Buying an Investment Property in Chicago: What to Consider Before You Buy

Buying an investment property is different from buying a home for yourself.

When you're choosing your own home, the decision can reasonably involve emotion, lifestyle, and personal preferences. With an investment property, those things matter much less than the numbers, the property, the location, the rental market, and your long-term strategy.

Chicago offers a wide variety of residential investment opportunities, from individually owned condos and single-family homes to two-flats, three-flats, and larger multifamily properties. But not every property that can be rented is necessarily a good investment.

Before you start touring properties, it helps to understand what you're actually trying to accomplish.

Start With Your Investment Strategy

“Investment property” can mean very different things to different buyers.

Are you looking for:

• monthly cash flow?

• long-term appreciation?

• a property you can improve and increase in value?

• a two- or three-flat where you'll occupy one unit and rent the others?

• a condominium that may eventually become a rental?

• another property to add to an existing portfolio?

• a property you may use personally in the future?

There isn't one universally correct investment strategy.

A property that makes sense for someone focused on long-term appreciation may not work for an investor primarily seeking immediate cash flow.

Defining your objectives first makes it much easier to evaluate individual properties later.

Understand Your Financing Before You Search

Financing an investment property can be different from financing a primary residence.

Down-payment requirements, interest rates, reserve requirements, underwriting standards, and available loan programs can vary depending on the property and how you intend to use it.

An owner-occupied multifamily property, for example, may have different financing possibilities than a property purchased strictly as an investment.

Before getting too far into the search, speak with a lender who understands the type of property you're considering.

Knowing your financing structure also helps you evaluate the investment accurately. The same property can produce very different financial results depending on the amount financed, interest rate, down payment, and other loan costs.

Don't Evaluate a Property Based on Rent Alone

It's easy to look at a property renting for $3,000 per month and start multiplying.

But gross rent isn't profit.

Depending on the property, expenses may include:

• mortgage payments

• property taxes

• insurance

• condominium or association assessments

• utilities paid by the owner

• repairs and maintenance

• capital improvements

• vacancy

• leasing costs

• property management

• landscaping or snow removal

• building expenses

• other operating costs

Some expenses occur every month. Others don't.

A property may look highly profitable during a year when nothing breaks and considerably different when a furnace, roof, appliance, or other major component needs replacement.

Building reasonable assumptions into your analysis can help you avoid evaluating an investment based only on the best-case scenario.

Research the Rental Market

Understanding what a property is likely to rent for is a critical part of evaluating a potential investment.

Current asking rents can be useful, but they're only part of the picture.

Ideally, you also want to understand:

• what comparable properties have actually leased for

• how much competing inventory is available

• how long similar rentals are taking to lease

• what features renters in that area expect

• whether demand changes seasonally

• how the property's condition compares with competing rentals

A renovated unit with in-unit laundry, central air, parking, and outdoor space may compete very differently from another property on the same block.

That's why rental analysis should be property-specific, not simply based on a neighborhood average.

Location Matters, But So Does the Rental Audience

“Buy in a good neighborhood” isn't much of an investment strategy.

Instead, consider who is likely to rent the property and why they would choose it.

Proximity to public transportation, employment, universities, restaurants, shopping, parks, schools, highways, and other amenities can influence renter demand, depending on the property and likely tenant audience.

Different Chicago neighborhoods and suburbs can also produce very different relationships between purchase price and achievable rent.

An area with higher property values may offer strong renter demand but lower immediate cash flow. Another market may offer a more attractive rent-to-price relationship but different appreciation, vacancy, or management considerations.

Those tradeoffs are part of the investment decision.

Condos Require Additional Due Diligence

A condominium can offer a relatively approachable entry point into rental-property ownership, but investors need to look beyond the unit itself.

Before purchasing a condo as an investment, investigate whether the association permits rentals and whether restrictions apply.

