Real estate investing in a high cost, high property tax and high debt market?

[prof61820]

I'm very interested in creating passive income by investing in local real estate.  Both Chicago and Suburban Chicago have shown good growth over the last decade and many neighborhoods and suburbs have returned to pre-recession prices.  That said, Chicagoland has high property taxes and worse, high government debt.  As a result,  I have a serious concern that property taxes on my investment property (and home) will significantly rise over the next decade to cover local government debt (mostly unfunded retirement benefits).  If property taxes spike over the next 10 years, my profits may be diminished and the value of my property may decline (think Detroit). 

Am I worrying too much about this?  Can I pass on property tax increases to tenants?  Am I missing a deduction on my taxes that may help me deal with this issue?  If not, is there an online tool for real estate investors to look at both current property tax rates and local debt before making an investment?

[daverobev]

Ok, so generally, barring world-changing events, stuff.. fluctuates, yes, but when it reaches a certain point, something pulls it back towards the average.

If house prices go up, wages go up, inflation goes up. If property tax goes up it might lead to more people renting rather than owning, hence higher rents in the long run.

I guess I'm saying.. there are micro and macro factors. And, it's impossible to see the future. If a house cashflows well now, and there aren't massive black clouds on the horizon, it's probably an ok bet. Don't over-extend yourself, make sure you have contingency so you don't lose the lot.

High property tax is, to me, a significant risk as you must carry that in a bad situation. You can *try* to pass on prop tax rises but the truth is really you'll be charging what the market thinks you should charge - if there is a mass exodus from Chicago, you're forked, either way ;)

Detroit.. yeah, special. Inflation and rising bond prices will, I believe, help the other pension funds out (until next time...).

As to the post title - if that's how you feel, RUN away. You won't sleep at night. And, frankly, you'd be insane to invest if you see any of that as likely! IMHO.

[prof61820]

daverobev - Thank you for your well thought out post.  An annoying part of all this is that I know the real estate market better than I know the stock market...maybe I should learn how to invest in the market better and have a hefty amount of cash on hand if my scenario plays out and prices drop?  Of course, I may have sold my home and moved elsewhere by the time this scene rolls around.  There are a lot of folks here that tell me that what happened in Detroit can never happen in Chicago...they remind of the folks that said the market would never go down in 2003-2007.

[prof61820]

If a house cashflows well now, and there aren't massive black clouds on the horizon, it's probably an ok bet.

Unfortunately, I see nothing but black clouds on the horizon for Chicago and many local governments that have to make balloon pension payments to massively underfunded police and fire pension funds in Illinois in addition to locals being on the hook for massively unfunded teacher pension funds.  These articles make it seem terrible for future property taxes - and they just address pension problems and don't account for the underfunded retiree healthcare commitments to government employees...

"Chicago must make the balloon-style payment to its police and fire unions, the first year of a new pension spending arrangement, to comply with a 2010 Illinois law mandating actuarially required contributions. Statewide pension reform could relieve the city of this obligation, but with reform stalled in the Illinois legislature and Emanuel's efforts coming up short, the city is beginning to reckon with the possibility that its pension payments through 2020 could average $1.162 billion a year, up 147 percent from the average over the last five years."

http://www.huffingtonpost.com/2013/10/23/chicago-pension-ills-rahm_n_4148014.html

" The pension fund for retired Chicago teachers stands at risk of collapse. The city’s four funds for other retired city workers are short by $19.5 billion. At least one of the funds is in peril of running out of money in less than a decade. And starting in 2015, the city will be required by the state to make far larger contributions to the funds, which could leave it hundreds of millions of dollars in the red — as much as it would cost to pay 4,300 police officers to patrol the streets for a year.  “This is kind of the dark cloud that’s coming ever closer,” Mr. Emanuel said in a recent interview, adding that he had no intention of raising his city’s property taxes by as much as 150 percent — the price tag, he says, that it might take to pay such bills. "

http://www.nytimes.com/2013/08/06/us/chicago-sees-pension-crisis-drawing-near.html?pagewanted=all&_r=0

[Johnny Aloha]

I have a friend who retired at 38 because he bought enough (17) rental properties in and around Chicago.  He is holding right now. 

From your post, I have a few comments:
- yes, Chicago has some significant financial concerns.  I would not let this be the only decision factor to invest though.  What are the demographic trends?
- the rent you can charge will be based on market conditions, not how much you pay in property taxes.  You could try list it high but you run the risk of prolonged vacancy.
- make sure you understand  landlord/tenant laws BEFORE you invest!   I've heard Chicago is difficult for landlords.
- if you aren't comfortable with Chicago but still want to invest in RE, there are lots of other ways to do it.

Best of luck.

[prof61820]

I have a friend who retired at 38 because he bought enough (17) rental properties in and around Chicago.  He is holding right now.

Yes - that's why I'd like to invest but I feel like I may have missed my window...and I'm concerned that stable property taxes and resulting property gains of the last 2 decades may have been fueled in part by "pension holidays" i.e. skipped pension payments...

Chicago has some significant financial concerns.  I would not let this be the only decision factor to invest though.  What are the demographic trends?

The demographic trends are good.  Population is increasing, companies are still relocating here, and hipsters are still flocking to the City from all over the midwest (and they are shunning the suburbs).  If you can spot the next Chicago hipster/student/artsy neighborhood near public transportation and buy low, you should do well - barring a property tax catastrophe.  One other issue that could cause problems in this kind of neighborhood is if the Federal government were to cut back on student loans...maybe I'm thinking too much...and, as a result should just put it in the market and sleep better at night.

the rent you can charge will be based on market conditions, not how much you pay in property taxes.  You could try list it high but you run the risk of prolonged vacancy.

I'd prefer to list it for little under market and increase my chances of attracting good, long term tenants.

make sure you understand  landlord/tenant laws BEFORE you invest!   I've heard Chicago is difficult for landlords."

You are correct, it is not good and the City council made it much worse last year for purchases of foreclosed properties...

if you aren't comfortable with Chicago but still want to invest in RE, there are lots of other ways to do it.

I do have a small investment in a Vanguard REIT but the thought of owning an actual property not near me (so I can fix the small and some of the big problems myself, collect the rent  and personally mind the store, if you will) does not seem like the best way to dip my toe in to real estate investing.  I am, however, open to all thoughts and suggestions.[/quote]

Best of luck.

Thanks!