Is the Chicago Flipping Market Done?
Rental Property Investor · Chicago, IL · Member since 2016 · 98 posts · 52 votes
I've flipped two properties this year, with the most recent one sold in mid-September. I was excited to line up my next deal, but after speaking to my agent I learned that the market has hit a strange slowdown throughout Chicago. Suddenly, nearly no one is showing up for open houses, and many agents are reporting that they're getting few if any calls on their listings. Also, prices for distressed properties have increased significantly, as banks are trying to get top dollar for their foreclosures. Labor costs have increased significantly too. So now we have higher investment costs and the potential for slow resale or depressed resale prices. I've begun digging into research and am seriously considering shifting my strategy back to buy and hold, as I fear the window for flipping may be over.
I'm interested in knowing how other investors are thinking about approaching the Chicago market as we end 2017 and prepare for 2018. Is the flipping market in Chicago done? Is this the end of the cycle?
@Demetrius Davis , I can see why you are concerned about taxes and people leaving town. What you have to be aware of is the business coming to Chicago. Google opened up their 2nd largest Headquarter in the city of Chicago. McDonald's is moving next year to their Worldwide Headquarters in the City. Pepsi, Boeing, United, Walgreens, Statefarm, Kraft Foods, Budweiser, Glassdoor, Uber, Groupon, Abbott Laboratories, Motorola, Etc are located here.
Chicago is the top 6th most powerful city in the world because of all the companies that call the city home. Who you are seeing living is the low and middle-income citizen.
Who is coming is the city is the high earners, which will switch things around in time. Chicago is the number one Tech destination in the nation today, not San Francisco! We have the infrastructure, and one of the best city transportation in the country today. All this attracts the millennials who are the most educated & powerful group at this moment.
Taxes are part of the rent to live here, a city that offers a lot of jobs and might as well call them well-paying jobs.
I sell houses every day, and due to universities and hospitals in Downtown alongside all these above-mentioned companies, I see a huge stream of incoming people, and all making a lot of money.
When I buy houses, my focus is on the cash flow. If after tenants paying all expenses (including property tax) the cash flow is high - then that's a property for me. Regarding income tax, my depreciation offsets that, so there is nothing to worry.
Plus, I better have lots of income to be taxed than low income and low tax!
Demetrius, City of Chicago's properties went up in value at least 7.9% depending on where you were buying and by at least the same the previous year. We are behind the growth rate in the other big cities: NY, LA, Miami, therefore, we can gain in catching up on value by owning properties.
And lastly, every time the property tax increase, most landlords pass the buck on the tenants, so the rents increase and the landlords make even more money!
If I can give you one advice: when following the market trends and look at all the data and different statistics, as only one or two articles could be misleading.
Good luck to you and hopefully you'll keep investing here at home, where a lot of out of town and out of country investors come to invest!
@bolla williams @demetrius davis, @lumi ispas
I know this is a bit late lol but I was just reading all of your posts and some good info here thank you. I must say however that the best information comes from the "ground" level in the real world & talking to real people as Bolla said. I never really take "statistics" and "data" whether online or published in articles for face value these days especially as media outlets have been exposed for their misinformation. I drive part time for a limousine service and cater to ALOT of wealthy individuals who live in winnetka, glencoe,lake forest and wilmette to and from the airports every day. I have heard again and again from these individuals complaints about city tax hikes etc and alot of them plan on leaving as soon as their kids finish high school etc. @lumi ispas, the exodus is not only occuring within middle to lower income families, but high earners as well. This is live data from the streets, not a biased article trying to glamourize the image of the city. I will say to all of you, if you want real information you need to get out there and talk to REAL people. Google searches,news articles etc may or may not give you the truth. If you look at Detroit, it was the wealthy who left first due to the corruption and so forth, not trying to get into all of that right now. Yes , we do have some high earner opportunities with the tech companies etc however it is the middle class blue collar worker who is vital and keeps the nation and cities running. If these people are suffering and leaving...you have a PROBLEM.
I see this is late as Besnik said in the last post but I figured I'd still give my input. The Chicago market is not dead, my team and I are having deals come in and out of our door faster than you would believe. I recently moved to the Chicago market to pursue my first real estate venture and couldn't be happier with the Outlook I see potential for. Obviously this isn't within the same scope of time when the original post was made but being a new member of BP I wanted to share
I see this is late as Besnik said in the last post but I figured I'd still give my input. The Chicago market is not dead, my team and I are having deals come in and out of our door faster than you would believe. I recently moved to the Chicago market to pursue my first real estate venture and couldn't be happier with the Outlook I see potential for. Obviously this isn't within the same scope of time when the original post was made but being a new member of BP I wanted to share
Thanks for sharing.