Depending on the building, considerations may include:

• rental caps or restrictions

• minimum lease terms

• required ownership periods before leasing

• move-in and move-out procedures

• association fees or deposits

• rules affecting tenants

• current or anticipated special assessments

• association finances

• restrictions that could affect future marketability

Association assessments also directly affect your monthly expenses.

A condo that appears attractive based on purchase price and rent may look considerably different once assessments and other ownership costs are included.

Multifamily Properties Need a Different Analysis

Chicago's two-flats, three-flats, and other multifamily properties can provide opportunities for investors and owner-occupants, but they introduce additional considerations.

You'll want to understand the legal number of units, existing rents, lease terms, tenant status, utility responsibilities, building condition, and operating expenses.

Don't automatically assume that every occupied space you see can legally be rented as a separate dwelling unit.

For an occupied property, existing leases and tenancies can also affect what happens after closing.

The income a seller is currently receiving is useful information, but it shouldn't substitute for your own analysis of the property's legal use, expenses, condition, and realistic future rental potential.

Understand the Property's Condition

An investment property doesn't need to be perfect.

In fact, properties requiring improvements can sometimes create opportunities for an investor who understands the costs and potential return.

But deferred maintenance isn't free simply because you're willing to tolerate it.

Before purchasing, consider both immediate repairs and longer-term capital expenses.

A professional home inspection can provide useful information about the property's condition, but investors may also need specialized evaluations depending on the property.

The goal is to understand what you're buying well enough to incorporate foreseeable expenses into your investment decision.

Consider Vacancy and Turnover

No rental property is guaranteed to remain occupied continuously.

Even in a strong rental market, tenants move.

When evaluating a property, consider what happens financially if it sits vacant between tenants.

Turnover itself can also cost money. Cleaning, painting, repairs, marketing, leasing, and lost rent between tenancies can affect your return.

A property that consistently attracts qualified renters and retains good tenants may ultimately perform better than one with slightly higher theoretical rent but frequent turnover.

Know What You Want to Manage Yourself

Real estate can be described as “passive income,” but owning rental property isn't necessarily passive.

Someone needs to handle:

• tenant communication

• rent collection

• maintenance

• repairs

• emergencies

• recordkeeping

• renewals

• compliance

• turnover

Some investors handle those responsibilities themselves. Others hire professional property management.

Either approach can work, but the cost and time involved should be considered before purchasing the property, not after the first tenant calls with a problem.

Brian Somera Group provides acquisition guidance and leasing representation for residential investment properties, but does not provide ongoing property management.

Think About the Exit Strategy Before You Buy

Even if you expect to own the property for many years, consider how you might eventually exit the investment.

Could the property appeal to both investors and owner-occupants?

Would an existing tenant affect a future sale?

Could association rental restrictions change the property's usefulness to investors?

Would improvements you're considering add value to future buyers, or primarily benefit current tenants?

You don't need to predict exactly when or why you'll sell.

But understanding who might eventually buy the property can help you make better decisions while you own it.

Work Backward From the Numbers

One of the easiest mistakes in investment real estate is finding a property you like first and then trying to make the numbers justify the purchase.

A better approach is often the reverse.

Establish your investment criteria, financing assumptions, target rental range, expected expenses, and acceptable return first.

Then evaluate properties against those criteria.

That makes it easier to walk away from a property that doesn't make sense, even if you happen to like it.

Buying the Property Is Only the Beginning

A successful rental investment isn't determined solely on closing day.

Acquisition price matters, but so do financing, property condition, rental demand, operating expenses, vacancy, tenant placement, ongoing management, and eventually your exit strategy.

That's why I approach investment-property searches differently from traditional home purchases.

At Brian Somera Group, we can help investors evaluate potential residential properties through both sides of the equation: what it takes to acquire the property and how it may compete as a rental afterward.

If you're considering your first investment property or looking to add another property to your portfolio in Chicago or the surrounding suburbs, we can help you evaluate the market, understand potential rental demand, and develop a search strategy around your investment goals.

Let's Discuss Your Investment Property Search