Welcome to Passive Real Estate Investing. I’m your host Marco Santarelli. Well, I haven’t done a market spotlight in a while and I thought it’s maybe a good time to do another one here. So the question is, why should you consider investing in the Chicago area market. Chicago is such a large market. We’ve been in and out of Chicago for many, many years, had a lot of success. It is a mega metro area with a lot going on. And so that’s one of the things we’re going to talk about today.
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So what I did is I brought one of our fantastic property providers in the Chicago land area on the show with me here. So his name is John. John, welcome to the show.
Thanks Marco. I appreciate the invite.
Well, it’s great having you on, I know we’ve had some conversations about Chicago and what’s going on there and more importantly, why should anybody consider investing there? Now? I will say we’ve been in Chicago for many, many years, not necessarily every month or every year, just because of a lack of inventory among other reasons. But Chicago is interesting because it’s such a mega metropolitan area and there are so many companies that are out there. It’s one of the world’s richest cities. It’s often rated as having some of the most balanced economy in the United States. There’s 12, at least that I know of 12 fortune global 500 companies and then 17 financial times 500 companies. So it’s a strong economic center. You’ve got a lot of people that live there that move there. And I think it’s a good market to look at. So why don’t we start with kind of the 40,000 foot level of the market. If I were to come to you and say, why should I look at Chicago? Or why should I invest in Chicago? What would you tell me?
Well, first off Chicago, I think is a very unique market, very diverse there’s endless opportunities, whether you’re in the actual city of Chicago, or if you’re out in the south suburban areas where we do a lot of businesses as well, the growth that we’re seeing personally out here is logistics, right? There’s a lot of infrastructure getting put in because the mid America here is the central hub for railroads for anything to get shipped out. Uh, on top of that, Amazon is bringing in it and about every south suburban town, new fulfillment centers, there are seven of them. I know of right now that are getting brought into the south suburban towns. There’s more going back up into the city. Google is in west side, Chicago tech is a big hire right now, uh, in the west side of Chicago. All those things are possibilities for young people that want to advance and move up with plenty of housing in the Chicago land market.
Yeah. We just updated a, an article on our website, which anybody listening to this as welcome to go and check out. And in fact, I’ll make sure that we put the link in the show notes, but it talks about the Chicago Real Estate Market. And we try and update that, you know, once or twice a year. What’s interesting is I’m just reading right off the website. You mentioned, you know, it’s a logistical hub and it absolutely is. In fact, it has some of the largest number of federal highways and railroads in the entire country. But one of the quotes off of our webpage here is Chicago is an international hub for finance culture, commerce, industry, education, technology, telecommunications, and transportation. So you stopped to think about that. It just goes to show you how broad of an economic base the city has. And because of that, it just brings in all kinds of jobs and provides all kinds of jobs to people, you know, in and around Chicago land. So I think that’s a strong thing to look at because I know that when I look at markets, I want breadth and depth. I don’t want what I call one trick pony markets that are dependent on one thing like oil and gas, for example. So you’re in a great market.
Yeah. I think Chicago offers all those it’s multicultural. It’s still, uh, you know, on top of just job growth, it’s a tourist destination as well, right? Where all these people come in, which creates more revenue. Uh, and, and that in turn is more job growth for everybody. Chicago is a beautiful summer location that people still want it as a destination to come see a ball game, right. Come down here and see, see some of the shows that go on Lollapalooza or some of these things that people still make Chicago, their destination in the summertime, because quite honestly, it’s one of the nicest cities you ever go to. It’s a lot of fun.
Yeah I know with COVID aside, of course, the tourism and hospitality industries there in Chicago have added thousands of jobs. And that literally has created billions of dollars indirect spending by visitors who actually come to the city and, you know, spend time there. And, you know, I, I personally don’t think of Chicago as a tourist or a vacation destination, but, you know, I guess that’s just being ignorant and biased because I don’t know enough about it to make Chicago a destination, but it generates billions of dollars in direct spending by visitors.
