Chicago real estate is known to be among the most expensive in the US. Despite this, many investors are still attracted to its market. In this episode, Marco is joined by John, one of their local property providers and property managers in the Greater Chicago market as they examine the overall rental market in Cook County. They talk about why we should be investing in Chicago and Cook County and who are the major employers in the area. They note why it is crucial that you know the street itself and the property in general before making any final investment and discuss the price range of Chicago apartments. As they talk about the typical neighborhood classification, they ultimately point out the reasons for succeeding and failing in the single-family rental business.
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Market Spotlight: Chicago, Illinois
Chicago has long been one of those major markets we’ve been able to recommend to our clients where we have attractive inventory, solid returns and good appreciation potential. With me in this episode is one of our local property providers and property managers in the greater Chicago market. We’re going to find out what makes the Chicago market such an attractive place to invest in real estate. John, welcome to the show.
Good to be here, Marco. Thanks for the invite. I always love talking about Chicago.
Chicago is an interesting city. It’s a very large metropolitan area. In fact, the last time I checked, it was the third largest metro area in the country with nearly ten million people. Why do you like Chicago?
You don’t have to really sell Chicago to people looking for an investment property. There are other markets where it’s a hard sell. You say a lot of things to help them feel comfortable. I like Chicago because it sells itself soon as the facts get out.
I’ve been to Chicago multiple times. It’s such a big area. You have Cook County in the middle where the city of Chicago is located. Then you have all these major suburbs surrounding that region and people don’t realize that Chicago goes all the way down to Indiana. How many regions should we be looking at when we’re looking at the Chicago Metro area?
You’ve brought up a major point about Chicago. We can’t talk about it as “Chicago.” There are 795 neighborhoods in Chicago. If you’re looking to invest in that market, it’s got to be narrowed down from ten million people in 795 neighborhoods. I’m going to be talking about what I know and that’s the Cook County and the opportunities that reside in that county.
Why should we invest in Chicago?
As I look at Chicago, they have this enormous gross regional product, $575 billion. To put it in perspective, my daughter married a gentleman from Belgium. The entire country of Belgium, including Poland, has $575 billion. This city is equaling two countries in Europe. They have a lot of Fortune 500 companies based there. They have 31 of them and they’re all names you know Boeing, United Airlines, Walgreens, Allstate, Kraft and it goes on and on. They have a beautifully diversified economy. There’s not one industry that has more than 14% of the concentration of those industries, which means there’s not going to be a big player that leaves Chicago and it then crashes and your renters are leaving town because that one industry crashed. This is so diverse and insulated protected. It’s a very strong diversified producing machine how I see Chicago.
Do you happen to know if the population there is growing? Is there a net population growth or is it diminishing? I know some regions in the northeast, at least in the past, have been shrinking, but is Chicago a growing market?
In the population growth patterns, Chicago has gradually fallen in population. You have to dissect it though. The Chicago Metro has grown but if we’re talking about Chicago, including those 795 communities, they have gradually fallen. What’s happening is some are moving from the city and some are moving to the suburbs. There’s a lot of shifting going on within that job market but we’re talking about Cook County. We’re talking about surrounding the Metro. That pocket is actually growing.
Do you happen to know how big Cook County is? I know it’s a pretty large county but there’s so much more around Chicago that is not part of Cook County. I’m not saying that’s good or bad or indifferent. How much of the market does Cook County makeup?
They were 8% of all real estate activity in terms of transactions. I’m not sure what the actual population is of just Cook County. The city itself has a population that is far below the 9.5 million. If we go off of that, we can see it’s about 2.2 million. I’m guessing here and there are people that could look this up and Google it and see but I’m going to estimate that two million, which is the major Metro component is probably the mix of the Cook contribution to the 9.5 million overall.
Out of curiosity, because I’m sure some people are wondering who some of the major employers are there but can you maybe name a few of them so we have a sense of the types of businesses that make Chicago their home?
