Written by Noah Birk
For new and existing apartment investors, Chicago’s South Side is a unique opportunity. Between the cash on cash returns, appreciation potential and economic development in these neighborhoods, investors should take a closer look at the South Side.
Cash Flow– Where can you find 10% cash returns? 20%? 30%? In the neighborhoods that comprise the South Side of Chicago. Cash on cash returns are the number one reason investors are flocking to the South Side. You can consistently find 8%-12% cap rates all over the south side; that is rare in any major city. The vast majority of new buyers on the South Side are investors who are fed up with the 1%-3% returns (or negative yearly returns in many cases) that the majority of major east and west coast cities offer. There is certainly a risk vs. reward debate that needs to be weighed before investing in the south side, and the decision to that debate always comes down to one question: Can you manage the building? If the answer is “yes”, the investment can be incredibly lucrative. If the answer is “I think so”: there’s a good chance things are not going to work out the way you planned on your spreadsheet. If the answer is “no”: pat yourself on the back for having the self-awareness many before you have lacked.
Appreciation Potential– If I had to break real estate investors down into two groups, I would say there are investors looking for cash flow (see bullet point #1…) and there are investors seeking appreciation. Great cash flow typically comes in more management intensive areas. The main question investors should consider in this scenario is “How much did I invest, and how much rent am I collecting every month?” On the flipside, great appreciation potential typically comes in areas that people are always going to want to live. The main question investors should consider here is: “How much did I buy the building for, and how much can I sell the building for in X amount of years.”
It is rare but, the ideal investment is when great appreciation potential and great cash-flow potential intersect, and that is exactly what we’ve seen over the past few years on the south side of Chicago. South Side investors have been enjoying great cash-flow while their building values have appreciated over 100% in most south side neighborhoods.
New Business– For the first time in a long time, we are seeing new businesses coming to the area. Whole Foods opened in Englewood, Mariano’s in Bronzeville, and a new Jewel Osco is set to open in Woodlawn. Along with new Starbucks locations, new Chipotle locations and other national chains, we are seeing great locally-owned restaurants and coffee shops opening all over the South Side. All of the new businesses are a breath of fresh air to an area that has historically struggled to attract quality retail operators. Business investment into the community has been a driving force of increased real estate activity.