Multifamily Investing in the Chicago Market
The Chicago multifamily real estate market can be complex, and at times filled with potholes and landmines. It is extremely vital - if you are going to invest in multifamily properties in Chicago - that you do these four things:
- 1. BE CONSERVATIVE IN YOUR UNDERWRITING
Think your taxes are going to go up a mere 2% a year going forward? Think again - those days are over. If you are modeling out income and expenses into the next decade, be sure to factor in taxes going up and do not plan to continue the record rent increases we saw here post COVID. Rents are starting to level and if the tax man hasn’t gotten to your building yet, be thankful but prepare yourself because it’s coming. It is always good to give yourself some extra padding and if you don’t need it, lucky you!
- 2. WIN WHEN YOU BUY
We all know that we win when we buy in real estate, not when we sell. It is important not to overpay for an asset just because it’s got a purdy little greystone exterior and those sexy turrets (don’t get me started on turrets). So how do you win? For starters you have to know your numbers — Understand your current rents and how much CURRENT upside you have with or without improvements (don’t always believe the pro forma numbers given to you by the sellers, just trust me on that). Understand the reported expenses and figure out what is missing (how many times do we see a seller provided expense sheet that is missing vacancy, maintenance, management etc.? The properties just rent themselves right?). Understand the local CAP rate and how it correlates to current market interest rates. You likely will not make money if the CAP rate for a property is lower than interest rates. Next, you have to negotiate logically and potentially find other terms in the deal that might be exciting to the seller. These could be higher earnest money, a shorter closing window, waiving contingencies, etc. This also means showcasing that you are a good buyer; have a proof of funds available, have a bio available, be able to show the seller that you have been in the end zone before and can get a deal done (a good realtor will help you with this). - 3. DON'T GET ANALYSIS PARALYSIS
This is one of the biggest challenges that I see plague investors (or soon to be investors). This statement sometimes feels contradictory to my points above but it isn’t by a long shot. When I advise people to underwrite conservatively and know the numbers, that doesn’t mean let the details hinder you into inaction. I always say going from 0 to 1 is the hardest part of the real estate journey. Buying a home run or grand slam deal on your first go around isn’t necessary, so don’t overlook the single or double in search of that mythological 2% rule deal that just isn’t out there right now. Go out, get reps, tour buildings, build confidence, and put some damn offers in! - 4. WORK WITH A KNOWLEDGEABLE REALTOR WHO'S BEEN THERE
I am not talking about some fly by night realtor who says they have done a few MF transactions. I mean someone who actively invests in the market, has won AND LOST in the market, has built some callouses from the ups and downs of investing, and knows the ins and outs and in-betweens. Look no further my friends - I got your back here. But in all seriousness, partnering with a professional who has done this before is so critical to the process. They will be your eyes on the back of your head and help you avoid some major pitfalls. I like to tell my clients that I will save them thousands of dollars just by helping them avoid the mistakes that I personally have made over the years.
In the end, buying multifamily real estate has been the most rewarding experience of my life and has helped me build wealth over the years. It can do the same for you if you do it wisely and learn from those around you. Build a good team, surround yourself with people who are smarter than you, and always keep moving forward.
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