It’s pretty diverse. I made the point that there’s no one industry that has more than 14% of the total. That doesn’t mean there are not some big players following leads the way. They have major operations. United Airlines, Walgreens and Allstate are all significant employers. It’s a market that has a lot of private sector jobs. They have a huge concentration of private sector versus the government and service areas related to that. It has a blended blue-collar and white-collar. A lot of people think Chicago might have a lot of blue-collars, they do because there are 9.5 million people but it’s pretty blended.
Everyone is concerned about the types of neighborhoods that they’re in. We put them on a range from A through D. F being a complete failure. A is being more of the premium type neighborhoods. B is more of your bread and butter, blue-collar or upper blue-collar, lower white-collar type neighborhood. C is more of the lower income type neighborhoods. D is certainly not the best place to be. In terms of the type of product that we’re getting from your company and the investment properties that are available most of the time, what types of neighborhoods are those in?
The neighborhoods that we’re in are, first of all, in Cook County. They’re part of the south of the city network. We try not to go down into the suburbs because as soon as you cross that invisible line, the exact same house that we’re selling that has a $1,800 property tax, I’m talking two blocks into that defined suburb, it goes to $7,000 to $8,000 of property tax. You want to be very careful where you’re buying that the property tax doesn’t crush you. We have about eight zip codes that we operate within and those zip codes are 60619 and they go up the numbers 60620, 60627, 60628, 60629, 60637, 60643. These zip codes give you where we buy, and street by street you can’t buy whatever looks good on paper in a zip code. You’ve got to know the street itself and then you’ve got to know the property.
I hear so many people who look at Chicago ask the question, “Why are the taxes so high?” More importantly, why does it make such a difference to go two blocks and have a vast difference in the property tax amount?
If I had you in the car and we were driving down the street, you would see one of the properties we’re providing that is the neighborhood looks pretty, middle class working America, you go two more blocks, you move into the suburbs, nothing has changed. The houses all look the same, the streets all look the same, neighborhoods all look at the same, parks all look the same. Your property tax exploded and they’re able to get a lot more money for the prices of their houses because you crossed the line into the suburb. If you’re an investor in a single-family rental context, you want the very best price with the highest matching rent. That’s where we’re at. The average rents that we’re getting are crazy. Some of the best in the country is sitting right there in Chicago. I would say the average rent in our sectors is $1,700. You’re paying $170,000 and you’re getting a $1,700 rent. You’re getting out magical 1% rent to the price you paid ratio that everybody’s hoping to find.
Or slightly higher, so it’s around 1% or higher in terms of the rent-to-value or rent-to-price ratio. What is the price range of these properties and what is the related monthly rent? What’s the low and the high on the price range?
We start at about $131,000 with a $1,300 rent. That’s a home built in 1950, four-bedroom, two-bathroom and about 1,072 square feet. All of our properties, not all but most tend to have a basement and a detached garage. Most of the houses in Chicago were built in World War II. As an investor, don’t be surprised to see a ton of 1930 to 1940 and maybe a 1950-year built. That’s unique to Chicago. This is a city that exploded back then and it took all the landmass and built these properties.
The good thing for investors, not good for us that have to renovate them, Chicago has a very harsh builder inspector code law. We have to take a property built in 1930 and we have to bring it to a 2019 code that can involve replacing the plumbing pipes, the electrical wiring, the electrical boxes, almost everything. Some of these rehabs are massively gutting the house and bringing everything to the code of now. Great for you that are buying the house. Can you imagine the contractors and what they’ve got to do to get that house ready for you? The inspectors, I respect them and I’m not saying negative about them, they’re tough. Chicago inspectors are the toughest in the country and their demands on the contractors are tough and impeccable. You don’t make any shortcuts with these folks and you provide a fabulous rental property for the tenant and for the investor that’s coming in. There’s no question, our best renovation work is in Chicago.
What would you say is the typical neighborhood classification or grade as I was describing it? I was trying to get an idea of the types of neighborhoods that most of these rental properties are located in.
