Unwittingly Buy Downtown Chicago Condos Like A Pro

Shhhhhh. Don’t tell anyone.

But here’s a dirty little secret.

Cutting edge tools, market data and advice shouldn’t be exclusive to the players on Wall Street.

Whether you’re a first-time home buyer or investor, it matters not.

You should likewise be granted the same insider information that the big boys use. Yes, the kind of deadly information that’s NOT typically available to the general public.

Information that most real estate agents shall never reap because (1) they’re not willing to pay to get it or (2) they don’t know where to find it in the first place.

If you’re buying any single family residential property, then here’s a stealth way to double-check what levels (price!) you’re buying at.

In other words, are you overpaying, underpaying or getting a fair price?

It’s called the: MORTGAGE/RENT RATIO.

Here’s the single most important ingredient that you’ll need to get from a good real estate agent whenever you buy downtown Chicago condos; or any residential property.

Answer: the “Rented rate” (if the unit were to be rented at the current market).

Repeat: if you fail to confirm what rental price the property would realistically fetch, at the time you buy the property, then you’ll never uncover whether you’re: overpaying, underpaying or getting a fair price.

When you run a comparable market analysis report on the rental rates for a condo in a specific building… or a house in a particular sub-division… then you’re half-way done.

After you learn what the unit would currently rent for… you then find-out what the monthly mortgage payment (assuming a 100% loan with no down-payment) would be… on a standard 30-year fixed rate mortgage at that time.

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As an example, the interest rate on a 30-year mortgage is currently 4%.

Therefore, if you were borrowing to buy a $399,900 home, then your monthly mortgage payment would be $1,905/month.

Simply take your monthly mortgage payment and divide (/) it by the monthly rent that the property would legitimately rent for-at that moment.

  • A fair Mortgage Rent Ratio would be between 1.00 and 1.05
  • Anything below 1.00 would imply the home is undervalued (good buy).
  • Anything above 1.05 would imply that the home is overvalued.

Quick history lesson…

  1. MORTGAGE/RENT ratios in the 1980’s housing bubble were 1.25.
  2. In the real estate bubble of 2005-2008, they were out in the stratosphere at 1.85.

What levels are you buying at?

Do you even know?

Does your advisor even know?

Have you ever heard a real estate agent say: “… now’s not the time to buy?”

I’ve never heard a real estate agent say that.

All I ever hear brokers say is:

“… how great the location is; or that interest rates are at all-time lows.”


Interest rates were also at all-time lows in the last decade (2000-2010).

Last decade, all the brokers were touting how important it was for you to own real estate. Take a hardened look at this wealth cycle image to see what it led to.

WARNING #1: if you’re buying a property where the seller claims there’s a tenant at the tail-end of their lease… residing in the property and paying $$$ per month in rent… you absolutely must run your own analysis to see IF the market rents are supporting that threshold.

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For instance, I recently stumbled across a condo for sale in LakeShore East (downtown Chicago) where the owner has a tenant residing in the property (for 5 more months) and paying $1,600/mo in rent. Which equates to $2.46/sf… for a unit that would otherwise rent for $2.30/sf. In fact, I’ve seen the same units in that building rent for $1,400/mo in rent. And rarely for $1,600.

Hence, IF that tenant moved out today, the likely rent it would fetch is $1,500/mo.

Luxury Houses in Lincoln Park Chicago are renting for up to $12,000 per month rent. Depending on the size and location, they can rent for $8,500 per month.

Bottom line, you have to intimately know your local market rents inside-and-out before you buy any property-even if you plan to live in the property.

Therefore, make certain to ONLY draw your rental comps (and sales comps for that matter) from the MLS.

Not from Zillow…

Not from Trulia or etc…

… ONLY from the MLS.

If you’re attempting to be a pricing expert by looking at Zillow “Zestimates” and such… then congratulations, you’ve just taken your first step toward losing money in real estate.

WARNING #2: the Mortgage/Rent ratio analysis is intended to quantify levels (price) for single family detached houses; which actually don’t have monthly association fees.

Therefore, for condos/townhouses, I always add the monthly assessment fee to the numerator of the equation:

Ex. Mortgage payment + association fee / monthly rent

Repeat: condo association fees can/do affect the value of a property.

To use the mortgage rent ratio for condos/townhouses, definitely include the monthly association fee in the calculation.

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I’ve run these calculations for my downtown Chicago market at least 10,000 times.

For fun, I choose a building…

Then I run a report that shows me all RENTED units the last 6 months… which gives me my rent levels for that building or subdivision…

Then I run a similar 6-month look-back report on all the actual CLOSED for sale units…

Then I just do the math.

I know what the actual rents are…

I know what the actual sales prices were…

I know what the current mortgage rates are-simply by going to Chase, Wells Fargo or Bank of America’s website and looking…

And I know what the association fees are because (as a managing broker/owner) I have access to all the real data at my fingertips.

If you’re ever feeling boredom, and wish to spend 5 glorious hours on a Saturday afternoon (instead of going golfing), you can run these numbers too; assuming you have access to the data.

It will offer you a tactile sense of what levels (price!) these assets are trading for in various neighborhoods-and all without leaving the comfort of your favorite chair.

or, you can hire someone to help you: CAVEAT EMPTOR!

One things for certain. If you (or your advisor) is only looking at the “Sales Comparison” approach to guide your real estate buying decisions, then don’t be surprised when your wallet finds its way into the Bermuda Triangle.