In 2015, Chicago placed 10th on the list of cities most searched by international buyers, according to Realtor.com International.
What a difference two years makes. In 2017, it dropped down to 16 on the list, and word on the street is that international buyers are cooling on the city. International buyers would much rather spend their money in Miami, Los Angeles, New York, and other cities around the country.
It’s not all bad news, though. This has opened the market up for investors who want to rent to international clients.
Let’s look at why buyers are leaving Chicago for other cities and then give you a better understanding of how you can capitalize on it.
Why Aren’t People Buying in Chicago?
The reason international buyers are losing interest in Chicago is simple. The return on investment isn’t as big in Chicago as it is in other major cities.
In the past, it was common for international buyers to purchase real estate in Chicago for their children who were enrolled in college in the city. Then, when their kids graduated, they sold the property and netted a nice profit. The influx of international students in the city gave the real estate market a huge boost.
The buyers needed a good return on investment for this to work. Otherwise, they were wasting their money. The real estate market in Chicago is weak right now, and that has hurt the return on investment.
Like the rest of the country, Chicago was hurt by the housing crash that took place several years ago. Unlike the rest of the country, it hasn’t bounced back as quickly as anticipated.
Most of the country’s real estate market sits where it did in 2006, before the market crashed. That’s not the case in Chicago. At the beginning of 2017, it was still 19 percent below where it was in 2006, and home values were only expected to go up by 1.95 percent for the year. That’s almost 2 percent less than the national average. The lack of growth speaks to a troubled market.
These numbers put Chicago at the back of the pack among the country’s 100 largest metros for the year. The problem will likely fix itself within the next year or so, but in the meantime, international buyers don’t want to sink their money into the real estate market here. Most don’t intend on holding the real estate for long enough for the market to recover. Instead, they would much rather make use of all the rental opportunities in Chicago.
The city has seen a rise in luxury apartments, and many international renters are filling them. If you want to take advantage of this growing trend, you need to take special care, though. Renting to international tenants isn’t the same as renting to people who live in the United States. You need to cover your bases so you don’t end up losing money on the deal.
Renting to International Tenants
Most landlords have only dealt with tenants who live in their country. If you are part of the Chicago market, though, there is a good chance that you will come across an international tenant or two, and you need to be prepared. You have to go through the process a bit differently, from checking the credit to collecting the rent. These steps will help you protect yourself.
Checking the Credit
If you rent to international tenants, you will have to check their credit. However, you probably won’t have access to a social security number, so that means the process is a bit different.
You will need to get the person’s taxpayer identification number. The IRS gives this number out to all U.S. taxpayers, and the number will allow you to track the person’s rental history and consumer reports. While not all tenant screening services work with this number, many of them do, allowing you to run a rental credit check.
In some cases, the taxpayer identification number might not bring up anything. The tenant might be new to the United States and doesn’t have a history over here, so the record is clean or cannot be retrieved.
You don’t want to take a risk, so ask the person for a year’s worth of bank statements.
Examine the statements to make sure the person pays his or her bills. You can also look for bad checks in the bank statements and look at the income-to-debt ratio. This will give you a much better idea of the worthiness of the renter.
Some renters won’t part with an entire year’s worth of bank statements because they will feel it is too intrusive. It is up to you to decide if you want to take a risk on someone who won’t give you access to bank statements and doesn’t have a credit history. Proceed with care if you decide to move forward, as the person might be hiding something.
Run a Criminal Background Check
Many people think they need a social security number to run a criminal background check, but that is not the case. You just need the full name and date of birth to run this check. Your tenant criminal background check won’t just check for crimes committed in the United States. It will check all over the world, so you’ll know if the potential renter’s record is clean. This will protect you from letting a criminal rent your property.
Consider Allowing International Guarantors to Be on the Lease
If you’re renting to international students, you will likely rent to people who need to have a cosigner. Students often don’t have income or established credit, so you will want someone to guarantee the lease.
International renters often don’t have a guarantor who is located in the United States. They will want to use someone who lives abroad, and that can be tricky. Some serious drawbacks come with using an international guarantor.