^ What those wholesalers do is push junk deals 99% of time. They basically cherry pick comps and try to market it as a great deal to a newbie investor who doesn't know any better it makes me sad to see their "scam" advertisements. I am sure some wholesalers have actual deals but that's the majority I have seen at least on the North Side of Chicago maybe in less hot markets like Back of the Yards they have more motivated sellers to make it work. I registered for a bunch of mailings out of curiosity and was overwhelmed by the amount of garbage deals.
I currently have two Chicago flips under contract sell side with great profit for client and another under contract buy side where the numbers are solid. Strategies to find deals....
1) Find old properties in MLS that were originally over priced. For example originally listed at $800k and dropped it to $775k then $750k then 725k then $700k. By that point everyone has already seen it early on when it wasn't a good deal. Then you go in lowball them offer $625k and get it for $650k. All this on a deal that would of had multiple offers and gone over ask if it was priced at $650k originally. This strategy works I recently had an 800k listed property from 2 months old under contract at 750k then my client broke contract because they got cold feet so the seller relisted it he puts it up as "new" in MLS and guess what it ends up selling 40k higher then we had it under contract at lol
2) Have auto alerts set up and when you see a good deal jump on it fast. Push the broker to accept your offer that day rather then doing a best and highest. A lot of brokers don't like playing games believe it or not and are willing to work to get your offer accepted and be done with the deal quick.
3) Find ways to do a major value add outside just a rehab. For example adding livable sq ft, adding bedrooms, duplexing an attic. These are things that will make it appraise out on paper higher. Everyone loves pretty kitchens and baths but when you add in closing costs, commissions, carry, etc. it often won't cut it.
@bolla williams @demetrius davis, @lumi ispas
I know this is a bit late lol but I was just reading all of your posts and some good info here thank you. I must say however that the best information comes from the "ground" level in the real world & talking to real people as Bolla said. I never really take "statistics" and "data" whether online or published in articles for face value these days especially as media outlets have been exposed for their misinformation. I drive part time for a limousine service and cater to ALOT of wealthy individuals who live in winnetka, glencoe,lake forest and wilmette to and from the airports every day. I have heard again and again from these individuals complaints about city tax hikes etc and alot of them plan on leaving as soon as their kids finish high school etc. @lumi ispas, the exodus is not only occuring within middle to lower income families, but high earners as well. This is live data from the streets, not a biased article trying to glamourize the image of the city. I will say to all of you, if you want real information you need to get out there and talk to REAL people. Google searches,news articles etc may or may not give you the truth. If you look at Detroit, it was the wealthy who left first due to the corruption and so forth, not trying to get into all of that right now. Yes , we do have some high earner opportunities with the tech companies etc however it is the middle class blue collar worker who is vital and keeps the nation and cities running. If these people are suffering and leaving...you have a PROBLEM.
No offense but do you think these "wealthy individuals" are deep down sincere in what they are saying or just shooting the time during their limo ride? Majority like to talk about leaving etc but how many of those actually do? Heard all these anecdotal stories throughout this thread too many times. Doom and gloom is all I hear.
I lived in Chicago and moved to Sacramento years ago. I can give you my take as well as other investors on why we have never, or recently stopped investing there.
I live in CA where prop taxes are roughly 1.2% and can only raise by max of 2% each year if prop values increase. As an investor I can run my numbers and make a sound decision on the investment knowing that my costs will be relatively fixed with time. Homeowners can do the same.
In Chicago, I would have to run the numbers, and not only have an already rediculously high tax cost but I would also have a complete unknown variable in my long term projections as Chicago has a track record of increasing taxes and is not currently financially stable. To me 99% of the time thats an unnacceptable risk, as an investor and even as a homewoner. If I wanted to purchase a high risk investment I’d invest in stock. People invest in real estate because of the stability and calculated risk. We are also discussing unknown risk in Chicago, which in my opinion is not comparable to the west coast or many other sunny belt state outlooks on population growth, appreciation, job growth, and other factors.
As a home owner I have my dad who is looking at retirement, has paid off his house which is worth about 290k yet still pays about 7k in taxes a year. More than double what I pay on one of my props worth about 400k. So as a homeowner I would be hesitant to buy in Chicago knowing that even after I pay my home off I will have a significant tax bourden which continues to rise. These facts in my opinion are enough to deter many from investing or purchasingg in Chi, eapecially now thatthey have more options for better employment in other growing cities
So as a homeowner I would be hesitant to buy in Chicago knowing that even after I pay my home off I will have a significant tax bourden which continues to rise.