We’ve found that having experimented with Class Cs, we’ve never done Class Ds, we’ve tried some Class As, there’s no question that the sweet spot is Class B property. Our definition of Class B in the Cook County market would be a home that is typically older than other markets and other states we’re in that would still classify as a B but it has multiple bedrooms, meaning three or four, multiple bathrooms, basements, garages, fully renovated and in neighborhoods where people are taking care of their facility and their yards. Even though Section 8 is dominant, the people are functioning people, these are the working-class blue-collar folks of the city.
One challenge we have in multiple cities on a regular basis is tight inventory. This has been a big problem in Atlanta and it’s been a problem to a large degree in Dallas and other major metropolitan areas. What’s going on in Chicago in terms of access to rental inventory?
Starting at the macro level, there are 7,750 rental properties. We start with that number and the number of foreclosures going on is 5,890 properties. All properties in some state of foreclosure that’s 7% lower than last month and 35% lower than a year ago. You would think that would bring an ample opportunity to buy distressed properties but when you whittle that down to our challenge, we have to find you the investor, a property whose price is going to return to you a strong cap rate on the rents. We have to be careful with what we buy and how we buy. We haven’t had too much challenge finding properties in the Cook County market that work. The numbers work, at least within the budget, we have to buy homes.
If I was invitation homes with their 125,000 houses under inventory control, it would be tough to come in and carpet bomb Cook County and try to grab everything that’s available. We have a great ground team here in Chicago that does a great job sourcing. It’s two times harder than it was years ago but we never measure that it’s harder. We measure that it’s available and if it’s available and the numbers work, we consider that a workable market even though we work a little harder to find and locate that property.
What’s the rental market like? Is it active? Is there a strong demand? How would you describe the overall rental market in Cook County?
The rental market is very strong and it is a robust market. Chicago is a rental place. All those 795 neighborhoods have a 42% rent component to owner occupant but as you’d come into Cook County, it’s 70% of the people are renting. It’s such high demand and they want to stay in Cook County. They don’t want to push way out into the suburbs and rent out there because it’s too far. The commutes are too brutal. Everybody’s trying to stay well within where they work. We never have trouble renting and finding tenants. Everything we do in Section 8 in Chicago, this market has one of the best-run Section 8 offices in the country. In the several years that we have been operating with the Section 8 Department, we haven’t had a single issue. Some of you do have properties in various cities with Section 8 and I’m going to guess you’ve had some nightmares dealing with Section 8. We have not. It’s quiet, functional and it works. The rents that Section 8 is giving on these homes are $1,300 up to $1,800 Section 8 rents.
People are pretty polarized when it comes to Section 8. There are those who love it and wouldn’t give it up and there are those people who very much dislike it because of the red tape and the extra time that it takes to get the inspections done and rented, the property turned around. Are you having that problem there? Is the turnaround time long? Is it short?
It’s very short. Keep in mind our properties are massively renovated. It’s a complete renovation. We’re talking new appliances, new plumbing, new bathrooms, new bathroom fixtures, new granite counter tops, new flooring, everything painted, new water heaters, new furnaces, new everything. When a tenant walks in the door, it looks like new construction and they go, “I can rent this.” We go, “Yes,” and it’s a done deal. Not all of the properties within the streets where we buy are like that. Some of them haven’t been renovated. They’ve been around a long time and they are pretty weathered. Placing tenants, keeping tenants and Section 8 haven’t been a problem. Property management is doing a great job and the only thing you have to do is make sure you’ve got it right for those inspectors, not the Section 8 inspectors, the city inspectors when they come out to give you an occupancy permit. There’s no tolerance for anything except a well-done code-compliant house.
It sounds like you’ve got incredible renovations and I’ve seen some of them. I know that they are pretty impeccable. Talk about the management services out there, if there’s anything different about them compared to other markets. I like to make sure that investors have a good feeling about the management side of things. We put them directly in touch with the property management company so they can build that relationship and ask whatever questions they want to ask.
