Industry Insider: James McClelland, Mack Cos.

If you are one of those homeowners who finds yourself in a bind and is considering selling your home at a huge loss, James McClelland advises you to, instead, hold on to it and rent it out.

“At this point it is smarter to hold on to the house and rent it, waiting for values to rise. But if you opt to do this, you should definitely spend the money on a good property manager who will research rents in your area, screen tenants for you and collect the rents, because those pose the biggest problems for inexperienced landlords,” said McClelland, CEO and president of Mack Cos., the largest owner of single-family investment properties in the Midwest.

If you can delay selling, do it, he says.

“If you sell your house at the lowest point in the market and take a huge loss, you will never recover financially,” he said. “Be patient and take a deep breath and there will be a way out for you. If you overreact, you will pay the price.”

McClelland predicts it will take another five years for the Chicago area market to become healthy again. So you should be prepared to rent your house for at least that long.

“We've had five years of pain and I think that we should expect at least five more years for this excess inventory to work its way through the system,” McClelland said. “Sometimes you need a slap in the face and that is what we got after the huge run up in prices during the early part of the last decade. Now prices are adjusting. Values had to come back to sensibility and, unfortunately, it wiped out a lot of people's equity.”

If you have the misfortune of foreclosure, McClelland could become your home's next owner if you live in a Southwest suburb like Downers Grove or one of its neighbors because that is one of the areas where he shops for bargains to rehab and rent to top-tier tenants.

What is your background?#8220;I have been in real estate for 36 years. I began by selling real estate, then became a broker; then I owned my own company, Gaslight Realty in South Holland. Then I built planned unit developments like single-family home communities, strip shopping centers and office complexes. Then I owned Viking Homes and for the past 14 years I have owned Mack Cos., buying distressed properties from banks, rehabbing them and leasing them out.#8220;We have pretty much stayed the course over the years, not buying any more now than we were when the housing market was hot. We still buy about 200 properties per year. It is just that we used to buy properties built in the 1960s and now we are buying homes that were built in the 1980s #8212; for the same price.#8221;What is your secret to success?McClelland's company has grown, he said, by adhering to a strict AAA+ investment strategy: #8220;A#8221; properties in #8220;A#8221; locations with #8220;A#8221; tenants. For 14 years he has specialized in redeveloping distressed single-family homes in great neighborhoods in Chicago's South and Southwest suburbs.#8220;When we look for places to invest in properties, we always begin with the tenant in mind. A real estate investment works when you have steady, dependable income. And the best way to get that is by having excellent tenants.#8221;McClelland evaluates a potential tenant's stability of employment, for instance. He or she must have worked for the same employer for at least three years, making a minimum of $50,000 per year. He also checks how they pay their bills, not just their credit score, and sends someone to their current address to inspect the site and see how they are maintaining their current home or apartment.#8220;We get an average of 650 inquiries a month for rentals and only rent to 40 of them, if that gives you any idea how picky we are.#8221;And since they are so particular about their tenants, they know that these tenants will be particular about the home they rent and its neighborhood.#8220;An #8216;A' tenant will want to live in an #8216;A' house in an #8216;A' neighborhood, so that is what we buy and then we redevelop them to new home standards and give all of our tenants an option to buy, putting away $300 per month toward a down payment if they decide to do that.#8221;Where should the novice landlord look to purchase rental property?McClelland said there are a couple key factors to determine if your future rental property is in an area that will attract excellent tenants. Look for investment properties near strong, vibrant downtown commercial corridors. If the nearby businesses are thriving, you're in great shape. If the businesses are boarded up or the majority of the businesses are vacant, then think twice before investing in the property.You also want a community with clean and vibrant parks, good schools, access to a train line or interstate, highly-rated medical facilities and well-funded police and fire departments, McClelland said.The neighborhood within that community should also have a high ratio of owner occupants to rentals. If you're going to own an investment property in a community you want it surrounded by people who own their homes, keep them up and plant flowers.But don't overshoot things. Some communities are just too high-priced to make the equation work. To make this a good investment, McClelland said, you need positive cash flow so the rent you collect must allow you to pay principal, interest, taxes, insurance, assessments (if any) and upkeep, and still make a comfortable profit.McClelland seldom invests in condominiums and townhouses simply, he said, because the demand among #8220;A#8221; tenants is not as high.What type of investment house should you buy?#8220;This is where novice investors will benefit from bringing in a professional who can assess how much work needs to be done to a house to make an #8216;A-quality' tenant want to live there. A lot of distressed inventory on the market has been vacant for a long time. The price might sound like a bargain, but if the house is damaged or you have structural issues that need to be fixed, then that price may not be so attractive anymore.#8221;Mack Cos., for instance, typically invests $50,000 into redeveloping the homes it purchases to bring them up to new-construction standards.The best tenants, in his opinion, are families, so his company primarily invests in single-family homes with three or more bedrooms, 1frac12; baths, two nice-sized living areas, good yard space and a two-car garage.Make sure the home in which you invest has city water and sewer, as opposed to well and septic, he advises, and make sure those water and sewer lines are open and undamaged. Likewise, do not invest in a property with foundation issues or structural roof damage. These can be extraordinarily costly to repair.Finally, realize that each village treats redevelopment and housing inspections differently and research the community's practices before investing.#8220;Many villages embrace turning a (bank-owned) property into a redeveloped rental property because it helps everyone in the neighborhood and improves their community. But some villages utilize the permit process as a revenue source for the village with inordinate fees, onerous reporting and over-improvements. If you buy a real estate investment in one of those villages, the costs will quickly add up and eat into your profits.#8221;For more information on Mack Cos., visit www.mackcompanies.net. 26574000James McClelland is CEO of Mack Cos., the largest owner of single-family investment properties in the Midwest.Courtesy of Mack Cos. 40002657James McClelland, right, owner of Mack Cos., inspects the work on one of the houses he is rehabbing. The company buys about 200 homes a year.Courtesy of Mack Cos.