Chicago, IL: -27.7% Return on Investment (2011)
Chicago is another market area that experienced a dramatic escalation of market values from the real estate bubble. With high rates of regulation and taxation, Chicago is an intrinsically difficult place to invest. Historically, values have been very high relative to rents and the restrictive land use laws have resulted in a constrained supply that sends prices spiraling up when demand increases and crashing down when it softens. Currently, approximately 39% of listings in Chicago are from foreclosures[1].
The state of Illinois is in an extremely difficult budget situation where the government financial commitments exceed their tax revenues by a considerable margin. The city is currently forecasting a FY’11 budget deficit in excess of $654 million dollars[2]. Furthermore, the city’s structural deficit is a matter of considerable long-term concern, since spending has been growing faster than revenue for a considerable period of time and recent budget gaps have been filled with one-time revenue fixes. The result of this accumulated financial irresponsibility on the part of city government is likely to result in dramatic tax increases that push business out of the city. Needless to say, this political environment is not the ideal backdrop for income property investors.
Even in the midst of recent value contractions, rents are still low in relation to market values. This means that investors must finance the monthly cash shortfall from their personal reserves and hope for value appreciation so that they can realize a profit. Successful income property investing will require you to guess the exact timing of a market bottom so that properties can be purchased when a path of appreciation is just about to begin. Chicago represents an income property market that should be avoided by astute investors in favor of other areas with more favorable economic fundamentals.