Sell Condo or Become Landlord in Chicago

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uzpakalis
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Sell Condo or Become Landlord in Chicago

Post by uzpakalis »

Hi all,

I purchased a two-bedroom condo in an up-and-coming area of Chicago in 2012 for about $110,000. This area is now in one of the "hottest" real estate markets in the country. I have lived in the condo since 2012. The condo is in excellent shape and paid off. HOA fees are about $350/month. Taxes are around $2,750/year.

Our family is growing so we are looking to purchase a moderately priced home within 30 miles of the condo. We do not need to sell the condo to purchase the home. Comps for the condo price out at $250,000-$275,000. Rents are around $2,000/month.

I'm capable of doing most routine repairs on my own and managing tenants.

On the one hand, the condo should continue to appreciate well and throw off some pretty good "passive" income on a monthly basis. On the other, I like the idea of pocketing the sale proceeds and putting it into my taxable account.

Would you sell the condo or become a landlord? Happy to provide additional information if needed.

Thanks!
systemBuilder
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Re: Sell Condo or Become Landlord in Chicago

Post by systemBuilder »

uzpakalis wrote: Would you sell the condo or become a landlord? Happy to provide additional information if needed.
Thanks!
I am a landlord and grew up in (Urbana) Illinois. When we finally moved out of our house in San Diego we kept it and rented it out. My house also doubled but it took 2 decades, not 4 years. So your condo is worth $250k - $275k, but the most you can hope to get from it is $24000 - $2750 - $4200 = $17,000 per year (taxable), assuming that nothing breaks, i.e. rent is about 6.5% of gross value assuming the median value. I believe that in today's rental world, that is a pretty good gross income on rent. On the other hand, if you sell the house you get $262,500 tax free and if your mortgage is 3.25% you will get $8531 tax-free interest-avoidance-income by forgoing mortgage interest on your home every month.

Note: I have had mortgages at 2.5% and 2.69% since becoming a landlord so your mileage may vary.

I am thinking that your condo has had a crazy run, and could easily drop to $220k in a recession or if mortgage rates go up for an extended period or if that locale falls out of favor. We kept our house in San Diego because we figured that retirees would keep the real estate market strong for the next decade, but Illinois is still spiraling downhill with the worst economic crisis outside of Puerto Rico. I was talking with several University of Illinois faculty about this last week - they were here in California doing fund-raising, and there is a crisis in Illinois public education. I am leaning towards a decision to sell while the market is hot. If the condo drops $25,000 in value you won't break even vs. ploughing your capital gain into the new house for probably 4, 5 years depending upon your income tax bracket.

I suspect this is probably not the answer you wanted to hear - after all you had an excellent run and have earned $140k on a $110,000 home in only 4 years - this can go on forever, right? right? no. The worst housing crisis in 50 years bottomed in July 2011 and you bought your condo at an awesome time. That type of gain happens once in a lifetime. I know because I bought my house in August 2011 as well - I had been planning that purchase and its timing for 13 years. I did a lot of study of housing bubbles and concluded that they bottom 16-20 quarters peak-to-trough, and the national market peaked in July 2006 - 20 quarters later was the bottom, this time, in July 2011. Your condo benefited from homeprice rocket fuel.
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Watty
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Re: Sell Condo or Become Landlord in Chicago

Post by Watty »

uzpakalis wrote:I purchased a two-bedroom condo in an up-and-coming area of Chicago in 2012 for about $110,000. .......

Comps for the condo price out at $250,000-$275,000.
You very likely qualify for the homeowners capital gains exemption so you could have over $140,000 in capital gains free of federal taxes. (Check your state taxes). If you rent the condo for more than a few years then change your mind about being a landlord and sell the place you will have lost that exemption and will have to pay the capital gains taxes on that $140,000.

To me that makes the the choice to sell it easy.

If you have a burning desire to be a landlord then sell that condo and buy different unit in the same building. You will have avoided the capital gains taxes and you will get more depreciation on your taxes each year.
technovelist
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Re: Sell Condo or Become Landlord in Chicago

Post by technovelist »

Sell.
In theory, theory and practice are identical. In practice, they often differ.
furwut
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Re: Sell Condo or Become Landlord in Chicago

Post by furwut »

I would sell and invest. Nobody ever got a 2am call from a mutual fund about an overflowing toilet.
Chadnudj
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Re: Sell Condo or Become Landlord in Chicago

Post by Chadnudj »

uzpakalis wrote:Hi all,

I purchased a two-bedroom condo in an up-and-coming area of Chicago in 2012 for about $110,000. This area is now in one of the "hottest" real estate markets in the country. I have lived in the condo since 2012. The condo is in excellent shape and paid off. HOA fees are about $350/month. Taxes are around $2,750/year.

Our family is growing so we are looking to purchase a moderately priced home within 30 miles of the condo. We do not need to sell the condo to purchase the home. Comps for the condo price out at $250,000-$275,000. Rents are around $2,000/month.

I'm capable of doing most routine repairs on my own and managing tenants.

On the one hand, the condo should continue to appreciate well and throw off some pretty good "passive" income on a monthly basis. On the other, I like the idea of pocketing the sale proceeds and putting it into my taxable account.

Would you sell the condo or become a landlord? Happy to provide additional information if needed.

