East Chicago, Indiana

[Matt B.]

Hello BP world,

I am looking at investing in Chicagoland and eyeing "better" parts of the south side to maximize CAP rate. Seems like Indiana has more favorable taxes and landlord laws... Does anyone have experience investing in East Chicago, Indiana? Is this area better than / worse than other south side areas? For example Calumet Heights, Bronzeville, Southshore. I know it is very block by block, but I was just wondering in general if there are red flags with east chicago, IN.

Is section 8 in Indiana as popular as Illinois?

 I am also interested in finding partners in state.  I am planning on moving to Chicago for 6-10 months to purchase and rehab then move back home.  If I can find a good on the ground partner I would want to do more deals remotely.  Thanks in advance for your thoughts.

- Matt

[John Lowe]

Like moths to a flame, the appeal of cheap houses is almost irresistible...

Indiana is definitely more landlord friendly than the city of Chicago, which has a very strong landlord-tenant ordinance, which can be found here: http://www.cityofchicago.org/city/en/depts/dcd/sup...

Northwest Indiana- East Chicago, Gary, Hammond, et al. has lots of cheap houses. Since the decline of the steel industry, there's been a lot of disinvestment, migration out of the area, and vacant housing stock that may never be filled. Think Detroit- there's opportunity for those that know what they're doing, the rest of us best stay out. Indiana outside of what could be considered the greater Chicagoland area, is a different animal, and I'm not familiar with the rest of the state.

There are also lots of cheap houses in the southern suburbs of Chicago. Rents are significantly higher (low end starts ~$1100) than in Indiana (low end ~$750). Property taxes are also higher. It is possible to have a house with an annual tax bill equal to 20% of the purchase price. There are many sub $30,000 houses with $4,000 tax bills. It can be appealed, but its still going to be outrageously high. Suburban municipalities can be little fiefdoms, some being antagonistic to landlords, others heavy handed on code enforcement, needless regulations, or fees. Within Chicago city limits, unless egregious, you'll be left alone. Taxes are more reasonable. But the houses aren't as cheap, the neighborhoods aren't as stable, and the housing stock is both older and more run down. Describing all the neighborhoods is beyond the scope of this post, but I'll comment on the three you named specifically.

Calumet Heights includes an area called Pill Hill, due to its history with African American physicians. Its an old, stable neighborhood, mostly detached brick bungalows. There aren't many houses for sale under $75k. There aren't a lot of rentals and its a very desirable area, a 3 BR will rent for ~1400. As a landlord, its hard to go wrong here, the tenants will be solid middle class folks.

Parts of Bronzeville are up and coming and parts are already fully gentrified. Any deals that come to market will be scooped up very quickly, and the area is a favorite for rehabbers. There are historic mansions, and during the boom, new construction. The area is the most diverse racially and socioeconomically of the bunch. Its also the best for appreciation, thus most forgiving of out of town investor mistakes.

South Shore is a mixed bag: houses, condos, and apartment complexes. Probably the area with the lowest % home ownership of the bunch. Forget about the Chicago bungalow, here there will be 75+ year old frame houses. Because of the heterogeneity, this area requires the most expertise, choose poorly and tenant retention will be difficult for many years (if not forever).

Entire neighborhoods have been abandoned by banks, effectively eliminating the retail market, leaving only investors. Some neighborhoods have essentially become rental communities. Ali Boon wrote a blog about her experience as a landlord in an over saturated market: 

http://www.biggerpockets.com/renewsblog/2015/01/19...

I have properties in Atlanta and Chicago and concur with her assessment. With so many choices available to renters, its not sufficient to have a nice house in a decent neighborhood. Its crucial to know where your target audience wants to live.

I'm a landlord that caters to working class tenants, actively acquiring cheap REO houses. The yields are attractive, but frequently elude out of state investors because the niche requires a skill set that most property management companies are not competent at. As a result, tenant turnover, repair expenses, and collection problems chip away at profit margins. Working class tenants do not think or act like middle class tenants. If this is unfamiliar to you, than it will require an investment of time (measured in years) and money (measured in thousands) to learn how to landlord effectively to this group. The learning curve may be less painful if you find an area closer to where you live. There are 2,000 miles between California and Illinois. Aren't there places that have decent cap rates that are less far away?