First, it will be difficult to verify the person’s credit history. You might not be able to run a simple credit check, so you could end up with a guarantor with shoddy credit. You will want to take steps to ensure that the person has spotless credit. That can include bank statements and other financial documents. This can be a time-consuming process, and it isn’t foolproof.
It’s also hard to hold the guarantor liable if the tenant skips town. There are legal and procedural hurdles in place when trying to enforce a U.S. judgment in another country. If you decide to file the lawsuit overseas to bypass those hurdles, you will have to put more time and money into the process. In many cases, the payoff from the judgment doesn’t cover the time and expenses lost. That’s why many landlords choose to cut their losses.
That sounds frightening, but there is a solution. International guarantor services are springing up around the country. These services underwrite and guarantee the rent. The tenant pays the service a monthly fee, and then the landlord gets the benefit of a guarantor. This is something to consider if you’re against using an international guarantor. Of course, the tenant will have to agree to this, as well, and he or she might not want to pay the monthly fee. You need to weigh your interests against the interests of the tenant and come up with the best solution.
The Security Deposit
As a landlord, you assume a larger risk with an international tenant, as it will be hard to make a legal case against someone who moves away. You can mitigate some of that risk by asking for a larger security deposit.
Landlords often ask for as much as six months’ rent for security deposits when renting to international tenants. If the tenant skips town, the landlord can use the security deposit to cover missed rent. This extra layer of protection is very helpful when dealing with renters from other countries that don’t have credit histories and use international guarantors.
If you do this, it is essential that you collect the security deposit before the tenant moves into the home. Some people will try to gain access without paying the security deposit, and then you won’t get the protection you need. Make sure everything is signed and paid before handing over the keys. If the person fails to pay the deposit, he or she won’t be able to rent the home.
Collecting Rent from International Tenants
You need to take special care when collecting rent from international tenants. The best option is to make it automatic through an online rent collection service. Then, you won’t have to track the tenant down to get the rent. Online rent collection also reduces the chance of fraud, and it makes it easier to stay organized.
Having the tenant hand over post-dated checks is another option. Have the person give you a year’s worth of rent checks, with each check made out for a different month. Then, you deposit one check a month. This is better than collecting cash, but it isn’t as good as automatic payments. It is much easier when you draft the money directly from the person’s account without running to the bank.
Be Mindful of Scams
Landlords always have to worry about potential scams, especially when dealing with international renters. You might come across someone who has no actual interest in renting your property. Instead, the person just wants to scam you out of some money.
This is more common than you might think, but it’s also easy to detect. Let’s say that someone contacts you to rent the property. He or she sends the money for the deposit but accidentally sends too much. The persons ask you to wire the excess money back to his or her bank account.
You send the wire, and a few days later, you get a call from your bank. The check or money order you deposited bounced and you’re out the money you wired to the tenant.
Protect yourself by never sending a wire transfer to a person you have not met. You should also run all background checks before getting into any financial deals with anyone.
Also, keep in mind that most people aren’t going to overpay. As a rule, people do not like paying rent and deposits. They aren’t going to give a nickel more than they owe; so, if they send several hundred extra dollars, something sketchy is going on.
You need to know your rights when rejecting applicants. There are valid and invalid reasons for rejecting applicants. You can reject an applicant based on credit history, housing history, or income. However, you cannot reject the applicant based on national origin or race. That means you cannot choose not to rent to international tenants. You might have to go through additional screening to get their credit profiles and histories, but failing to rent to them based on their national origin is against the law. The person could sue you, and you could end up losing a lot of money in the process.
If you do have to reject an applicant based on one of the valid reasons, document it so the person understands why he or she was rejected. You do not want to have any questions hanging in the air. It’s important that the person knows exactly why he or she was rejected. You should also keep your documents in case the person sues anyway. That way, you will have the proof you need.
The Bottom Line
International renters are a growing breed in Chicago, and it’s good news for landlords. You just need to protect yourself and your interests when dealing with these renters. It will be harder to prosecute them if anything goes wrong, so do your due diligence from the get-go. That starts with proper tenant screening and ends with the right method of rent collection. If you are careful, you can end up with excellent tenants who will help you grow your rental empire.