I regularly take the “L” around town and, sometimes, even out to my suburban Chicago investment properties when I want to see how a renovation is going. A couple of weeks ago, I ran into a fellow investor, Ed, who also takes the train to-and-from some of his properties. He hasn’t been investing in real estate as long as I have, but he’s got a good head on his shoulders and works hard. While on the train, he asked me if I thought buying a condo in Chicago might be a good investment. With so many new residential towers going up in and around downtown, it’s no wonder he asked. Looking out from the train’s windows, you’d think there’d been a run on condominiums that left investors scrambling to buy and build more. But, as Ed and I discussed, looks can be deceiving.
Does Buying a Chicago Condo Make Good Investment Sense?
According to the Council on Tall Buildings and Urban Habitat (CTBUH), more skyscrapers and tall buildings were completed worldwide in 2017 than in any year previous. Chicago, in particular, ranks second in the number of completed tall buildings in the U.S. and sixth in the world. But, what’s really interesting about this data is the increase in the number of residential construction projects versus commercial. In Chicago alone, 14% of its tall buildings function as mixed-use properties and 38% are home to condos and apartments.
At first glance, this shift certainly seems to suggest that Chicago real estate investors and developers are simply answering the call to provide more housing. After all, though Chicago’s housing market is recovering at a slower clip than most American urban real estate markets, it is recovering. If you’re a real estate investor who wants to expand your rental investment holdings in Chicago, you might be tempted to look to condos as a sound opportunity–especially in light of the development frenzy happening around you.
However, there are several reasons why buying condos in Chicago don’t actually make for a good investment strategy. Before you buy, consider these reasons carefully.
In spite of the growing interest from real estate investors in buying or developing downtown condos, the interest from home buyers and renters hasn’t kept the same pace. Whether the units are for sale or for rent, they’re staying on the market longer due, in part, to the expense of living in a condo. When potential buyers see that they can get more for their money by moving into a single-family home in an up and coming neighborhood, that tends to be what they do. In response, the sale prices of Chicago condos are dropping. This trend is only going to continue as prolonged vacancies drive more investors to push their rental holdings out of their portfolio, further increasing inventory–inventory that’s already at an all-time high. The number of new condos that came on the market in the last two years almost doubled from previous years. With supply quickly outstripping demand, the potential for realizing good returns is sure to lag behind.
Homeowner Association (HOA) fees can make the cost of buying a residential condominium to rent out or sell a profit-draining venture. In order to generate an income from the rental of a condo, the money you receive has to more than cover the association fee, as well as the mortgage, property insurance, and taxes. Association fees, already high in Chicago, are on the rise too. So much so, in fact, that the cost of keeping up with these fees might outpace your ability to increase rents, dampening your monthly returns. The cost of HOA fees can also deter buyers since these fees are not rolled into mortgage loans and can significantly increase a homeowner’s monthly expenses beyond what they can afford.
Additionally, some Chicago HOAs also charge special assessment costs to condo owners if the building needs an unexpected or time-sensitive repair. The expense of fixing items like the roof, the foundation, an elevator or stairwell, or the parking structure–if there is one–can add up to several thousand dollars. That hefty price tag gets divvied up between the units’ owners. In the end, the potential for spending too much on all condo-related fees poses too great a risk to your potential profits in the current market.
In addition to the high fees that HOAs can, and do, levy on condo owners, they also set strict guidelines on renovations. When buying and renovating a property that falls under an HOA, you’re agreeing to their terms for and their control of the rehab. This can include anything from the type of fixtures you install to the color of paint used on the walls. Even the most permissive of associations will still require that you get their approval before you begin your work–and that can take months to obtain. Whether you want to rehab and resell or buy and hold, any obstructions or delays to your renovation can seriously cramp your style and impede your profits–and, unfortunately, there’s little you can do about it.
Take Control: Invest in Single-family Homes
As an alternative to investing in condos, I suggest sticking with single-family residences. As long as you’ve got a reliable lead generation strategy in place, there’s no reason investing in Chicago real estate shouldn’t produce potentially good returns over and over again with single-family houses. Not only do you get to maintain control of your investment from the time you buy until the time you sell, but you get a say in how much you’re willing to spend. Unless you purchase a home in a neighborhood subject to an HOA, monthly association and assessment fees are a non-issue.
Also, with so many of Chicago’s neighborhoods in transition–like Logan Square, Humboldt Park, and Little Village–buying a house from a distressed homeowner has a better potential to produce a bigger return than a condo. There is a growing demand for homes in these and many other Chicago neighborhoods that have yet to be filled.
If you don’t have an effective real estate investor lead generation system, however, your hopes of finding good deals on potentially great homes could get derailed. Luckily, there’s an easy way to stay on track.
The Best Way to Find Good Deals in Chicago
I’ve been investing in single-family homes in Chicago for almost as long as I’ve been taking the “L.” In taking trips around the city and its suburbs, I’ve watched Chicago grow and change sometimes literally right under my feet. My real estate investing business, however, didn’t really take off until I found a way to find motivated sellers of distressed homes. What changed? I became an independently owned and operated HomeVestors® franchisee. I now have access to the top-notch marketing tools I need to keep the leads coming my way. As a result, my investment portfolio, and my potential returns, tower over many of my investing peers. It looks like Ed’s headed that way too.
For more leads and more control over your real estate investing business, contact HomeVestors today!
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