Correct. There’s still a lot of traffic that comes through. If you look at the airports, the midway or O’Hare right. Or there’s the international hub. Um, a lot of people come to this city and a twist of that a little bit is me personally. I think Chicago is undervalued compared to the other major cities in the United States. So that there’s huge opportunity with that compared to New York city or compared to LA, uh, I still think, you know, us being the third largest city that we’re undervalued there, there’s still a lot of great opportunities.
Well, that’s kind of a good segue. I was looking at some recent data from the Illinois Realtors Association and I was actually kind of surprised to see how much the median price has increased year over year from May of last year, which was after, you know, the start of COVID to May of this year, 2021, and the median price jumped up 19.2%. That’s incredible. I wasn’t expecting that. But as I look at the updated information on our website, I was actually surprised to see how much of an increase it actually had. What are you seeing there as far as trends in terms of price, growth, rent growth, and maybe employers that are moving in or out. Can you comment on that a little bit.
As for the increase in value? There’s not a ton of inventory on the market. Well, with the COVID and the pandemic, I think it’s put some halt to some of the inventory that can go on the market and prices have increased tremendously. A lot of new incentives are out and it, because we’re a metropolitan area, there’s a lot of new incentives for home ownership to all inventory is going low, quite honestly, on the rental side to be an investor on rental spot or rental houses, because a lot of people are coming into home ownership, which in turn, that’s a supply and demand issue. At that point on the rent side, we don’t have nearly the amount of rental houses that we used to have say just three years ago, because a lot of people have sold them. So rents are going to go up. I actually just left one of my south suburban towns. HOD has put tons of money back in the financing, right? So that’s government assisted, maybe some section 8, maybe some VA assistance pod is providing a lot more dollars to that. So rental opportunities are going to be endless, I think. And I also think rents are going to increase because there’s not going to be as much supply, you know, to go around.
It’s interesting that you mentioned a tight supply. I mean, a common problem all around the country right now, some markets far more so than others, but I know that I was looking at data earlier this week. And if you look at all the major metropolitan areas, not just the major cities like LA New York, San Francisco, Chicago, but all what I’ll call tier two markets, inventory levels are down below three months of supply in Chicago. As of this May just past May, you guys have only 1.4 months supply of inventory, which in the grand scheme of things is virtually zero because that stuff is getting sucked up very, very quickly. So the turnover is very high and that’s, what’s also helping to push property values up. But it’s, uh, you know, this lack of supply is a common problem right now across the board. Now, the other thing you mentioned too, is rental opportunities. Chicago, I’m trying to remember the exact statistic, but something like 50, just over 50% of the Chicago area population are renters. Is that about right? As far as what you know?
Um, I don’t know the actual percentage per se. Um, I do know there is endless supply of runners in Chicago. Uh, I’ve been in this business since 2008 and there’s never been a lack of renters. I can find a renter. So did you put anything out that that’s a good quality rental, uh, and will be rent? Yeah, it’s not to sit there. Uh, there’s a lot of good renters. There’s good quality renters here. Right? I mean, there’s a lot of good people in Chicago and, you know, I I’d say a lot of people from the Midwest, other hard working and, you know, I got big hearts. They, they truly do, you know, I’ve been here my entire life and, uh, there’s a lot of good renters that made a place to live. And, uh, you know, Chicago is a good market for that.
Yeah. And having good rental properties, a key thing, you know, just to echo what you just said, but I’ll add to that. I’ll say that good rentals in good neighborhoods makes for a very successful formula in terms of investing. So let’s, uh, go ahead. Yeah. That’s
I would agree with that good neighborhoods with quality tenants. That’s how it has to be done.
Let’s segue to talking about neighborhoods for a minute here. What kinds of neighborhoods are you focused on in the Chicago land area? I know that you’ve got a foot in Chicago proper as well as a foot outside in more of the suburb areas. So what kind of neighborhoods are you focused on and maybe comment as to why you’re picking those types of neighborhoods?
