Chicago’s Small Multifamily Returns Are Under Pressure From Taxes and Insurance

Written by:

Steve Marcinuk

Date:

15 Dec 2025

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Chicago’s small multifamily investors are facing mounting financial pressure from two sources that are increasingly difficult to plan for: rapidly rising property taxes and insurance costs. These fixed expenses, which are outpacing rent growth, are creating new risks for owners and threatening the profitability of buildings that, until recently, were considered solid investments.

“The biggest challenge right now is the moving target for two things. One is the insurance cost, and the second is property taxes,” says Niko Apostal, managing broker at Essex Three-Twelve. Apostal argues these costs are fundamentally different from operational expenses, which owners can generally predict and budget for.

Property Taxes Driven by Pension Obligations

Apostal attributes the property tax increases to Illinois and Cook County’s pension shortfalls. “The city and the county have this looming debt obligation to the pension system that’s causing it to have to raise taxes, and the only facility it has to do so pretty much is raising property taxes,” he explains.

This means the tax pressure is structural rather than cyclical. “So far, rents have sort of kept up with those costs, but all you need is for one soft rental season, and a lot of these buildings are going to be underwater just by sheer value of the property taxes going up,” Apostal says.

The risk is immediate: a brief rise in vacancies or a slow leasing season could turn a profitable building into a cash-flow negative asset if property taxes continue to rise. Unlike maintenance or market-driven expenses, these tax increases are tied to state and local pension obligations and will persist regardless of how the rental market performs.

Insurance Costs Unrelated to Local Risk

Insurance premiums are also climbing, but for reasons disconnected from the local market. “Chicago has one of the most stable climates in the country here, and yet we see our insurance costs going up like crazy to try and meet the issues that neighboring states or other places have, and it’s just not really fair to Illinoisans and Chicagoans,” Apostal says.

Chicago property owners are seeing premiums rise as part of national risk pools that respond to climate events elsewhere, such as hurricanes in Florida or wildfires in California. This means local owners pay more even though Chicago faces few of these hazards. Apostal describes this as a “perverse situation” where one of the country’s most climate-stable markets is penalized by broader insurance industry losses.

For owners, this creates a cost that can’t be managed through better property upkeep or tenant selection. If insurance rates are rising due to disasters elsewhere, local efforts to reduce claims or maintain buildings have little effect.

Unpredictable Costs vs. Standard Maintenance

Apostal distinguishes these unpredictable expenses from routine maintenance, which remains manageable. “Everything else is pretty standard. If you know how to buy a vintage building and you’ve got your contractors and your crew ready to be able to make whatever repairs, it’s pretty much the same thing over and over again,” he says. Plumbing, electrical upgrades, and similar projects are costs investors can forecast.

“It’s just the unpredictable ones, like taxes and insurance, that right now can be significant drags on the return on investment,” Apostal says. Owners can budget for routine repairs, but they cannot anticipate whether property taxes will jump ten percent or insurance premiums will spike fifteen percent in a given year.

This unpredictability is now forcing investors to reconsider how they evaluate deals. Buildings that appear profitable at today’s tax and insurance rates may become marginal or unprofitable if those costs rise. According to Apostal, the safest investments are those with enough cash flow to absorb significant cost increases without going underwater.

Implications for Investment Strategy

These challenges mean that small multifamily investment returns are increasingly tied to policy decisions at the city, county, and state levels rather than just market fundamentals or property management skill. As a result, investors are facing a new layer of political and regulatory risk that is harder to quantify or hedge against.

For investors, this could mean requiring larger cash flow cushions in their underwriting, prioritizing properties with higher rent growth potential, or focusing on areas with more predictable tax and insurance environments. For policymakers, Apostal’s warning raises the question of whether continued property tax increases are sustainable, or if they risk pushing small multifamily owners into distress.

The next twelve to eighteen months will likely reveal whether the market adjusts through higher rents, lower cap rates, or declining investor interest in small multifamily properties. For now, Apostal’s assessment is clear: the biggest threat to Chicago’s small multifamily market isn’t always visible in sales data, but in the operating statements of properties struggling to keep pace with rising fixed costs.

As property taxes and insurance premiums continue to climb faster than rental income, the margin for error narrows. A single soft rental season, spike in taxes, or insurance hike could tip many buildings into negative cash flow. This environment demands that investors pay close attention not just to real estate fundamentals, but to the broader fiscal and insurance landscape shaping their bottom line.