Property management to me is one of the pivotal reasons that you succeed or fail in the single-family rental business. I’ve had bad property managers. I know what it’s like to have a bad property manager. We outsourced property management to a third-party. The property management company lives right there. Their offices are right in the middle of where all of our properties are. They are literally a ten-minute drive to any of them. They’ve been there for many years. We’ve been with this property management company for a few years. We haven’t had an issue in a few years. That is uncanny that I can say that, that you haven’t had an issue in a few years with the property management company. I can name other cities where there’s an issue every day with property management.
The property management company we have is experienced. They’re responsive. I’ve been comfortable. I had a dear friend said to me, “I want to buy a single-family rental. Where do you want to put me? I know you’re in all of the cities.” I said, “I want to put you in Chicago.” He said, “Done.” He totally trusts me. He didn’t know the single-family rental business and he said, “Tell me why.” I said, “The rents are the best ratio to what you’re paying that we have or that we’ve seen in the country. It’s got the best property management overlay and the best Section 8 office I’ve ever experienced. I could name some cities where it’s a nightmare. I wish I could, I don’t want to embarrass that city but there are some bad Section 8 houses out there.” This one is like the perfect storm and I’m happy to put a really close friend right into the mix of all that. I’m happy with the property management company. I’m comfortable having them be your property management. We’ve worked it out with them that when someone buys a property from Norada, they can pick up the property management company if they want to or if they have their own, they do their own.
You’ve got a big market, lots of stability, a strong GDP, lots of inventory, great rent-to-value ratios, solid brick houses, inventory that you’re renovating with. Essentially, it almost sounds like a complete gut and rebuilds but you’re clearly replacing mechanicals and providing very nice finishes that impress tenants. You’ve got stellar property management tied in with that. It’s a complete package. I’m trying to poke a hole in this but there’s really not much to poke a hole into.
You’ve worked with me for years, Marco. I’m a straight shooter and I’m very candid. We talk about the pros and cons of a market. I’m pretty high on Chicago and I believe Chicago sells itself. Rental demand is high and so are the rents. Home prices are reasonable for the investor. Chicago homes are appreciating, job growth keeps coming. Churn keeps people renting. What I mean by churn, there are a lot of people being pushed out of the metro, out into jobs in the suburbs and they can’t afford the suburbs, so they keep renting where they live, which is where we are. Their job may have swung from Metro to suburb but they’re not going to move to the suburbs. The rents in the suburbs go crazy. We were in the sweet spot to even the churn that can be going on. To anyone looking to invest in Chicago, come into Cook County, come into the zip codes I shared with you and look at what Norada offers.
It’s a great market and if anybody goes out to Chicago and pays it a visit, it’s an entertaining city. It’s a beautiful city. It’s got a great downtown. One thing I recommend doing is taking the mob tour where you can see where Capone and his whole gang of cronies lived and toured and shot up the place. John, I want to thank you for coming on. Any last comments?
Come see a Chicago Cubs game or White Sox, see the Black Hawks, the Bulls or the Bears. This sounds on fire with excitement. As you’ve pointed out, there are some cool fun things to do. I don’t know how strange it is but it has 50 miles of shoreline.
How much of that is an actual beach or would you call it a beach?
I don’t know what percent. It’s 50 miles of shoreline on the perimeter.
John, thanks for coming on. For those of you, if you’d like more information on Chicago and the inventory, we have their contact. If you’re not in contact with an investment counselor, email us or go to our website, fill out the form, you’ll automatically be assigned to an investment counselor. You could have a free strategy session to learn more about us and find out how we can help you. If you have a question about real estate investing, go to our website, PassiveRealEstateInvesting.com. Click on the Ask Marco button at the top and I do try to get back to everybody and answer their questions. If you haven’t already, remember to subscribe. Help us spread the word. Visit us on iTunes. Leave us a rating and review. Thanks for reading. We’ll see you in the next episode.
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