The Chicago Real Estate Forecast: What Investors Must Know for 2019

They say that, in China, “May you live in interesting times” is a curse hurled at your worst enemies. Now, I can’t vouch for that. But, the Chicago real estate market has been through plenty of interesting—that is, difficult—times. Still, you gotta love Chicago. I certainly do. I’ve always thought of it as the most American of cities, but it’s also uniquely itself at the same time. One thing is for certain, though: the forecast for Chicago’s real estate market indicates that new real estate investing opportunities could be opening up in the coming year—and, I’m glad for it. As large, complex, and, at times difficult, as the market here can be, if you know when, where, and how to invest well, life as a Chicago real estate investor can become so much more than interesting.

What Chicago’s Real Estate Forecast Looks Like for 2019

The local market has long provided a potentially challenging investment environment and, so far, the forecast for 2019 shows a strong indication of continuing in that vein. Chicago remains the only global financial center with an undervalued housing market according to a report in Crain’s Chicago Business on the UBS Global Real Estate Bubble Index. Housing prices are rising across the U.S. at two speeds and Chicago is in the slow lane. Though numbers here have risen in the last several years, they are still almost 16% below their 2007 peak. As such, the market has been considered seriously undervalued for several years now, fueled in large part by the city’s slow emergence from the 2008 recession.

Additionally, value-add opportunities in Chicago seem to be harder to come by in the city center but promising investment properties in the suburbs can still be found. The suburban multi-family real estate market is healthy and stable, though there is a high level of competition and entry into the market can require a significant cash investment. If you are willing to exercise a little patience, however, buying from distressed homeowners facing the final installment of the city’s property tax hike could be well worth the wait—especially in older, more established neighborhoods where smaller, “ugly” houses are the norm.

If you can find a fixer-upper home for sale as a result of high tax bills or other financial pressures that plague and distress homeowners, there are several factors that favor a buy-and-hold approach. For example, Chicago has one of the lowest price-to-rent ratios in the U.S., signifying that the length of time a real estate holding has to be rented to pay for itself is more than palatable. And, provided you buy at the right price, multi-family properties throughout the city can potentially offer adequate income to cover the mortgage and operating expenses—even in an “interesting” market.

A Bird’s-Eye View of Chicago’s Real Estate Investing Niches

As is typical for a city its size, we tend to see a lot of apartments and not enough houses in Chicago; but, there are real estate investment opportunities in both markets. Personally, I’m sticking with distressed single-family properties. But, it’s never a bad idea to take a bird’s-eye view of the overall Chicago scene before committing yourself to one investment niche. So, let’s see what 2019 has to offer.

Luxury units may or may not provide the kind of returns you need to effectively grow your real estate portfolio and, therefore, may not justify the investment. On the one hand, Chicago saw a record year for luxury sales in 2018, fueling an explosion of both excitement and expectation that the year ahead will see median sales prices continuing to trend upward. On the other hand, overbuilding of the luxury sector continues—especially downtown. This tends to make the rental market more competitive, causing underperforming properties to be sold off at discounted prices. And, we are seeing rents fall—albeit, only slightly and not nearly as fast as New York.

The trick to succeeding with luxury housing, then, is to ensure that you purchase property at a low enough price point that holding it potentially pays off now and selling it pays off later, depending on how 2019 and beyond actually shape up. That’s a lot to ask of a sector that can fluctuate more wildly than others, however—especially in Chicago where median luxury home sales can differ year-to-year no matter how excited everyone gets. In fact, volatility in the luxury sector is one of the reasons I don’t invest in it.

Multi-family real estate may still be on a countdown to market saturation, as analysts warned would happen in 2018; but, it’s also possible they sounded a false alarm. Though thousands of new apartments did hit the market last year and more than thousands more will reach the market by the end of this year, demand has remained high and rent rates have kicked up. With continued low vacancy rates and high rents, investing in multi-family housing may be just the ticket for producing a solid stream of passive income from real estate rentals, depending on which direction market winds actually blow. Forecasting the Windy City’s multi-family sector is enough to make your head spin.

To complicate matters, the city housing program that expands affordability requirements for new developments in gentrifying neighborhoods of the North Branch Industrial Corridor, Near West Side and West Town, and the Milwaukee Avenue Corridor has put a slight damper on the multi-family sector. This program costs developers part of a project’s value when they’re already shelling out big money for land prices, construction costs, labor, and a long and winding permitting process. So, though the city helps to locate tenants for the affordable units, a lot of builders aren’t buying that it’s worth the trouble. With fewer applications being submitted for new developments, competition for existing affordable multifamily units may grow—and, actually lower rents. That means that the current uptick in rents could get tempered with a future downturn.

