First time investing Chicago vs Phoenix

[Saumya Dash]

Hi,

I am a newbie from California in the RE world. I am considering to make my first MFR investment, but am trying to decide between Chicago and Phoenix. Some of the criterias that I am looking for are:

1. Property Price in the range of 200-350k.

2. Neighborhood - A,B,C

3. Decent cash flow close to the 1-2% rule.

Reason I am feeling indecisive is because I am finding lot of MFR in chicago area however I am concerned about the job growth prospect and vacancy. Phoenix seems to be getting started with job growth, however I am not finding much MFR in this area.

Need some suggestion from the Pros, even if it means to consider looking at other cities.

Best Regards.

[Mike H.]

I would strongly advise you NOT to invest in real estate in Cook County. Too many risks that I just don't think add up if I were looking to invest out of state and you could pick any area out there.

1) The landlord laws in cook county are some of the worst in the country. Evictions take between 4 to 6 months and can sometimes go beyond that.

2) Crime in the city is forcing a lot of people to move. And while crime is mostly on the south and west sides, its starting to creep into other areas in the city as well.

3) Property taxes just got the biggest bump in history and may need another bump. And the state just boosted the income tax significantly as well. Both the state and cook county have some notable budget issues they're having to address. The state has some draconian law that they can't bump down benefits to govt workers (i.e. if their pensions have grown out of reasonable bounds given what they put in) so the only way both the state and county are going to be able to make up the pension shortfalls they currently have is, likely, by raising taxes significantly - which will drive out even more businesses.

As it stands, some of the counties in and around chicago have some of the worst tax rates you'll find. And they may be getting worse and not better. I have a couple houses I bought in cook county (when I was just starting out and didn't know better) that have tax rates of 4 and 5%. And I'm talking net tax rate not the 1/3. So on a 100k house, the taxes are almost 5k!

If you want to invest out of state, I would look at areas with good landlord laws and more stable economies. Indiana would be a good one. They have a state tax cap of 2%. So the most your taxes can be are 2% of the property value. Not 4 or 5 like some areas of Illinois are in.  They also have much better landlord laws. Evictions take 4 to 6 weeks instead of 4 to 6 months. And their economy is much more stable.

I'd probably put texas on the list as well based on what I've read. Great landlord laws. Good economic growth. 

But there's no way I would ever look at illinois with all the economic issues they're having and with the landlord laws so heavily schewed in favor of the tenant.