Live for Free With a Two Flat in Chicago
Posted 03-14-2014 at 10:46 AM by MarkHafeli
In Chicago, a large amount of lots in the city are filled with multi-unit buildings including two-unit buildings called two-flats. The standard two flat is made of a wood-frame, brick or greystone and will be two stories high with a basement and a 25 foot wide x 125 foot deep lot.
These two flats in Chicago have been used for decades as a way for families to have friends or relatives live in the same building while providing separate places to cook, shower and sleep. But as time went on, two flats have become an amazing starter investment vehicle for real estate investors serving the needs of shelter (literal and tax) and investment.
Having bought a two flat myself as my first purchase in real estate, I understand some of the challenges that people are going to have to overcome prior to making the investment. Here are the most common objections:
1. I don’t know how to be a landlord. This should be followed up by “yet”. Becoming a landlord is something that can be studied and learned then improved through practice. Chicago has an amazing program through the Community Investment Corporation that teaches Chicago residents how to act effectively as property managers. You will get advice from tenant screening to evictions to proper disclosures to security deposits and dispute resolution. Furthermore, there are companies that will do all of the landlording for you if you’re not comfortable.
2. For the same price of this two-flat, I could have a brand new condo in the area I like. Perhaps maybe the problem is that you are closed-minded. There are many wonderful, more affordable neighborhoods outside of the core areas of Chicago that could be awesome places to live. I challenge you to learn more about neighborhoods on the north and northwest sides of Chicago like Logan Square, Irving Park, Albany Park, Lincoln Square and Uptown. You could own the equivalent of two condos in some of these neighborhoods when compared to a River North or Lincoln Park. Also keep in mind that if you do want a two-flat in the core neighborhoods of Chicago, don’t expect the returns to be very high from a cash flow standpoint.
3. I’m not sure I want to share my home with someone I don’t know. To own a two-flat as an owner-occupant, you have to be a bit adventurous. When you list your property for rent, you will have the opportunity to meet prospective tenants in person at your property. You can ask them questions, check their credit, background, criminal history, work history, call references etc. By the time you’re done screening them, you’ll have a better idea of who they are and if they will be a good neighbor.
Assuming you are able to overcome these objections, that brings you to the profit side of this investment. By living for free, I mean that by having rented one unit in your building you are covering all or most of the other costs of owning/maintaining your property. Suppose you are currently paying rent of $1,500 per month, but have the opportunity of owning a two-flat in Chicago and paying $0 per month after all rents and costs are factored in. Here is what that could look like:
Two Flat Free-Living Scenario: Two Units, both include 2 bed/1 bath units renting at $1,500 per month. Live in one unit, rent the other. Purchase price $200,000, 20% down payment, 4.25% 30 year fixed rate loan.
Rent Unit 1: $1,500
Principle and Interest: ($787)
Home Insurance: ($120)
Property Taxes: ($333)
Water: ($100)
Cash Flow: $160 per month
So as you can see, given this scenario which is possible in Chicago, you could live in a two-flat for free or even for a small profit if you do it right. In this case, the mock buyer would have gone from being a renter and paying $1,500 per month to owning a two-unit building and earning $160 per month. That’s a $1,660 monthly windfall before even factoring in any tax benefits or potential property value gains over time.
So when you are considering your first home purchase, don’t rule out the option of owning a two-flat, it can be your first major step to financial flexibility.
See the full blog at: http://chicagoreinvestment.com/
These two flats in Chicago have been used for decades as a way for families to have friends or relatives live in the same building while providing separate places to cook, shower and sleep. But as time went on, two flats have become an amazing starter investment vehicle for real estate investors serving the needs of shelter (literal and tax) and investment.
Having bought a two flat myself as my first purchase in real estate, I understand some of the challenges that people are going to have to overcome prior to making the investment. Here are the most common objections:
1. I don’t know how to be a landlord. This should be followed up by “yet”. Becoming a landlord is something that can be studied and learned then improved through practice. Chicago has an amazing program through the Community Investment Corporation that teaches Chicago residents how to act effectively as property managers. You will get advice from tenant screening to evictions to proper disclosures to security deposits and dispute resolution. Furthermore, there are companies that will do all of the landlording for you if you’re not comfortable.
2. For the same price of this two-flat, I could have a brand new condo in the area I like. Perhaps maybe the problem is that you are closed-minded. There are many wonderful, more affordable neighborhoods outside of the core areas of Chicago that could be awesome places to live. I challenge you to learn more about neighborhoods on the north and northwest sides of Chicago like Logan Square, Irving Park, Albany Park, Lincoln Square and Uptown. You could own the equivalent of two condos in some of these neighborhoods when compared to a River North or Lincoln Park. Also keep in mind that if you do want a two-flat in the core neighborhoods of Chicago, don’t expect the returns to be very high from a cash flow standpoint.
3. I’m not sure I want to share my home with someone I don’t know. To own a two-flat as an owner-occupant, you have to be a bit adventurous. When you list your property for rent, you will have the opportunity to meet prospective tenants in person at your property. You can ask them questions, check their credit, background, criminal history, work history, call references etc. By the time you’re done screening them, you’ll have a better idea of who they are and if they will be a good neighbor.
Assuming you are able to overcome these objections, that brings you to the profit side of this investment. By living for free, I mean that by having rented one unit in your building you are covering all or most of the other costs of owning/maintaining your property. Suppose you are currently paying rent of $1,500 per month, but have the opportunity of owning a two-flat in Chicago and paying $0 per month after all rents and costs are factored in. Here is what that could look like:
Two Flat Free-Living Scenario: Two Units, both include 2 bed/1 bath units renting at $1,500 per month. Live in one unit, rent the other. Purchase price $200,000, 20% down payment, 4.25% 30 year fixed rate loan.
Rent Unit 1: $1,500
Principle and Interest: ($787)
Home Insurance: ($120)
Property Taxes: ($333)
Water: ($100)
Cash Flow: $160 per month
So as you can see, given this scenario which is possible in Chicago, you could live in a two-flat for free or even for a small profit if you do it right. In this case, the mock buyer would have gone from being a renter and paying $1,500 per month to owning a two-unit building and earning $160 per month. That’s a $1,660 monthly windfall before even factoring in any tax benefits or potential property value gains over time.
So when you are considering your first home purchase, don’t rule out the option of owning a two-flat, it can be your first major step to financial flexibility.
See the full blog at: http://chicagoreinvestment.com/
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