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If you have traveled in Chicago, you probably noticed its big potential when it comes to real estate investments.
As the third most populous city in Illinois, Chicago has 3 million residents within it’s city limits and 9.5 million in the entire metro area.
It only means that many people need housing, which provides a great opportunity for a first-time investor like you.
If you’re a newbie in the real estate business, it’s crucial to take time researching and choosing the best rental property that can provide you a good source of passive income.
Real Estate Investing Rental Property Chicago Tips For Beginners:
Focus on Your ROI
If you don’t want to take chances, it’s best to invest in a rental property location that promises a high return on investment.
The ideal cap rate is 7% or higher.
To know the highest ROI or Return On Investment, you’ll need to research the area and available houses for sale in the neighborhood.
Checking a trusted and reputable real estate directory can help.
Here are some tips when buying rental properties focusing on ROI:
- Invest in rental properties in areas that you’re familiar with.
- Gain a competitive advantage by drawing insights from your previous experiences. For instance, if you’re a doctor, you can buy a rental property for interns near your hospital. If you’re a young professional, you can buy a rental apartment for bachelors or young professionals near a business district.
- Check the cap rates or single-family houses, apartments, and multi-family residences using online tools, such as Zillow and Bisnow. Doing so will help you assess if the prospective rental property you want to buy is within a reasonable price.
Take note that in Chicago, well-maintained suburban real estate properties are in demand.
Cap rates in this place are higher than that of San Francisco and New York City.
Weigh Your Financing Options
When using a mortgage for your first rental property, you have to weigh your financing options, such as borrowing from the bank or a lending institution.
Remember that investment properties may require higher down payments than regular buildings with strict approval requirements.
Also, consider the renovation expenses before paying the down payment.
You can check the cost of your financing options by filling out a form available on lending sites so that you can compare rates.
Here are some questions you need to ask yourself when choosing a financing option for your first rental property investment:
- Do you prefer a 15-year or a 30-year mortgage?
- How about an adjustable or fixed rate?
- Can you handle more than a 20% down payment?
Invest in Low-Cost or Single-Family Homes First
As a new investor, it’s a good idea to purchase properties in the low or mid-range price brackets.
Since you’ll need to spend money on the repairs and renovation before renting or selling the house, you need to buy a rental property that you can keep up, and you can always find maintenance tips online to help you.
Here are the advantages of investing in single-family homes:
- Single-family homes are easier to manage than multifamily residences or commercial properties.
- With a single tenant, there’s less wear and tear on the property.
- The risks are low even if you don’t meet your expected profits.
- The first rental property serves as your training ground to test your actual real estate management expertise.
Screening Prospective Tenants
One of the things that a first-time investor overlooks is screening potential tenants.
Bad tenants can kill the ROI on your first rental property.
On the other hand, you’ll have peace of mind with a good tenant, knowing that the rent will be paid on time and your property will be kept clean and undamaged.
Here are some tips when screening potential tenants:
- You can try using MyRental, a monthly subscription for investors or landlords to verify criminal backgrounds, eviction history, and previous addresses. Microsoft office templates, like OnSite or Tenant Data, also serve as free online applications for people looking for rental properties.
- Contact previous landlords and neighbors. It also helps to contact the employer to verify if a tenant has a steady and reliable source of income.
- Run a credit check by ordering a credit report through Equifax Identity Report.
- Run a background check through companies like ScreeningWorks or StarPoint.
In the future, you can hire a property manager if you’ve acquired several rental properties and can’t handle the tasks and responsibilities of a landlord anymore.
It will make your real estate management a lot easier so you can focus on the most important aspects of your real estate business.
Understanding the Mortgage Market
Investing in real estate rental property is a major investment.
There are many factors you need to consider, such as the location, current mortgage market value, financing, type of property, and return of investment.
The factors that favor investors include increasing in single-family home permits, tightening vacancies, and rising rental prices.
As a new real estate investor, you need to understand the current mortgage market.
Having the right mortgage could keep the costs low. It also reduces the uncertainties about the cash flow of the property.
The mortgage leverage can save you some cash for repairs or other potential investments.
Here are the basic mortgage terms you need to know as a first-time investor:
Meets the standards of different government-affiliated enterprises.
Generally cheaper than non-conforming loans.
Conforming loans have guidelines including down payments, credit scores, income verification, and debt-to-income levels.
This type of loan is more expensive compared to a conforming loan because it doesn’t meet the requirements of a traditional loan provider or bank criteria.
Non-conforming loans also don’t meet the purchasing guidelines set by the Federal Mortgage Association or Federal Home Loan Mortgage Corporation.
Conclusion Investing in Rental Property in Chicago
When investing in a real estate rental property for the first time, it’s crucial to learn the ins and outs of the business without losing too much or taking a big risk.
Starting with a low-cost investment is a good idea so you can gain experience and improve your knowledge, skills, and attitude towards managing a rental property.
Most of all, don’t forget to weigh your options and screen potential tenants for a successful business.