So what we focus on and we’ve had since 2008 is, uh, south side of Chicago and the south suburbs and the state of Illinois running the numbers of what the best return on your investments are. That is where I feel you’ve minimized your risk. You’re in a, say a B to a B minus neighborhoods. You get good rents minus the taxes and the purchase price. You can get the cap rates that are good. They’re, they’re worth your investment. You know, there’s plenty of rentals in that area and you get good quality tenants. So those are the pockets we really choose on of where we stay. I mean, there’s some suburban towns that if people had to look up, you could say, I mean, Cal City Park Forest, or some south suburban towns, and then, you know, 79th street, south in the city of Chicago, which I know most people will know what that means because they never been here, but that’s like, that’s an east west street that we try to stay south of. And we know which blocks to be in on the south side, south side of Chicago in order to do business. I think here in the Chicago land market, you’ve got to have boots on the ground and you gotta be able to know where these pockets are, know the municipalities you’re dealing with, know what the, who the inspectors are and that way there that’s how you become successful in, in the rental game, you know, in the Chicago land area.
Is it fair to say that the, uh, areas and neighborhoods that you’re focused on are kind of bread and butter communities with predominantly blue collar demographics?
Yeah. Well, where we stay at, you know, there’s a lot of municipal workers, right? Some government workers, teachers, tradesmen, you know, that’s a lot of the population of where we buy our houses that we’re looking for, the standard house, that the median house that say anywhere 150 to maybe 250K but that’s 80% of your population is going to buy that house or live in that house. Right. That’s what someone can afford. That’s what they can rent. I’m looking for good. 3, 1, 3, 2 houses, three bedroom, one bath, three bedroom, two bath houses that they could raise a family. And it’s a good community, good schools, good amenities around them. That’s what we’re looking at in the areas.
We’re in probably a good time to ask you about section 8 opportunities and the section 8 rental housing program. Since we’re talking about neighborhoods, first of all, let me ask you this. Approximately what percentage of the inventory that you are turning over and selling is section 8 based. And then let’s talk about section 8 as a program.
So most of what I’ve done since 2008, I’d say 80% is section 8. Um, it does not mean that that’s all I focus on. It means that I will accept the market tenant if they’re qualified, but section 8, we have learned the ins and outs of it. And we’ve learned how to manage ourselves through it. And it’s a very successful program if you get the right people in place. So somewhere around 80%, I’d say is section 8 with the properties we provide.
Some people have, I dunno, maybe not. Uh, I would call bad tastes just from what they hear or read online. They feel that section 8 is maybe, uh, a concerning thing. It’s not a good thing. It may be implies that you’re in a lower income area. Can you maybe talk about section 8, the pro and con of it? Because I think there’s a lot of misinformation out there.
Okay. The pros of section 8, number one, whoever your tenant is carries, what’s called the voucher. Okay. There’s a housing choice voucher. It’s called and it’s for. So it’s all based off of bedrooms. One bedroom, two bedroom, three bedroom. That’s how they’re determined their voucher size. In order to receive a voucher, they have to submit documents no different than we have to submit documents for income tax. They have to show their caseworker what their income is. And then off of their income, they’re given a percentage of what they have to pay. And then the government, the federal government will pick up the rest of it. And that percentage could be anywhere from, they pay 60% of their rent all the way down and they pay 0% and the government pays a hundred percent. So great example of that percentage that I think is a pro is during the pandemic, right?
And some of these towns that people couldn’t afford rent or do things the federal government paid their rent, and it was direct deposit in your account by the first of every month or the second, depending on if there’s a holiday, you get direct deposit of their percentage. If it’s 60% or so on. So forth with that, there’s also inspections that come with it. They hold their tenants accountable. If they break something, you have an annual inspection. If they break something, it is a tenant responsibility and it’s listed right on their inspection. So annually on top of say every three months, or try annually with your management company, they are back in the house with pictures and documentations to hold these tenants accountable for the subsidies that they’re receiving. If they do not cooperate or don’t want to follow the rules that are presented to them, they can be removed from the voucher program.
So the pros are there’s little bit of a guarantee to it. I think on the rent side, Chicago is the second largest voucher holder and the United States. So that’s called the housing authority. But what you have to understand is that Chicago proper is a housing authority. That’s called CHA. And I can go on to all those, but there’s a cook county housing authority. There’s a park forest housing authority. There’s an Elmhurst housing authority. So there’s all these other minor housing authorities outside of cha, which is Chicago housing authority. So there is a abundance of voucher holders in this Chicago land market. So it is a perfect example, you know, how you can go out there and get renters and not every landlord wants to deal with it. Right? A lot of them I think are either misconstrued or maybe had a bad experience or didn’t handle the relationship properly with the tenant. And they don’t have to rent a section 8. You know, that’s a choice you get to make. So not every landlord in a Skyla market rents the section 8. I am one that will I, I rent a section 8. So I think there’s more pros than there are cons to dealing with section 8, myself personally.
