Chicago Real Estate Investing: Landlord-Tenant Rules

So you think you want to invest in real estate in Chicago – and by invest I mean buy income producing property and become a landlord. It sure seems like everyone in Chicago has visions of tenants dancing in their heads. However, before you go and put all your eggs in the real estate basket you would be well advised to do two things: 1) watch Pacific Heights and 2) thoroughly understand the rules regarding how Chicago landlords are supposed to behave with respect to their tenants.
I’m half joking about watching Pacific Heights but there are tenants out there, like Michael Keaton’s character, that know how to milk the system and make a career out of it. And that’s where Chicago’s landlord tenant rules come in because they can be quite arcane and onerous and you don’t want to make any mistakes.
I’ll provide a link to all the original source  materials from the City of Chicago in a bit but first I’m going to provide you with some of the key highlights courtesy of Greg Braun of Braun & Rich. Greg represented my buyers on an investment property that we closed on on Friday and he provided a great little summary document along with some great advice. You can find Greg’s summary here: City of Chicago Lease And Security Deposit Requirements.
As Greg pointed out it’s those 6 security deposit items at the bottom of the list that you really have to watch out for. You can screw up the 11 items on the top of the list – and most landlords do – and recover but if you screw up one or more of the security deposit requirements you can be liable for 2 times the value of the security deposit plus court costs! I am not joking.
My favorite is the interest on the security deposit, which must be paid by the landlord to the tenant annually at lease renewal. Sooooo many landlords don’t do this and let me tell you just how absurd this gets. The city of Chicago sets the interest rate to be paid on security deposits and for 2014 it is .013%. So if the security deposit is $3000 that means that the landlord must pay the tenant $.39 (39 cents) interest and failure to do so can cost the landlord $6000 plus court costs. That seems fair, right? A $6000 penalty for cheating a tenant out of $.39? I actually know a landlord who got burned by this and it pushed his precarious financial position over the edge.
This whole thing with the security deposit has gotten so nasty that many landlords no longer hold security deposits. Alternatives include:

  • Charge a higher rent for the benefit of not having to make a security deposit
  • Charge move in and move out fees
  • Have the tenant pay the first and fifth month rent in advance. This tests the tenant’s ability to pay rent. You don’t want to have them pay the last month’s rent in advance because then you have to pay them interest on that.

Of course, the landlord loses some leverage when there is no security deposit.
The other topic that was discussed at the closing by both attorneys was that if a landlord gets into a legal dispute with a tenant then they should just settle. The cost of fighting it out in court and the potential loss is just too great not to settle. Like I said…watch Pacific Heights.
So here are links to some of the city of Chicago rules that Greg’s summary is based upon and some other useful resources:

There are other resources available to investors like the standard Chicago lease, rental applications, and the Illinois Association of Realtors’ Landlord guide but those documents are not public. Nevertheless, someone did put the Landlord Guide out there.
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