When I told my new neighbor, Bryan, that I am a professional real estate investor, he was immediately intrigued. He said it was after he’d done some reading on the best Chicago neighborhoods for real estate investing that he’d chosen to buy his home here in West Town. But, he didn’t want to stop there. He’d done well for himself over the years and was in a position to buy a few more properties around town. So, he was considering areas like Logan Square and Pilsen for purchasing rentals since the median rents in those neighborhoods are pretty high. He’d also read that owning buy-and-holds is a good investment strategy, generally.
While there were benefits to being a landlord in Chicago, I told him, he should keep in mind that there are challenges too. Before he started spending his hard-earned cash on property to renovate and rent out, I wanted him to know what he could realistically expect as a landlord and, then, decide if it was right for him.
What to Expect if You’re Thinking of Being a Landlord in Chicago
Bryan’s interest in buying income property in Chicago is not uncommon amongst new investors, and it’s certainly understandable. Online, buy-and-holds are often touted as a great introduction to the world of real estate investing and are even championed as a somewhat safe investment strategy when you’re just starting out. After all, if you can buy at a good price, renovate under budget, then get someone else to help cover the mortgage, you’re as good as green—or so they say. And, in a city like Chicago, where the price of home ownership coupled with the overall cost of living exceeds what many people can afford, renting is the best, if not the only, viable option for residents. So, finding someone to help cover the mortgage on your rental property isn’t usually hard.
But, being a landlord isn’t always easy either—no matter your level of experience. So, if you’re thinking about buying property to renovate and rent out, consider the following points I offered to Bryan before you buy. Trust me: the more you know, the better your returns can be.
Benefits of Being a Landlord
To start, let’s consider the benefits of being a landlord. There are several and, with enough time, they can potentially add up to the kind of money in your pocket that equals a profitable real estate investing career.
- Passive income. One of the main attractions of becoming a landlord is the opportunity to make passive income. After the mortgage is paid and all operating costs are covered, everything leftover is yours to keep. And, if you purchase property in neighborhoods where rents run high, like Logan Square and Pilsen, those leftovers could be substantial—provided all of your expenses, including upkeep, taxes, and insurance, remain low.
- Tax deductions. As a landlord, you can also take advantage of several investment property tax deductions that can help to offset some of the heftier costs of rental property ownership. For example, the cost to renovate, maintain, and market your units may all be deductible. The same is true of certain operating costs, including the expense of running a home office, and any interest accrued on the mortgage or renovation loan. It’s also possible to take a depreciation deduction to account for normal wear-and-tear and obsolescence. And, as an investor in Chicago property, these tax deductions are a big plus and an even bigger necessity. Not only are property taxes high in Cook County, but the combined state and local tax burdens are some of the highest in the nation.
- Property appreciation. Over time, even with normal wear-and-tear, property tends to appreciate in value. For this reason, it can be less risky to buy and hold real estate than it is to buy and hold stocks. And, if you start investing in real estate at a young age—or, at least, younger than me—you’ll have a better chance of weathering any market storms that may occasionally blow your way. And, the most recent housing crash aside, Chicago real estate doesn’t typically take a deep dive when the country’s economy does.
Challenges of Being a Landlord
Unfortunately, the benefits of being a landlord are never guaranteed, which makes the challenges equally, if not more, compelling. Review and weigh these challenges carefully. Your ability to actually realize career-making returns as a landlord depends on your ability to successfully navigate the drawbacks—and potential pitfalls.
- Tenant problems. One of the main deterrents to becoming a landlord is having to deal with tenants—and for good reason. Even the best of tenants can create the worst of problems if they fall behind on the rent due to a job loss or bring in a roommate who later refuses to pay. But, unfortunately, sometimes tenants just habitually pay late or flat out withhold the rent for no good reason. Whether they have an excuse or not, you’ll still have a loan payment to make and you’d better make it on time; landlords can get foreclosed on too. In addition, if there’s any damage that’s been inflicted on the property and the repairs cost more than the tenant’s security deposit, you’ll have to cover the difference. Should you want to evict a troublesome tenant, you’ll need to cover all your bases. The road to an eviction in Cook County is long and fraught with paperwork that can try even the most fastidious of landlords.
- Holding costs. Anytime your Chicago rental investment is vacant, whether it’s while performing the initial renovations or in between tenants, you’ll have holding costs to pay. These include the mortgage, utilities, property and liability insurance, and taxes. Without a tenant in place, these financial obligations can really add up and become difficult to meet. Cook County property taxes, in particular, can sock it to your bottom line. Local property owners, already no strangers to high taxes, saw a significant increase in their tax bill this year. The average taxpayer in the northern suburbs of Chicago, for example, received a 3% increase; taxpayers in the southern suburbs averaged a 5% increase. That’s a lot to pay out for a property you aren’t making an income on.
- Property maintenance. The expense of keeping your property in good working order year-round can be considerable. And, you don’t get to take a break from your responsibilities as a landlord in winter when everything is closed due to a snowstorm or in the summer just because you’re away on vacation with the family. Everything from issues with the plumbing to a broken heater must be fixed as soon as possible or your tenants could have reasonable cause to withhold the rent. The City of Chicago Residential Landlord and Tenant Ordinance states that they can even sue you. But, it’s not just new issues that pop up from time-to-time that you need to stay on top of. If you want to get top dollar from your current and any future tenants, you’ve got to keep everything running smoothly and looking good, which, in Chicago, isn’t cheap.
In my experience, buying, renovating, and selling houses is a lot less trouble than dealing with rentals in the short run or banking on an unknowable future housing market in the long run. Being a landlord is just a plain hassle. And, while there are risks to investing in residential property of all kinds, flipping single-family homes gives you the option to get in and out during a market you know and within a timeline you have more control of. Then, you can use your potential returns to invest in additional properties—something that tying up your funds in rentals can hold you back from.
That doesn’t mean you won’t still have to work hard as an investor, because you will. But, with the right tools that generate the best leads, flipping houses is a good business to be in—and a better investment strategy than being a landlord.
A Better Investment Strategy Than Being a Landlord
Long ago I was a landlord. I took some well-intentioned, but misguided, advice and spent my hard-earned cash on a couple of rentals when I was just starting out. I wouldn’t call it a great introduction to real estate investing, though I did learn a lot. Unfortunately, after dealing with several evictions and maintenance issues that never seemed to end, I mostly learned that being a landlord was not for me.
But, buying, rehabbing, and selling homes as an independently owned and operated HomeVestors® franchisee is right up my alley. As a franchisee, I have access to some of the best marketing tools and resources in the industry to source leads on motivated sellers on an ongoing basis. And, these aren’t just any leads—these are qualified leads generated by the “We Buy Ugly Houses®” national advertising campaign that have a higher conversion rate than any lead generation strategy I’ve seen. So, I have a better chance of getting a great deal and realizing good returns—without ever having to hassle with being a landlord again.
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