Yeah, well, I think a lot of people like the predictable, consistent and reliable income that comes in direct deposit into your bank account, that’s not coming directly from the tenant. It’s basically a subsidy coming from the local or regional government. And here’s another thing I don’t know if this is true, John in your area, but I have found often with section 8, they will pay above the fair market rent from a traditional lease compared to the section 8 rents. Is that true in your area?
How they word that? And I’ve sat through some of their classes of how they word this, they call those opportunity districts. Okay. And I’m sure this is anywhere in Chicago. I know for sure. Yeah. So they have picked out neighborhoods that they feel are better neighborhoods for their voucher holders and they will pay above market rent in those neighborhoods. And it’s, it’s set, but they’re called opportunity districts. So, so that’s what you look for when you’re trying to find those neighborhoods where they pay more.
Okay. So the bottom line is you will often find section 8, paying above market rent. And so if you happen to own one of those properties that has a tenant, a section 8 tenant that qualifies you will receive a higher revenue for your property than you would with a traditional lease. Correct. Interesting. Okay. Okay. So nothing has changed and that’s pretty consistent. Okay. Let’s talk about the properties. Um, talk about the types of properties that you focus on, what you’re renovating and turning over as far as turnkey rental properties. So we have an idea of, of size bedroom, bath price range. These are the types of things that I like to know.
So what we focus on as I stated earlier, is we look for the average family home, right? Three bedroom, one bath, three bedroom, two bath. The families can come in and they can grow in, you know, and live in a nice community. We look for price points on the turnkey side, 150 to 250 K, approximately that we try don’t, uh, try not to go above that. What we do when we go into these houses, they’re full gut renovation. I get licensed plumbers, electricians, furnace roof than all the inside trims flooring. We go through these houses with full plans and permits and we update everything. I mean, it’s true that the plumbing has gone through tremendously. There’s some sticking points that I go through. When I look at these houses and number one is there’s gotta be water pressure places, right? So we’ll rip out walls in the bathroom. We’ll put a new tubs. I put all new copper pipes in to make sure we have water pressure and make sure drains drain properly. Um, I want people to have good homes to live in because then they’ll stay longer. And you know, when you rent houses, if you get a mistake four or 5, 6, 7 years now, you’re making even better returns on your investment because you don’t have a turnover every year. So I try to get these tenants, understand that they get a beautiful house when they start, and we keep them for longer leases than the average landlord. So the plumbing’s done, the electrical is done. We go in, we update electrical panels. We check out, make sure all the GFI’s are updated and up to code. Furnaces, they’re checked out and certified. If we think there’s anything bad with it, the furnace is removed. We re had a new furnace, a new AC roofs are again, certified or removed a tear off replace if needed.
And then all the new interior are put in new cabinets. Countertops. We put tile on the shower. Walls are all tile tile on your bathroom, floors, your kitchen floors. And then there’s either a hardwood rescinded and finished in the living room and bedrooms. Or we put down a vinyl flooring. If the hardwood is not there, we do not put any carpet in our units over the years. We figured the carpet doesn’t last that long. And, uh, you end up removing it. And quite honestly, a lot of people are finding out what their allergies and other things that they have now. Um, a lot of people don’t like carpet. So, so we’ve moved to a, more of a vinyl flooring for everyone. It also looks nicer.
It looks great, and it lasts longer. You have less maintenance, cleaning, turnover and replacement over the years. So it is definitely the better way to go. And your scopes are pretty extensive. And I think that’s rather important, especially when you’re dealing with an older age for the housing stock, because let’s face it. You know, a lot of the property in Chicago is decades old, and that’s not a bad thing. We’re talking about mature areas with, you know, just an older housing stock. But when you’ve got an extensive renovation, when your scope of work is that broad, then you can take something over that is like new, with no deferred maintenance. And it makes for a great rental.
