Carol was shocked when she opened up the property tax bill on her rental holding, and she was still in an agitated state when she came to see me with that bill clutched in her hand. I calmed her down and, as a seasoned investor in Chicago real estate, was able to give her some perspective. I reminded her that taxes had gone up the year before and she knew they would go up again this year. But she was taken aback by just how much of a rate increase her property had been assessed for. She worried whether the rents she charged would be able to keep up with this tax hike. We talked about where the local market is heading and how Chicago’s property tax problem may influence real estate investors’ decisions.

Chicago property tax impact on investments

Property Taxes on the Rise in Chicago

Recently, Chicago has been no stranger to increasing property taxes. Two years ago, taxes went up over 10% for the average homeowner to fund City Hall and school construction projects. Last year, property taxes are rising by an additional 10% on average, depending on where the property is located and its assessed value. And, we can expect more tax increases although they will be less dramatic.

For now, homeowners in the city will see their bills rise the most while those in suburban Cook County will be slightly less impacted. Lower priced homes are taxed at a lower rate than higher priced homes, as determined by the assessor’s office every three years. There’s some nuance on how a property is taxed, however, since some neighborhoods have additional taxes for services like mosquito abatement or local improvements. Navigating the Cook County tax code can be a little complicated. That said, city residents will still generally pay less than suburban homeowners when comparing properties with similar market values.

Effect of Increased Taxation on the Real Estate Market

Chicago’s real estate market has been sluggish in recovering from the housing crisis compared to the rest of the nation. Although it has been shrinking, we still have a shadow inventory of foreclosed homes and many local homeowners currently owe more on their mortgage than their home is worth. Many investors, like Carol, purchased one of these distressed properties based on the popular notion that housing prices will fully recover in the next one to two years.

However, the dramatic increase in property taxes is making these investors feel a financial pinch and wonder if the market is heading in the right direction for them. If not, the holding costs of rental properties will tug at your pocketbook. To maintain a decent cap rate, you will want to pass the additional taxes on to your tenants. However, the question remains whether or not the market will continue to bear rent increases.

To answer that, we need to look at the different rental market segments. There has been a glut of new apartment developments built in the luxury market recently. The over-availability of luxury housing does not bode well for expecting this segment to absorb raising rents. In fact, we are already seeing a depression of occupancy and rent prices in this segment. However, the Class B, or older housing, market continues to remain stable. These properties, especially in suburban neighborhoods, will see the lowest property tax increase and, even with a modest rise in rent, will look comparably more affordable for renters.

While investment property owners in the Class B market may be able to maintain their cap rate, regular homeowners may not fare so well. With so many homeowners already underwater on their mortgages, we can imagine that increased property taxation will cause even more financial distress. These homeowners may look for a way out of a difficult situation and be ready for an investor to approach them with a win-win deal to avoid foreclosure.

Finding Opportunity in Turbulent Times

Current market conditions, combined with the significant surge in property taxes, create a unique opportunity for investors. Focusing your investment strategy on older, suburban houses remains a fairly safe bet, especially if you can buy from a distressed homeowner at a price that makes sense for the long term. However, you will need to find those opportunities if you are going to weather the market turbulence. HomeVestors® has the strongest lead generation tools available. Independently owned and operated HomeVestors® franchisees can rely on the widely-recognized national brand “We Buy Ugly Houses”® and strategic marketing tools to bring in the leads every day. When homeowners need to sell quickly, they know to call HomeVestors®.

You should get in touch with HomeVestors®, too, if you need real estate investing help in this uncertain market.


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