That said, the average rent for an apartment in Chicago is up by about 5% since last year and rising at a faster rate than much of the U.S. It’s not just happening downtown either. Even out in the suburbs, rents are creeping up and showing no sign of falling anytime soon. Vacancy rates downtown have dropped, too, which is mighty impressive considering the cost to rent is up. Outside the city center, vacancies are hovering even lower, also not too shabby. If multi-family properties are your real estate investment niche, this all bodes well—for now. Should bill H.B. 2192 pass and repeal the Rent Control Preemption Act, you may not be able to raise your rents even if market rates, or your operating costs for that matter, do go up.

Student housing started the academic year down. The University of Illinois at Chicago is reporting an uptick in enrollment for the fourth straight year, but REIT housing provider American Campus Communities says vacancies are up too. Columbia College Chicago, where enrollment is off by about a third since its peak in 2008, is selling its 343-room dorm in the South Loop, which is expected to be repurposed, and Columbia College Chicago, Roosevelt University, and DePaul University sold their 1,279-room University Center in August. This market looks unpromising for investment.

Single-family houses always seem to be in high demand in Chicago and the desire for move-in ready homes is hitting critical mass. So, if you buy, renovate, and sell houses, like I do, this is good news. In fact, by mid-2017, the single-family housing market had become one of the busiest in the country and the uptick in activity spilled over into suburban counties. On the surface, this looks great. Look just beneath, however, and you’ll see that despite the overall rise in demand home sales actually dropped off by more than 16% in September of last year. How much of the drop was due to the usual impending holiday season downshift is hard to say. But, lowered inventory is certainly playing a significant role.

So, what’s behind the decline in inventory? That answer seems to be the rise in mortgage interest rates coupled with the increased cost of purchasing a new home. Together, these can make the prospect of moving from an old house to a new one seem financially daunting. After all, the median home sale price in Chicago was up by 4.5% by the fourth quarter of last year, with the surrounding metro area falling not far behind. Obviously, these numbers aren’t huge when compared to the price spikes other cities, like Austin, are experiencing. But, it is enough to make many existing homeowners, like the Baby Boomer generation, just want to stay put—especially in light of the recent property tax hikes that have only served to tighten the financial restraints of already struggling homeowners.

On the positive side, inventory squeezes help to push median home sales that much higher and houses tend to fly off the market that much faster. And, in some Chicago neighborhoods, like Humboldt Park, the shift is particularly dramatic. Home prices there skyrocketed last year as did median days on market by year’s end. So, selling your investment property when demand is high and inventory is low can certainly work in your favor, especially if you buy and rehab single-family homes in up-and-coming neighborhoods. Where you might run into a snag is in the finding of homes to rehab and resell in the first place. But, you rarely ever want to look for houses where home buyers and even other investors are looking, anyway. Your best deals will always be off-market real estate deals.

Distressed properties still account for a large number of properties in Chicago even with foreclosure starts down and foreclosures dropping overall. In fact, Crain’s Chicago Business reported in January that, though foreclosures are at their lowest level since the housing crisis, at .085% of inventory the Windy City continues to rank in the top three states with the most distressed homes. And, in terms of the number of homes that are underwater, Chicago takes the cake. More than 250,000 homeowners owe more on their mortgages than their house is worth. That number equates to just over 15% of the homes out there—many of which are not on the market since homeowners in trouble often keep it to themselves out of embarrassment and shame or because they simply don’t know where to turn.

The advantage of making the pursuit of distressed properties your niche is that there is always a chance you’ll be able to buy them on the cheap. And, because homeowners who can’t pay their loans usually can’t pay for the home’s upkeep either, you’ll likely have a nice fixer-upper on your hands if you can nab one. With the right real estate investment analysis and valuation tool, calculating all of your numbers to ensure your potential for solid returns are high should be a breeze, too.

Buying distressed properties isn’t all roses, however. In fact, the method with which you try to acquire these houses could wilt your enthusiasm altogether. Before a home is foreclosed on, it typically makes its way to the auction block and, here in Chicago, that usually means the Cook County Judicial Sales Corp. Buying a property from an auction carries significant risks on its own, but in Cook County it’s particularly tricky and potentially costly. Here again, your bottom line will be much better off if you find distressed homeowners before they officially enter the foreclosure pipeline. They’ll be glad you helped to keep things from going bad to worse, too.

Get Better Leads on the Best Chicago Opportunities in 2019

In general, it looks like the most reliable Chicago investment opportunities will be found with single-family and distressed properties. If you can find one that is both and you can buy it without issue—bullseye! To do that, of course, you’ll need the best lead generation system you can get your hands on and a better way to calculate the numbers as your deal-finding strategy improves.

Luckily, as an independently owned and operated HomeVestors® franchisee who leverages the best marketing tools in the business, including the “We Buy Ugly Houses®” brand, motivated sellers of all kinds of properties come to me. And, by using our proprietary valuation software, ValueChek™, I can quickly determine if a property has the potential to deliver a solid ROI. If it does, I make an offer on the spot. That helps to put me ahead of the competition in Chicago’s most promising and potentially lucrative real estate niches. When you’re a Chicagoland investor, this sort of positioning is particularly critical to your success—especially if things get, well, interesting. And, here in the Windy City, they always do.

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