this, but a few random thoughts from a 36 year old who's only real estate experience is owning his own home for a few years and investing in some REITs:

1. Most 2 or 3 flats in good Chicago neighborhoods run north of $400-500K (probably closer to $700k+). Would you advise creating a ceiling on my purchase price (assuming financing isn't an issue - read below..) so I don't have all of my assets tied up? Assuming a price of $700K, I would be looking at tying up $140K assets (assuming 20% down). This would leave me with roughly $110K in non-retirement accounts.

2. Would I even be approved for an investment property loan in the ballpark of 400k+? I have spoken briefly with mortgage bankers, and they noted that the banks will often count the yearly rental income (per the leases) on top of your W2 income. If this is the case, I am thinking I might be, but still unsure??
I have read instances of banks allowing less money down if you allow them to place a lien on your brokerage account until you reach a certain equity threshold ownership in your property. I'm not sure if banks do this anymore, but this could save me some headaches.

If you're dead-set on doing this given your current income and assets, go ahead and talk to a bank or two to see what they'll tell you. You MIGHT find a local bank/credit union that could work with you, but most large banks might be more favorable of traditional metrics, ratios, etc.. From a glance, what kind of return do you think you'll be getting, assuming you put 20% down, and allowing for interest, taxes, vacancies, etc.? It sounds like you're going to be fairly leveraged, and your income isn't a huge number to make mortgage payments for too long if it takes you a few months to find a tenant, or (worse) you have a deadbeat that isn't paying.

3. I am not handy at all. I can paint but I am not good at repairs or putting things together. I am not from Chicago originally, so finding referrals for good, trustworthy repair people might be challenging. Most (if not all) Chicago two/three flats are old. I would be worried about getting a quality inspection and possibly finding a major repair(s) that need to be done shortly after closing.

I never did ANY work on a house until I bought my 50 year old home a few years ago. Experience is the best teacher. But you might want to rethink your plan if you'll be relying on hiring people to do most of the work.

I could live in one of the units and rent the other out. I'm not sure if I would want to do this (to be around my tenants all the time), so I may still rent at a close by apartment building.

Well, that would be a sure fire way to keep an eye on the place! They also might be slightly less inclined to be a deadbeat if they know you're living next door (not a guarantee by any means, but might be a slight deterrent). Also, if you're living in one of the rooms, your rent is paying down the mortgage, and you only have to worry about one less room to keep full. Also, it allows you to practice your hand at remodeling work since you can do whatever you want in your space.

Overall, look at your risk:reward equation. You mention you think that other land lord made a good return - what do you feel is a reasonable "good" return you would get, assuming your rental is filled 90% of the time with only having to spend 0.4% of the property purchase price in upkeep and maintenance each year, along with interest payments, real estate taxes, insurance, your time spent on it, etc.?

Now look at that number, and realize that it's your 'best case scenario'. Then weigh it against the other factors that can whittle that return down to zero - or beyond! Then consider the likelihood of those various scenarios.

Many people have had good experiences with rental real estate, but just know what the range of outcomes is, and through a true cost/benefit analysis, see if those returns you think you might get are worth the risk and hassle.

 

[Bestwifeever]

Find a good realtor (who knows the neighborhoods you are interested in) and go look for a three flat. Live in one unit for a few years while the other two make your mortgage payments, and you put what you would have paid in rent into your investments. See how you like it. Good luck--many people have done this in Chicago. Oh, and get to know your alderman.

 

[LoneAspen]

I'm not familiar with real estate in Chicago. However, in many cities there are two things you want to educate yourself on if you're going to pursue rental properties:

1. Rent control laws (if any). I live near San Francisco, and have read many horror stories (from both tenants and landlords) about the myriad of rent control laws, and issues, they have there. I would suspect many other large cities have rent control also, so before buying anything, make sure you know what the laws are and how they would affect you.

2. Ability to rent out a unit. Before you buy, make sure you'd be able to rent it out, especially if it's a co-op, or has HOA/condo board oversight. You wouldn't want to buy something only to find out there are rules in place that only allow owner-occupied units.

Food for thought, and good luck in your endeavor!

 

[HillCountry]

I am a small time TX landlord. I am into real estate mostly to hedge against inflation. I can answer some of you questions based on my personal experience.

I don't have an opinion against leverage but you might want to start small. It can be a good idea to find some partner at the beginning.

I don't think you will get the loan. Your rental income has to be established for a couple of years to be considered as income.

You can pay professional to do the fix. Use Angies list to find good contractors.

It does not matter you are renting now. And you might be able to get good HUD properties as first time home owner.


You can check out Bigger Pockets forum where lots of your questions are already answered.

Good luck.

 

[FIGuy]

I am a small time TX landlord. I am into real estate mostly to hedge against inflation. I can answer some of you questions based on my personal experience.

I don't have an opinion against leverage but you might want to start small. It can be a good idea to find some partner at the beginning.

I don't think you will get the loan. Your rental income has to be established for a couple of years to be considered as income.

You can pay professional to do the fix. Use Angies list to find good contractors.

It does not matter you are renting now. And you might be able to get good HUD properties as first time home owner.


You can check out Bigger Pockets forum where lots of your questions are already answered.

Good luck.

+1 on Biggerpockets.com. Read every post there before you put one cent into RE. You'll be way ahead of the game.

My opinion: Invest in a higher cap rate area (probably not Chicago) and use professional management no matter what!

We bought a 6 unit 4 hrs away before we bought our own house (still haven't actually and probably never will). The cash flow from this building more than pays our current rent after paying for itself, including management.

 

[meekie]

You should be able to get a better mortgage rate if you plan on living in the unit. I'd look for a two/three flat that you can live in one unit and rent the others for now. That would also help with the car issue.

Being able to do your own minor repairs can save you a lot of money, I would never consider being a full time landlord without it. Most home repairs are about experience and having the right tools. Get experience by helping friends, or finding a handyman that needs an extra pair of hands in exchange for free training.

While there can be good money in landlording, there's a lot of hidden expenses for repairs, maintenance and vacancies that you need to remember.

We bought a house in 99, then moved in 2012 when we wanted a different neighborhood. We pay for a professional management team, which costs me 8%, and they use a more expensive gardener for the house than I used to. When the house is paid off, the income from it will easily pay the property tax for both our properties, and possibly give us a small income. The depreciation on it will also be a big tax write off once our income drops a bit. For us it's a good balance between work and profit.