Chicago - a good place for buy and hold?

Question

I'm not exactly a beginner; I have 30 units in Kansas City, but I'd really like to diversify my investing and I really enjoy the city of Chicago. Despite all the headwinds the city faces, I really believe Chicago is a big winner in 15-20 years to climate migration. I've looked at numerous properties online, inside the city and also in the suburbs, and the returns look OK on paper, but gosh, those property taxes seem to fluctuate wildly. I've heard some pretty horrible anecdotes about getting a bill that's anywhere from 20% to 120% higher and as an investor it's really hard to reconcile how that affects your investment and how investors react to that.

I'm really trying to understand the investment strategy: Usually, in Kansas City, if my bills go up (tax/insurance) then I raise rent marginally to cover those costs. I try not to raise rents on good tenants if I don't need to, but in Chicago, if my taxes go up $100/month, do you just jack rent to meet those costs regardless of how good a tenant is? Is the thinking that someone will ultimately pay it, even if the tenant moves out? Do people find turnover to be high in the city?

I grew up in NYC, so rents going up was never unexpected, even if it was $100-$200 per year, every year, and if you bought something in the year 2000, I imagine you'd have made a fortune if you still owned it in 2022 and I'm sort of hoping for a similar experience with Chicago.

Half the people I talk to about Chicago say it's in a death spiral and the other half say it's a great city, and to come on down, the water is warm.

Jonathan Klemm · Answer

Appreciate the shout-out @Doug Spence

Hey @Rob Bianco - Great detailed post and in my opinion all your concerns are valid.  The fluctuating taxes in Illinois and Chicago specifically are definitely the most challenging part of investing here.

We honestly underwrite our deals conservatively with respect to taxes and look at the % increase in that specific neighborhood over the last 10 years and use that to interpolate moving forward over the next 5-10 years.  Generally speaking, the areas with the highest taxes aka the northwest side of the city also typically see the highest appreciation, which can help to offset some of the taxes.  Additionally, we appeal our taxes on all properties each year no matter what.

Chicago has what seems to be an endless supply of multifamily properties that need to be renovated, which is ideal for our business model.  We try to add so much value that it strongly outways the painful taxes.

Happy to connect and talk more Chicago real estate @Rob Bianco

Crystal Smith · Answer

The challenge with having a conversation about Chicago is where in Chicago are you referring?  It's kind of like making a comment about NYC. Manhattan is different than Brooklyn, the Bronx, Queens, Staten Island, or Long Island.  Too large and diverse to make a macro comment about the market.

Bottom line- It's a great market if you just do your due diligence.  With regards to taxes- Our attorney challenges taxes every year.  We don't even have to ask.   W/ regards to taxes going up on a property- We usually pass it on.  When we run our number to determine profit and loss over 5 years we always assume an increase in taxes along with other operating expenses, which then drives how much income (rent) we need out of the property to make our numbers.

John Warren · Answer

@Rob Bianco I think a lot of the mystery around real estate taxes in Chicago is just lack of education. I have yet to be shocked by an increase. I take what the county says about assessed value at face value, and I try to buy at or below assessed value. Honestly, Cook County itself is sort of skewed towards investors who take the time to understand the system and who hire an excellent tax attorney. We just acquired an apartment building in a nearby suburb where we were able to see a 1/3 decrease in the taxes due to us buying below market value. That goes straight to the NOI which bumps our value!

Paul De Luca · Answer

@Jonathan Klemm made some great points

@Rob Bianco - it depends on your expectation for cash flow, your financing, where you're looking etc but you never know until you look & run some numbers.

Jonathan Klemm · Answer

Hey @Rob Bianco - To answer your questions, yes, I definitely think that is a valid strategy.  Maybe the more important questions is determining your end goal.  If it's enough cash flow to quit your day job vs. focusing on higher appreciation for long-term wealth, your answer that question you might be able to base your strategy and location of investing in Chicago on that.

Long term no matter what I believe real estate is the best investment you make because you increase your wealth through cash flow, appreciation, depreciation, and tax savings.

Doug Spence · Answer

@Rob Bianco

@Jonathan Klemm is your guy in Chicago. He's a broker, he runs a contractor company, and he's investor friendly (because he is an investor himself). I don't invest in the Chicago market, but I know Jonathan personally and he's a great dude!

Eudith Vacio · Answer

Hey Rob, you definitely should come out and visit when it’s warm. @Crystal Smith made a really great point about the various neighborhoods within the city. I personally invest in the south side of chicago where taxes tend to be lower. I think it’s most ideal if you can find a value add opportunity where you don’t have to worry so much about taxes. And definitely concur with everyone else on appealing taxes.

Rob Bianco · Answer

@Jonathan Klemm I'm not much of a flipper. I am however very familiar with cosmetic renovations in value add type deals, but I usually wind up keeping them as rentals because they're in good neighborhoods with a good tenant pool. Doing heavier lifting like foundation work, masonry, and gut renovation is a bit beyond the scope of what I'd be interested in.

What I guess I'd like to know, is if I were to just pick up a house/condo/townhouse that cashflows today on paper (with minimal work needed), if that is a workable strategy that would lead to better profits over time, or if the property tax fluctuations would make that an untenable position?

Chicago - a good place for buy and hold?

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