In case anyone still cares about real estate after the events of the last few days I thought I would catch you up on what is happening with Chicago's market for investment properties. The confluence of several factors has created a real frenzy for real estate investments:
- People with cash are desperate for return with paltry returns on bonds and both stocks and bonds perceived as too risky.
- Record low mortgage rates allow you to generate very high returns on equity with even modest returns on assets.
- Renting is the only option for a huge segment of households who don't have down payments and whose credit scores have been trashed.
- A hot rental market tempts investors with the prospect of increasing returns.
The result is that any decent investment property priced reasonably gets multiple bids practically overnight. The last investment property that I put under contract (I represented the buyer) went under contract in 4 days at 13.7% above list price with 6 offers. And that's not unusual. In fact, that has been the norm for several months now.
It should therefore be no surprise that the Chicago Tribune ran a story on Friday on how small rental buildings are up 10% in value from a year ago. This conclusion is based upon a Cook County home price index devised by DePaul University's Institute for Housing Studies. However, the institute goes on to point out that prices are still more than 54% below their peak.
A couple of days earlier CoreLogic released their December MarketPulse Report, which actually reiterates my bullet points above. A lot of what is contained in that report is rather arcane and not particularly useful but I did find the graph below to be interesting. It shows the year over year rent increases for multi-family units and single family homes over the last few years at the national level. The bottom line is that when you can lock in a mortgage payment for an investment property at around a 4% or less interest rate and your rents go up by 2 - 4% per year then your investment return grows nicely over time. Meanwhile, Chicago rent increases have recently been even larger than depicted below. And if inflation goes into high gear - a real possibility given our monetary policy - then these investment properties become the ultimate inflation hedge.