Rent Versus Owning Debate - Chicago and my experience (Worth: short sale, foreclosures)

[33Bearz]

I saw a thread about rent increasing and thought that rent versus owning would be a good topic to discuss. I bought a place in January in Bucktown/Wicker Park - Damen blueline stop. I know there is still a glut of foreclosures to hit the market but seriously the pricing disparity between renting to owning has never varied this much in certain sections of Chicago. Also worth noting that non short sale/foreclosure home sales are only down .5%. I looked all over Chicago from LP, to Lakeview, to West Loop, South Loop, Bucktown etc and really analyzed the rent to cost of buying ratios when making my purchase as my strategy is to live there for a couple years and eventually rent it out. I found that LP and Lakeview, all though they did not decrease in home value as much and there are not as much foreclosures on the market, the price levels when comparing to potential rent was about break-even at best for an older unit not even comparable to other areas but LOCATION. However the best areas I found were Bucktown/Wicker Park, South Loop and West Loop, where if you go the foreclosure route can net a cash gain at a $1,000/month plus gain equity from paying a mortgage on the best "deals." The renter markets especially where I live is really strong. I found a roommate in 1 day who almost covers my whole mortgage and leaves me to pay taxes, etc.

My friends renting think they are getting "deals" paying $800 each for a 5 bed to live in Lakeview, when collectively they are paying a mortgage on a $750k plus home. You are always paying someone’s mortgage somewhere when renting and from Net Worth perspective are just throwing money away. My girlfriend, who just moved in with me, is looking to buying a place as well and having it as a pure rental property. Which is also something you need to take into account – for my unit I went the whole 9 yards, granite, s/s appliances, wet bar, office, marble bath, Brazilian cherry floors, etc. But that is because I am living here as well as renting out a bedroom. For her I have had to emphasize you want nice, but renter nice and unless you can pass the added costs in price to the renter it is not worth it. Plus nicer stuff costs more money to maintain.

I know people lost their shirts and that what I am discussing is today's market but Chicago is a hub for young professionals all who rent. I would highly encourage these potential 1st time home buyers to buy as they did not have any skin in the game to loose in the 1st place (including stocks, and 401k losses) and can take advantage of this market. Young professionals for the most part live together to even afford living in the city in their 20's. Why not be the one collecting the rent? You would have to be paying to live anyway and that way you have a closer eye on ensuring your unit is taken care of. Plus even if prices further decline you find that you can live eventually rent free let alone the revenue you can generate each year. I don’t know many assets that pay out cold hard cash in excess of 30% of your personal contribution (down payment) each year and historically appreciate in value. Plus you have more control through tangible maintenance and upkeep to ensure the value is still there which is more than I can say about the stock market and all the crap data we get where a hedge fund and high frequency can crush any investment and the investment analyst trade on their own accounts. I don't know how many times I have seen a stock price drop when crushing all unanimous estimates published by the big bad banks and their guidance is better than expected.

When I was analyzing the historical data I found you won’t be able to take on debt this cheap and have the spread between renting to owning this wide ever again (at least not by the time you want to sell out of a potential rental unit). The areas I mentioned above have vacancy rates of less than a week/year (South Loop - 2 weeks) still much lower than national averages and other cities (except New York).

Lastly I would extremely avoid units with high HOA dues and take extreme caution when going through the selection process. HOA dues are not a deductible expense for tax purposes (sorry I am CPA/MBA). I would avoid high rises all together unless you can pass the added risks and costs to the renter – High rises have the highest HOA dues and the highest cost for repair and maintenance. My friend owns a studio (his 1st place) that he has rented out for years. The entire building needed new windows – his costs was $14,000; a 2-bed was $44,000. Fixing anything in a high rise is risky business only owning 1 unit. Now if you own the entire building that is another story. Those guys make a killing and generate significant economies of scale (which is my goal). I recommend the standard 4 flat units in most neighborhoods. There is always a risk when buying and this way you can split that risk amongst 3 others instead of all on you if you own a home or out of your control and at a much higher costs if you do the high rise route.

Sorry for length but I thought this would be a good basis to start conversation so hopefully we can all learn more about this subject and I can learn from others experiences. Also I have a blog where I like to discuss anything from business to economics to politics if you are interested in reading and postings - http://bandeforum.blogspot.com/. I just started it but the underlying goal is to increase mine and your knowledge by using more thought process (similar to what an executive would use) over the routine work that most jobs are like early on.