3 Reasons Why Rent to Own Investing Can Be Difficult in Chicago and Illinois
As a real estate investor, you may have considered the rent-to-own strategy as a way to generate passive income and build wealth. Rent-to-own investing, also known as lease-option investing, involves leasing a property to a tenant with the option for them to purchase the property at the end of the lease term. This can be an attractive option for both investors and tenants, as it allows the investor to generate rental income while potentially selling the property at a higher price in the future, and it gives the tenant the opportunity to build equity and improve their credit before purchasing the property.
However, rent-to-own investing is not without its challenges, especially in the Chicago and Illinois markets. In this blog post, we will discuss three reasons why rent-to-own investing can be difficult in these areas and provide some tips on how to navigate these challenges. If you’re looking to sell your house fast or sell your house fast in Illinois, Tony Buys Homes can help you navigate the complexities of the real estate market.
1. Strict Rent Control Laws
One of the primary challenges of rent-to-own investing in Chicago and Illinois is the strict rent control laws that govern these areas. Rent control laws are designed to protect tenants from excessive rent increases and ensure that rental housing remains affordable. However, these laws can also make it difficult for investors to generate a profit from their rent-to-own properties.
In Chicago, the Residential Landlord and Tenant Ordinance (RLTO) regulates the relationship between landlords and tenants, including rent increases. Under the RLTO, landlords are required to provide tenants with at least 30 days’ written notice of any rent increase, and they cannot increase the rent more than once every 12 months. Additionally, the RLTO prohibits landlords from retaliating against tenants who exercise their rights under the ordinance, such as by raising the rent or terminating the lease in response to a tenant’s complaint about the property’s condition.
While the RLTO does not specifically address rent-to-own agreements, it is likely that the same rules would apply to these arrangements. This means that investors who enter into rent-to-own agreements in Chicago may be subject to the same restrictions on rent increases as traditional landlords, making it difficult for them to generate a profit from their investment.
In Illinois, there are no statewide rent control laws, but local municipalities may have their own rent control ordinances. For example, the city of Evanston has a rent stabilization ordinance that limits annual rent increases to the lesser of 5% or the increase in the Consumer Price Index. Investors who own rent-to-own properties in areas with rent control laws should be aware of these restrictions and factor them into their investment strategy.
2. High Property Taxes
Another challenge of rent-to-own investing in Chicago and Illinois is the high property taxes in these areas. According to a recent study by WalletHub, Illinois has the second-highest property tax rate in the nation, with an average effective rate of 2.16%. In Chicago, the effective property tax rate is even higher, at 2.30%. These high property taxes can significantly impact an investor’s bottom line, as they increase the carrying costs of owning a property and may make it more difficult to generate a profit from rent-to-own investments.
One way that investors can mitigate the impact of high property taxes is by carefully selecting the properties they invest in. By focusing on properties in areas with lower property tax rates or properties that qualify for tax exemptions or abatements, investors can reduce their tax burden and improve their chances of success with rent-to-own investing.
Another strategy for dealing with high property taxes is to pass some or all of the tax burden onto the tenant. In a rent-to-own agreement, the investor can include a provision that requires the tenant to pay a portion of the property taxes as part of their monthly rent payment. This can help to offset the investor’s tax liability and make the investment more profitable. However, investors should be cautious when implementing this strategy, as it may make the property less attractive to potential tenants and could lead to higher vacancy rates.
3. Tenant Default Risk
A third challenge of rent-to-own investing in Chicago and Illinois is the risk of tenant default. In a rent-to-own agreement, the tenant is responsible for making monthly rent payments as well as additional payments that go towards the purchase of the property. If the tenant fails to make these payments or otherwise defaults on the agreement, the investor may be forced to evict the tenant and find a new buyer for the property.
Tenant default can be particularly problematic in rent-to-own investing because the investor has a vested interest in the tenant’s success. If the tenant is unable to purchase the property at the end of the lease term, the investor may be left with a property that has not appreciated in value as much as they had hoped, making it difficult to sell the property and recoup their investment.
To minimize the risk of tenant default, investors should carefully screen potential tenants before entering into a rent-to-own agreement. This may include conducting credit checks, verifying income and employment, and checking references to ensure that the tenant has a history of responsible financial behavior. Additionally, investors should consider requiring a larger option fee or higher monthly rent payments to provide a financial cushion in the event of tenant default.
While rent-to-own investing can be a profitable strategy for real estate investors, it is not without its challenges in the Chicago and Illinois markets. By being aware of the strict rent control laws, high property taxes, and tenant default risk, investors can make informed decisions about whether rent-to-own investing is the right strategy for them and take steps to mitigate these challenges. If you’re looking to sell your house fast or sell your house fast in Illinois, Tony Buys Homes can help you navigate the complexities of the real estate market and find the right investment strategy for your needs.