Q: What do you think is the key for buying and owning rental property?
A: A lot of the money is made when you buy, short term and long term, because your return on investment is literally a direct reflection of the rent you’re collecting compared to the amount of capital it took to buy the property and the ongoing expenses.
If you overpay, it essentially lowers the return you’re getting from day one, before you even collect one month of rent.
Q: What is something that successful rental property owners are consistently doing?
A: Comparing the condition of the property to its competition in the area. In Lincoln Park, for example, a lot of the rental stock in that market is vintage. That’s pretty common. In other neighborhoods, like the West Loop, most of the rental stock is new or newer construction — built or rehabbed in the last 10 years. So obviously if you’re buying something of lesser quality or appeal, you can’t expect to get the same amount in rent.
Q: What are some warning signs you should look for in a potential rental investment?
A: In terms of construction and the state of it being rehabbed, you want to check all the major systems — electrical, plumbing, HVAC — and make sure they’re all in good working order. I own units that are completely gut rehabbed, and those units have the least amount of phone calls, the least amount of worry.
As for units that are older and haven’t been rehabbed, there’s usually constant upkeep on those units. And that’s a major factor you have to keep in mind when analyzing a property’s potential.
Q: What are some common mistakes people make when it comes to gutting homes they want to rent out or flip to sell?
A: One recommendation is do not over-improve the property. You really have to examine and know the market you’re in. For instance, what are renters or buyers expecting as far as finishes? If your competition is renting just fine with standard finishes, the market may not warrant a higher rental price point. There’s a certain point where investing more money in expensive finishes will not translate into more profitability. A high-end quartz countertop may not get you any more than a mid-priced granite option.
You’re not doing what they saw on a house-flipping show where they’re fine with dropping $50,000 of the show’s money. You should have a certain level of design and appeal, but overdoing it can cost you.
Q: Any other advice?
A: Yes, stay in a neighborhood you know and you’re close to. If you’re in your own backyard, you’re less likely to be second-guessing yourself about areas you’re unfamiliar with. From a management perspective, too, it’s a lot easier to check up on it, coordinate maintenance, collect, rent, etc.
Be aware of the ordinances in the city in which you’re buying the property. The city of Chicago, for example, has very specific landlord-tenant ordinances. The fines are heavy if you don’t follow them. You have to be aware — and cautious — of it all.
When you’re calculating your budget, don’t forget to set aside some money for some deferred upkeep and larger repairs that will be needed down the line. Major projects like a roof or back porch can cost thousands, and if you don’t budget for it, it can be a big surprise that can haunt for years to come.