A hundred percent. And also I didn’t get into the basement side of that as not as you talk about the older homes, you know, we check for some pumps, we make sure there’s drain tile. There’s an egress window. We make sure the drains connected to the drain tile stall. You know, we check for leaks. We don’t want any water in these basements. These houses are gone through, you know, extensively with my team. And I’m obviously the one who oversees it all, but we make sure that they’re getting something that’s for sure. A good turnkey rental.
Are you finding enough inventory with the market conditions today, or is that a challenge?
We’ve been able to acquire properties, not nearly as many as we would, like. We’ve kinda diverted into some newer things a little bit that we didn’t focus on as much. We were strictly single family for a long time. And I went into some more, two and three flats now. So, um, I found a couple of those, but, um, there’s definitely a scary on it. As you’ve already said, the inventory is low. If you’re on MLS, um, or you’re looking there, there’s not a ton of inventory in Chicago landmark, but I do have other avenues that I generate leads and then get things off market. But I think we’ll be okay probably for an extra year and a half, two years. But with this pandemic, a lot of my off market stuff, whether it be an auction or a sheriff sale, or some of those things, the courts were shut down for like 18 months. So that’s the backlog. So in about, I’d say another year, year and a half, there’s going to be some more shortage, right? Where, where some of these deals might not come so sure. But as of right now, we have a couple of opportunities and some existing opportunities because, you know, we manage over 250 units. So there’s all, I always have my hand on the pulse of whoever I manage and to see what stuff is and then what we can do with it.
So before we transition to that final section of this conversation, which is property management, just a quick question, as far as inventory mix, what percentage of the product that you are looking for renovating and turning over is single-family versus anything else, like a duplex or a two flat, or larger.
I would say 80% of what I looked for is the single family. Um, we we’ve just switched recently. I picked up four, three units just because they came to me. But other than that, everything else is single family that we’re renovating at this point.
So whoever’s listening to this. I mean, it’s probably just important to realize that true with pretty much, most every market that we’re in 80% of the housing stock or the inventory available as a turnkey rental that you’re going to find or purchase is going to be single-family detached. And then the other 20% is going to be a multiunit of some kind, whether it’s a duplex triplex, fourplex, or what you guys call up in the Northeast, a two flat, three flat, it goes by different names, but essentially that’s what you’re looking at. So John let’s kind of wrap things up here with property management. I know that you have a couple of family owned businesses, and I know your wife helps out on the property management side, along with, uh, some ladies for support, uh, talk about the property management services that you have there. And, uh, anything else you want to share about the management side of things.
Yes, so we own, we stay on if we sell any turnkey, is we a management company in place? My wife runs it. She’s in the office everyday with it. We have three girls on staff. Uh, one girl handles maintenance calls all day long. Another lady she collects rents all day she’ll call and make sure rents are getting collected. And then our other lady is more in the leasing department checking on waters. And then she’s also putting up pictures for anything that we’re trying to lease out or anything like that on the websites. Our management company is an extensive, uh, I feel, uh, obviously because we’ve done it and sure I’m biased cause it’s one that I’m part owner of. But, um, there there’s a lot that has to be done in the Chicago land market. And I think through the years of us doing this, we’ve learned some things that I think are really beneficial.
They make it to maximize returns for investors. Uh, number one, I spoke of a little bit already is that we have rapport with the people we do business with, you know, uh, when we go out to these municipalities and I see inspectors, I see section 8 inspectors, or I need permits or I need something done. Um, they know who I am and I, and we get things accomplished because we’ve been doing it so long. And these towns, they know our work and they know what the, what to expect. So, so we get more done that way. Number two, your water bills and the Chicago land market. And I don’t know how it is across the rest of the United States, the water bills, if the tenant doesn’t pay, um, travel with the landlord, they travel with the investor. Okay, well, we make sure the water bills are checked monthly.