There is nothing untrue about what you said....but the thing is most of those things have been true for literally decades and it has not caused an issue yet. These opinions would have been valid (but ultimately incorrect) 5 years ago...10 years ago...15 years ago...20 years ago and 25 years ago when I moved here. People were saying the same thing when I bought by first house for 290K...which is now worth 900k.
Chicago real estate does as well over time as pretty much any other place in middle America.
@Eric M. sure, you could be right, but to say it'll be fine because of past performance is a fallacy.
Today's US is not 1980s or 1990s US. You can develop tech and provide services from almost any remote location that has a decent talent pool. There's more competition between cities, and the result is higher mobility. People can move around more freely if they face growing pressure within their home state, especially if its in locations that provide other perks such as better weather. If Chicago's financial situation and property tax hikes outpace its growth and performance, the result is increased financial pressure on the population via higher rent or mortgage costs, which will impact all, but the poor first and most. To a small degree(and small subset of people) I believe this has been a contributing factor for leaving the state, but on average the positive impact of general growth in the past has outweighed the tax hikes which is why you still have seen rising home prices. I think the large recent hikes may have shifted that dynamic too far negative, and we will see the impact of that in the years to come.
Here's one study showing recent rents have declined nearly 15% in one year(maybe due to a declining lower income population?): https://www.zumper.com/blog/2018/06/mapping-chicago-neighborhood-rent-prices-summer-2018/
Statistics can be cherry picked to argue any position.
So I showed that every other time something has been predicted it was wrong and you say that doesn't mean it's wrong this time.
So all we have done is proven that no one really knows what will happen...so what's the point?
Lots of opinions on the factors involved with flipping houses, this has been an interesting read. I'm of the opinion that flipping is never dead, we merely go through periods where acquiring the right properties at the right price can be more competitive and challenging than others. I'm working on a flip of a single family home I got from auction at way below market value. I'll be able to put it on the market fully rehabbed for a price that will attract young families in the area.
If you can put out a product that a young family with one or two children can comfortably buy, and you stay within the comps, you can't really go wrong.
1) If rent rates can cover all expenses including taxes and still cash flow per the investor desired return than whats the big issues with taxes? Never understood this argument.
2) Assuming the $400K property is equal to the $290K property in all aspects as possible, how does paying 28% more for a property with the same or less cash flow make sense? I can buy more doors with the same or better cash flow, which my tenant pays. I can get my principal back faster to reinvest which equates to compounding returns. (who hates compound interest?)
3) States like NJ is much worst and property values are much higher. Yet people make money in NJ. At the end of the day its all about the numbers.
4) If you are flipping, successfully, taxes shouldn't be too big of a holding costs for a 3-9 month hold.
my 2 cents
Thanks everyone for all the great feedback and insights! A lot of people agree that the Chicago market is one that is tough for squeezing out deals these days. Question for Chicago investors: What’s your investment strategy now? Have you moved on to other markets? If so, which ones? Are you sitting on your cash?
This is a little bit off-topic, but has been a fascinating thread to read. LOTS of differing opinions. As a guy new to the REI world, this makes me want to be even more cautious.
I have been driving around the city’s south side a lot in the past week, simply because the north and NW side is mostly done, in terms of deals. I wanted to see if there were ANY possibilities, or if I was just looking at a difficult neighborhood to work (although tons of still-beautiful cheap properties).
I was incredibly saddened. Chicago truly has the most beautiful residential housing in the USA. Block after block of beautiful brick bungalows, 2 and 3-flats, craftsmanship and design and care in construction so evident from just a drive by. But these incredible neighborhoods have fallen into such disrepair, crime-ridden, drug-infested. So unbelievably sad. Just south of the beautiful South Shore golf course, I could see that someone with a vision, money, and city connections could TRANSFORM this area into a neighborhood that feels like a port/waterfront. Bordered by the train-tracks to the west, it could have an Eastern Seaboard vibe. This area could be an extraordinary draw for people. So much potential, and yet there were vacancy signs everywhere, lots of boarded up buildings.
There are a few blocks here and there, and I even talked to a few people on the sidewalk. Some folks ARE taking chance by buying in and around there. It seems there are some solid working-class and middle-class blocks.
COULD Chicago’s southside still have potential? Or is just more of the issues that come with low and ultra low-income tenants?
I wish I had some way to execute on that vision...
Best of luck to all Chicagoland investors here!!
Out of state investor looking at Chicago South Shore area around Kingston ave area. Anyone familiar with this neighborhood can share their thoughts?
