Real estate properties can make for worthy investments, especially if you strike while the market is hot (which Chicago's happens to be), but there's a lot to consider if you want to do it right (which we'd highly recommend). Aaron Galvin, managing broker and owner of Luxury Living Chicago Realty, defines an investment property as "real estate someone has purchased or is holding, but does not occupy, with the intent of renting the property to provide income or selling the property for a future gain."
Though investment properties come with their fair share of risks and headaches, benefits can outweigh the pitfalls. Whether it's additional income from rent or the selling of the property, appreciation, tax benefits, or leverage in your dealings with bank lenders, getting into the investment game pays off. But the question is, where to start?
Experts agree enlisting the help of an investment real estate professional and even consulting a lawyer familiar with local real estate laws is worth your while as you ease into the investment market. Depending on what you're going for, purchasing an investment property could either make you a landlord or a more hands-off "turnkey" investor, like the Chicago clients Matthew T. Bowles, a partner at Nevada-based Maverick Investor Group, works with. Bowles says conditions in Chicago are currently primed for potential property investors to find success.
"Chicago is at a much earlier stage of the expansion cycle so the upside appreciation potential is much greater. Smart investors that bought in Phoenix in 2010 and in Atlanta in 2011 are buying in Chicago today," Bowles says. "We have clients from around the country and around the world that are flocking to the Chicago market because of the comparative value proposition, not to mention the fact that it is an international destination city and one of the largest and most diversified economies in the U.S."
Another reason the city stands out for investors? Unlike many Americans cities, 55% of Chicago residents rent (compared to a national average of about 35%), which makes life easier for investors trying to keep their properties occupied.
Even so, these perks only come into play if you choose your property carefully. According to Galvin at Luxury Living, because the city's in an upswing it can be harder to find deals and returns aren't as strong as they have been in previous years. More specifically, distressed properties like foreclosures and short sales that have made up most investment purchases in the last five years are becoming scarcer in the most desirable neighborhoods.
Finding what Bowles calls "investment property sweet spots" requires weeding out the many properties that are too expensive and don't generate enough rent to cover expenses and leave anything left over for you. Neighborhoods where tenants are moving out instead of in and rental demand is low can also up your costs and cancel out benefits you might be earning elsewhere.
"A good real estate investment will have a desirable location, high occupancy rates in the surrounding areas and the potential for an increase in future value," Galvin says. Two or three-bedroom units are more in demand, but as Galvin points out, one-bedrooms or studios might mean you'll only have to find one tenant to oversee instead of two or more.
When it comes to financing these purchases, cash is your best bet, but if that's not an option, you'll need to pre-qualify with a mortgage lender and make sure you qualify for an investment property loan which usually sets a slightly higher bar than a primary home loan. From there, let's turn to Bowles for a run-down on getting the rest of your money-related ducks in a row:
"In terms of investment property analysis, you first want to confirm the gross monthly rent (the 'actual' rent, not somebody's 'anticipated' rent). Then you want to confirm your fixed expenses including property taxes, insurance, property management fee, and home owners association fees if there are any. Subtract those from your gross rent. Then make sure you factor in an estimate for maintenance and vacancy. If the property is in a solid area, fully renovated with a tenant in place, we usually estimate 7% of the gross monthly rent for vacancy and 5% for maintenance. You may have no vacancy for two or three years, but then have two months of vacancy during your turnover, so you want to create a monthly average over time to use for your calculation. So, once you subtract your fixed expenses and you subtract your vacancy and maintenance, then you need to subtract your mortgage payment (if you got a mortgage). The money you have left over is going to be your positive cash flow. Divide your annual positive cash flow by the total amount of money you invested (down payment plus closing costs, etc) and you come up with your 'cash on cash return.' This is a basic calculation that allows you to compare the returns from your investment property against returns you may be getting from other asset classes. Keep in mind, this doesn't even take into account the tax benefits, the future appreciation potential, or the hedge against inflation that your investment property provides."
Whatever you do, Galvin says, educate yourself on local landlord/tenant law and consult with an experienced professional when diving into the investment market for the first time.
For more information, Bowles and his nice colleagues at Maverick Investor Group have offered up access for Curbed Chicago readers to a 60-minute webinar about the Chicago real estate market and where it's most advantageous for investors to buy here. Use the code "Curbed Chicago" to take a look.
·Luxury Living Chicago Realty [Official]
·Maverick Investor Group [Official]
·Curbed University [Curbed Chicago]