While standing in line at my favorite 80’s themed coffee shop on Milwaukee Avenue the other day, I overheard two young men discussing how to find the best real estate investment in Chicago. They chatted about wanting to find modestly-sized homes in walkable neighborhoods or with access to public transportation. New to sourcing leads on the most marketable fixer-uppers to buy, renovate, and sell, they were somewhat flustered. As an experienced real estate investor, and proud Gen Xer, I casually offered up some coffee and old-school advice. Here’s what I shared.

Finding the Best Type of Chicago Real Estate Investment

Chicago is home to one of the fastest growing segments of home buyers in the nation: Millennials. Last year, Cook County saw 43% of its mortgages go to Millennials. In Chicago alone, that number was 41%, according to recent research. The importance of attracting Millennial buyers when deciding how to invest in real estate cannot be overstated in our current market.

Needless to say, my new young friends were excited to hear that they were onto something potentially big. But what kind of property should they focus on if they wanted to gain a market share of Millennial buyers?

I liked these guys–they reminded me of me when I first started out–and I wanted to help get them on a solid investment path. So, I helped them understand where the best opportunities in Chicago real estate investing lie.

Luxury homes. Values in the luxury sector tend to be thought of as stable, and returns on investment as being potentially substantial. This line of thinking is what’s continued to make luxury homes attractive to investors–and it’s wrong. Because luxury condos and apartments have been overbuilt recently, this sector is actually one of the least stable at the moment. In Lincoln Park and downtown, in particular, sale prices are on the decline and homes are staying on the market for half a year or more. The recent tax hikes could lead to them sitting longer. Even Millennials, who like living near downtown, aren’t buying. I think real estate investors should forgo these properties for the time being.

Multi-family. The multifamily market is faring better than luxury homes, so it remains a favorite with many investors. But multi-family units are expensive to purchase and maintain as buy and holds. Furthermore, Class A and B occupancy rates dropped downtown this year, with Class A expected to drop even more as developers continue to saturate the market with new units. Additionally, with rents lowering and holding costs increasing, the income stream they provide may only be enough to cover the mortgage and operating expenses–not exactly the fastest way to achieve significant returns. In addition, since competition is already strong in this sector, this may be the most difficult and riskiest time for new investors to try to get a foot in the door. Millennials wanting to own a home probably won’t be interested anyway.

Single-family Residences. Older, smaller, “ugly” houses make for some of the best real estate investing opportunities in Chicago. These single-family homes, usually being sold by distressed homeowners and often in transitional neighborhoods, can be bought at enough of a discount that leaves room leftover for the rehab–even an environmentally-friendly one. This makes them especially attractive to Millennial buyers who want to own a modest home in a gentrifying area and keep their environmental footprint small.

Of course, over time, many real estate investors find they want to round out their portfolio with a variety of property types. I’ve done this myself in the last decade or so. But current market conditions suggest that now is the time to appeal to Millennials. They want single-family homes, which is fine by me. That’s my niche anyway. I can almost always count on getting the best returns from buying and renovating older, smaller, ugly houses anyway. So, where do you find them?

Finding Deals Through Local Government and Bank Programs

In Chicago, there are several options for real estate investors to find inexpensive single-family homes that will appeal to Millennial buyers. The most common are local government and bank programs. Houses available through these programs appeal to investors looking for cheap Chicago property primarily because of the potential discounts. As attractive as these discounts are, however, they do come with some downsides. Let’s briefly take a look.

• Foreclosed properties in Chicago are owned by a lender, typically a bank, and may be made available through the Multiple Listing Service (MLS) or through an auction. The condition of these homes is almost always poor and, ideally, the price reflects this. Of course, even with a cheap buy, you could risk your returns if surprise rehab costs occur or you discover previously undisclosed unpaid liens or taxes attached to the property.

• Chicago’s forfeiture program lets the city sue the owners of homes that are dangerous and unlivable, then makes these houses available to investors for renovation. The point of the program is to reduce neighborhood blight and raise property values. However, the court can take forever to hear these cases. If you finally do get a property, you’d better complete the rehab within the city’s timeframe–or pay the resulting fines.

• City-owned properties are available for sale through the Department of Planning and Urban Development (DPD). You may receive discounts when purchasing these homes if certain development criteria, such as community enhancement and environmental sustainability, are met. But there is a long application process and, because every intent to purchase is published in the paper, other potential buyers can snag the property out from under you if they make a higher offer.

• Cook County Land Bank Authority (CCLBA) gets houses through donations and forfeitures, then clears the titles and removes any red tape that might complicate a sale. Unfortunately, the cost to rehab these homes can be a lot more than you bargain for–they’re rarely a simple fix-and-flip. If you don’t renovate on time and within CCLBA guidelines, they’ll take the property right back.

Obviously, none of these options are an efficient means to building an investment portfolio. Plus, what I’ve found over the years is that the best time to buy is before homes are absorbed into these programs to begin with. There’s less red tape, less property damage, and more of a chance to help a homeowner in distress.

The HomeVestors® Franchise

The option I chose for finding leads on single-family homes was to become an independently owned and operated HomeVestors® franchisee. Because of the nationally-known “We Buy Ugly Houses”® brand, sellers in financial distress already know who to get in touch with when they need out of a difficult situation– me! I know it works because franchisees like me have already bought over 140,000 houses nationwide.

After a few rounds of coffee, and a croissant or two, my new friends and I parted ways. But not before they made the decision to contact HomeVestors® to get started on investing more strategically in Chicago real estate–and building some green of their own.

Each franchise office is independently owned and operated.