@Brad Taylor, did u drive by this area by any chance? Seems there pockets of good and bad all over south...hit and miss on the right deal.
Kingston north of 80th street is a high crime, high poverty area. Lots of very nice, large apt building. However large apartment buildings attract large families. When you place lots of large families living in poverty together in dense spaces, you tend to get lots of issues.
Once you get south of 80th street, there are more single family homes, and therefore lower density. That area is decent for investment. You can make money on Kingston north of 80th St., but your tenant pool quality will be likely much lower.
@Troy Williams Unless you've got someone who can thoroughly scout the area for you and knows it well, I would not advise investing in South Shore, especially if you're from out of town. It's block-by-block, and the areas that are tolerable are usually just SFH. Rents are going to be much lower and tenant pool quality is difficult.
I have not read all the way back through this entire thread, but so many interesting points that I will have to later this evening.
My wife and I are trying to close on a 4 flat in Avondale to house hack. Our agent has done a good deal of investing there and believes the area still has a lot of room for growth. I am curious if there are any areas that people are looking at near the recently announced Lincoln Yards development by Sterling Bay. That area seems like it could become an incredibly hot area, making investments somewhat near there potentially more attractive. I know they are planning 5000 residential units though, which I am not sure how much that hurts or helps.
@Demetrius Davis are there certain areas you think make more sense to do buy and hold for cash flow if you are less concerned with appreciation? I know Oak Park is seeing a lot of development, but I have also heard the taxes there aren't great. I have no experience with the suburbs or what the market is like for SFH's out there
@Paul Bommarito the south suburbs are your best bang for buck for great cash flow if you're not crazed about appreciation. Double digit caps rates and cash on cash returns can be had, quite easily, and almost always a significanlty better neighborhood and school system than anything you'd get on the south side. If you're looking for light rehab or turn-key deals at $60k and under, $400 cash flows or more on SFH's, let's talk. I can provide you plenty of inventory.
@Paul Bommarito thanks for your post and insights into Avondale.
@Jarrell D. makes a good point about the south suburbs, but taxes worry me there.
Jarrell, which towns are you seeing as most stable with regarding to taxes, yet still able to cash flow?
@Demetrius Davis man it’s all over. One must become learned on tax appeals and exemptions in order to play the game out here...or just get DEEPLY discounted deals to where your monthly payment allows home to cash flow. With that being said....it’s almost a tipping scale of cash flow and equity out here...with a decent amount of middle ground.
More concerned with cash flow? You’re looking Dolton, Cal City,Markham....you want nicer neighborhoods and equity? You’re now in Lansing, CCH, Matteson, South Holland.....you want your rental to be the only rental on the block and amongst a sea of home owners? You’re now looking in Tinley and Oak Forest.
It also becomes a game of availability and what kind of volume you are looking to do. Everyone always wants the absolute best neighborhoods at the lowest price. But how long is one willing to wait, and compete and hold out for...a home run deal?
It comes down to preference of the individual at some point. Needless to say, the homes in the above average neighborhoods don’t come available as often, as especially at great prices.
We can chat more man, DM me. I’m lining up stuff all the time out here. Headed out the door now to go look at some stuff on and off market. I can help you out, out this way. I also have a private money guy who can do loans under $70k at close to conventional rates. (6-7%)
If you want cash flowing rentals, I can help you out for sure.
Who knows , this is what i'm hearing on the streets. I do know a few people who have moved to Dallas. I believe Chicago has too much industry to "fail" or crumble however people who actively assess different markets in terms of cost of living, taxation, infrastructure,crime etc are finding better suited opportunities for themselves in other states.
@Russ Fry you make a great point! The population decline is a very real factor. I am very concerned about Illinois's mixture of high tax and fiscal problems. My day job is in a Chicago charter school, the entire district is being impacted by declining enrollment due to families leaving the city or the state altogether. A part of it is tax, the other piece is public safety, too few high quality educational options, and high rent. Even buy and hold investors in Chicago need to be aware of this issue. When buying, everyone should stress-test their deals to ensure they can cash flow with a rent decrease. As more people leave Chicago, there will be less competition for rentals and prices may drop a bit. Also, we should watch out for the major influx of luxury condos. If there is an oversupply, they will begin offering concessions and the ripple effect could be felt down market as renters realize they can get more their money.
What are your current thoughts about the Chicago market now and future prospects?
@Calvin
@Calvin Lipscomb, I am not currently investing in Chicago, simply because I have been unable to find deals that make sense. If I can find a deal with decent margin, I would purchase another flip or rental in Chicago.