2% Rule in Chicago?

Question

I am VERY late to the game on this one, but does the 2% rule actually work in Chicago in A and B neighborhoods??  If I understand correctly, a $300k property should rent for $6,000/month?  This sounds like high rent for even somewhere like NYC (where the purchase price would be $1.4M!!)  What am I missing?

Josh Sexton · Answer

The 2% rule definitely doesn't work in Chicago (or many other major metros).

For some areas, the Section 8 cap rate is usually a good guideline to follow.  It is tough to get more because there isn't a great market rate tenant base.  Depending on the home and the area, this might be at or slightly above 1%.  We rent just over 200 homes, most of which are on the south side, and they all rent around 1% of the ARV give or take.

For those A and B areas you're lucky if you can get 1%.  Unfortunately, you're stuck with what the market will support and trying to price it at 2% is unrealistic.

Travis Russell · Answer

Haha, thanks @Atul Mohlajee !  I had initially started thinking I need to focus on West Garfield Park!  There's so much inventory and you can get properties for a steal!!  But then I realized how high the crime is on most of the streets.

I drove through several blocks and there are just endless boarded up units.  Great to purchase, but difficult to rent or resell.  I researched a few units through the county code violations website and found so many citations for poor conditions, dangerous construction issues, and unpermitted work that it just didn't make sense...yet.

For a new investor, I thought I found a gold mine!!  For experienced investors, you know to focus on other areas for now.  Thanks for the head up and tip on Austin!!

Atul Mohlajee · Answer

West side of Chicago but I wouldn't go there in the Austin neighborhood.  Even Chicago Police is afraid to be placed in that neighborhood.

Travis Russell · Answer

Thank you @Atul Mohlajee and @Josh Sexton !  Now I don't feel quite as crazy as yesterday.  I read that rule and wondered if there was something I was missing or doing wrong.  The rent just didn't follow the pattern for the West Loop neighborhood.  I do agree that I'm sure in the B & C neighborhoods where you can get property at better prices then 1-2% is achievable.  I'm still navigating the limitless potential that lies South of the Eisenhower, but I'm sure there are many areas where this rule would make sense.

Atul Mohlajee · Answer

Oak Park, IL is at least a B.  Total Cost includes repairs of an SFH I aquired in 2011 in a foreclosure auction was 160000, Current monthly rent 2300 is definately more than 1%.  But if aquired at today's prices at 300000 plus as it appraised for 275000 in May 2013 when I got a loan on it, this monthly rent will be less than 1%.
Acquired a estate sale townhome this month for 119000 in Oak Park near transit in an estate sale, will rent easily for 1500 after some cosmetic work and painting (3000-4000 tops)which is again more than 1%.  However majority of properties in this area bought at retail price will be at a less than 1%

Travis Russell · Answer

In the West Loop, many properties don't even seem to reach 1% (which I'd consider a B, almost an A).  Much of the core has been converted to it's highest and best use.  One condo we own and are renting is getting .6%, where the market could probably justify a .65-.7% rate.  They're dream tenants though so we haven't increased their rent yet for their 2nd year lease.

Brie Schmidt · Answer

In Chicago for A/B I am seeing about 1.3% give or take

John Van Uytven · Answer

2% Rule, is more of a guideline.

And it's true that you can't meet it everywhere.

1% is common in some areas and 3% is common in different areas.

Are you willing to travel some?

Ramon Jenkins · Answer

After spending time with @Dawn Anastasi :

--------------------------------------------------------

I know for a fact it works in Wisconsin.

I would go through her threads just to get a

better understanding of 2% or 3% rule.

Take the knowledge and try it in your neck of the woods.

Travis Russell · Answer

That makes sense @Adam Christopher .  I'd love to get $6,000 in rent for a condo that I own, but I think I'd give my tenants a heart attack!

2% Rule in Chicago?

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