Every unit we have, we get a duplicate water bill. There’s some, because I know a lot of municipalities I’ve seen water bills have other investors that have been upwards of a thousand, 1500 bucks, $2,000 that weren’t tracked monthly, cause we’ll call and have water shut off and we’ll do some things. And that we’ve learned through the years. If there’s a problem, any type of say, say something happens to the house or we have a storm here, we’ve become very good on how we handle those and mitigate those losses. Now that we have insurance adjusters that we recommend, or have you use, we have ways of going about things that, again, I, we try to maximize returns and sometimes I don’t feel other management companies look at those types of things. We have a tax consultant that goes to make sure we appeal taxes. So there there’s a whole team we’ve put in place of a way we go about this to make sure that this investment is a good investment and we get the returns that are needed.
And then on top of it, the tenants, all of them know me, I’m the guy that goes, and I meet every single one of these tenants. They know me personally. So they have, I have a rapport with these people. They understand that I’m not, I’m going to do what I say I’m going to do. So it makes the relationship way easier if I stay on and manage, because they already know who I am. And, and nothing’s really changing. They still get to deal with me and, you know, rents get paid and it’s, uh, it makes everyone make money and hopefully buy more.
Yeah definitely. Well, I mean, everything you just described is what I always refer to as full service, professional property management, and you’ve pretty much covered all the bases there. So the one thing that’s interesting about what you do that I don’t think I’ve ever heard anybody else is you actually challenge the property taxes. You actually fight them with the, um, county or municipality to try and keep them at bay or lower them. I don’t know of any other management company that does that. That’s pretty interesting.
In Chicago, you know, that’s one, if you look at anything in Chicago, that’s one of the negative factors, right? As is they feel the taxes are getting high in the south suburbs and then in Chicago. Well, with that being said, we have to find a way to combat that. And I have a tax consultant that I use anyone who’s inside of my management company. It gets referred to him. He doesn’t get paid unless he saves you money. So all you gotta do is send them the information. And every year it’s an annual deal. Just say, fight them every year. And some of them, he saves you a bunch. So I’m yelling, it’s a little, some he doesn’t save, but it has to be done. Right. Just to make sure that cause that’s right to your bottom line, if you save money. Sure. I mean, that’s straight to the bottom line.
It’s such a brilliant value added service that you’re providing that I don’t understand why other management companies don’t do the same thing. It’s just, it’s very interesting.
Well, that’s a, it’s a learn a long time ago. You have to do that in Chicago, but it’s a, it’s a must.
Well, pat yourself on the back for that. I think that’s brilliant. Um, well, John, that pretty much wraps it up. Is there anything else you want to talk about or mention about the market or the investment opportunities before I wrap up this episode?
Well, just, uh, Chicago land again, I’ve been doing it since oh 8, uh, in the Chicago land market, south side, south suburbs. Um, I think it’s a great area. I think we do extensive rehab. We, we provide great product. Uh, I’d put my rehab up above about anybody in the area. Quite honestly, there’s leasing agents and some other people that I deal with in my field out here that, you know, kind of tell me when law property has something that they want to come run it because they know what they’re going to get. Right. So I’ve kind of set a standard of being one of the better property providers in the Chicago land market. And a lot of people want to rent from us. So if you’re looking for, you know, a good, full turnkey investment, you know, I think we’re a great fit and uh, you know, we’ll do it with integrity and pride and hopefully build from there.
Yep, and that’s exactly how you have been to date. So we’re very happy to be working with you and our clients also are very happy to have invested with your team there. So keep up the good work. Well, John, thanks for taking the time here today. I appreciate you coming on and educating us about Chicago and the opportunity there.
Uh, I appreciate you being on Marco and look forward to doing future business with you.
Great, well just hang tight. So for everybody listening, if you’re interested in learning more about Chicago and the opportunities there, just contact your investment counselor here, we’ll, we can provide you more information, spoonfeed you, whatever you need, get you in touch with John and share whatever inventory is in the pipeline. Keep in mind that there might be a little bit of a delay in that inventory just because things come in waves and sometimes it’s a little bit tight, but other than that, we appreciate you taking the time to, uh, tune in today. Remember to subscribe because we drop at least one episode out every single week sometimes with the Ask Marco episodes. So I hope you enjoyed the show today. Thank you for listening and we will see you all on our next episode.
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