Thanks!
I live in Chicago. Given the paid-off nature of the condo, I'd say go for renting it. I'd even be tempted to hire a top-notch management company for the place, just to keep the pain-in-the-butt factor low for you.

If your place is truly in one of the hot neighborhoods (guessing it's in South Loop, Pilsen, Andersonville, or West Loop; maybe Bucktown/Wicker Park), you should see steady price appreciation, and that's without factoring in the positive cash flow you'd be getting on a paid off place.
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G12
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Re: Sell Condo or Become Landlord in Chicago

Post by G12 »

I recently sold a rental property we owned for 6 years, we never occupied the property. Did well on rental income, tenants, sold for a gain, etc but the depreciation recapture and its tax impact, plus capital gains, etc and I would take the tax free sale in a heart beat. If you have not researched the taxation structure as applies to rental property I would suggest you do so. One could utilize a 1031 exchange to roll taxes forward to new property but we have other properties and chose not to. Real estate acquisition and disposition can be very time consuming, cumbersome, and costly even when avoiding realtor fees, the couple we sold to eventually paid cash as the lender demands grew so ridiculous it wasn't worth the headache to borrow the money.
tampaite
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Re: Sell Condo or Become Landlord in Chicago

Post by tampaite »

Deleting my messages on this forum
Last edited by tampaite on Mon Jun 03, 2019 9:44 am, edited 1 time in total.
MikeMak27
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Re: Sell Condo or Become Landlord in Chicago

Post by MikeMak27 »

Sell, Sell, Sell!!! (Jim Cramer voice)

I own a condo in Chicago and am selling it on July 1st. I am going back to renting. It is also in a hot neighborhood (Fulton River District). I'll net close to 85k in profit from only 3 years of ownership. The reason why I'm not holding onto it in hopes of more price appreciation is Chicago's fiscal situation is a NIGHTMARE! The first property tax increase will come in the mail in a week or so. Then there will be smaller increases for the next two years. That property tax increase only fixed the police and fire pension. The municipal employees and teachers union pensions are still underfunded by billions of dollars. CPS is a train wreck and the state isn't in a hurry to help out. Additionally, I think that you'd make more money per year having your money in the market then you would holding real estate. Plus, you won't have to deal with finding and keeping good tenants.
Mak 3 fund portfolio: 50% US small cap value & US Small cap (IJS, IJR), 40% Emerging Markets (IEMG, VWO, FPADX), 10% US REIT (VNQ)
Constant Chaos
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Re: Sell Condo or Become Landlord in Chicago

Post by Constant Chaos »

Was just reading an interesting article about the large number of new apartment buildings being built this year and next in Chicago. 8000+ units coming.

After completing nearly 2,600 downtown apartments last year, developers are on pace to add 4,000 this year and 4,400 in 2017, according to Appraisal Research. Before 2008, they rarely built 1,000 units a year.




http://www.chicagobusiness.com/realesta ... -west-loop
quantAndHold
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Re: Sell Condo or Become Landlord in Chicago

Post by quantAndHold »

I would so sell that.

The only reason to keep it would be if you're planning on moving back into it.

Sell it, realize the capital gains. If you want rental property, but something else.
Yes, I’m really that pedantic.
Pacman
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Re: Sell Condo or Become Landlord in Chicago

Post by Pacman »

I'm normally a good boglehead when it comes to things like this and would say sell. However, the political situation in Chicago has been bad for years and I can tell you that plenty of young professionals are willing to pay fortunes to live in the "cool areas." I can only wonder how long this will continue for.
michaeljc70
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Re: Sell Condo or Become Landlord in Chicago

Post by michaeljc70 »

Pacman wrote:I'm normally a good boglehead when it comes to things like this and would say sell. However, the political situation in Chicago has been bad for years and I can tell you that plenty of young professionals are willing to pay fortunes to live in the "cool areas." I can only wonder how long this will continue for.
The financial situation is quickly deteriorating. The city had to pay 8% to borrow money last year!

Also, they try to stick it to people that don't live in the city (and therefore cannot vote). For example, the hotel tax is 17.4% because they figure it is not Chicagoans paying it. Don't be surprised if they increase the Homeowners Exemption to stick it to landlords.

I would sell and take the nice, tax-free, quick profit.

You didn't say what neighborhood it was in, but if it was near the 606, that and the bounce back from the recession would be 1 time things.
Topic Author
uzpakalis
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Re: Sell Condo or Become Landlord in Chicago

Post by uzpakalis »

Thank you for all the advice.
michaeljc70 wrote: You didn't say what neighborhood it was in, but if it was near the 606, that and the bounce back from the recession would be 1 time things.
It is near the 606. Think Bucktown, Logan Square, Wicker Park.
michaeljc70
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Re: Sell Condo or Become Landlord in Chicago

Post by michaeljc70 »

uzpakalis wrote:Thank you for all the advice.
michaeljc70 wrote: You didn't say what neighborhood it was in, but if it was near the 606, that and the bounce back from the recession would be 1 time things.
It is near the 606. Think Bucktown, Logan Square, Wicker Park.
I sold my house in Bucktown 6 doors from the 606 and cashed out. I moved to Logan Square and haven't looked back.
Detroittl
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Re: Sell Condo or Become Landlord in Chicago

Post by Detroittl »

Michael -

You seem to have planned it pretty well. Bucktown near the 606 seems to have only gone up a few percentage points since 2016 while taxes have gone way way up and heading higher.
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