Chicago two and three flat investment properties (Elgin: 2013, rental)

[chicagoyp2013]

[SIZE=3]I posted a little while ago about buying a condo unit (in a condo building) and eventually renting it out for an investment return. In addition to my research, most of you indicated that owning condos and renting them out does not usually generate that great of a return (if any). I’ve decided a condo probably isn’t for me then.

I am wondering what your opinions on the Chicago two and three flat market is (for investment purposes)? I know my landlord nets substantial positive cash flow each month off the two flat I live in. But I’m wondering what it’s like to actually own one.

It looks like a decent two or three flat can be had for $400-500K in the Northern/near west neighborhoods. Based on high level numbers and assumptions, it appears it is possible to net a positive cash flow each month.

I guess I’m just curious to hear the quirks/things that everyday people like myself don’t think about when pursuing these endeavors.

My plan would be to live in one of the units indefinitely and rent out the other units. If I ever moved from the area, I would either sell (if it made sense to) or hire a property management company. Even with a 10% cut of gross revenue to the property managers each month, the numbers still work. But I would imagine the key is in getting a thorough inspection and setting aside adequate reserves for major repairs (new roofs, etc).

Thanks in advance..
[/SIZE]

[knitgirl]

But I would imagine the key is in getting a thorough inspection and setting aside adequate reserves for major repairs (new roofs, etc).


That's key! I own and live in a 3-flat in Elgin and these old buildings are constant maintenance. We have 3 water heaters, they've all been replaced once or twice in the last 15 years, new boiler, new roof, new fence, expensive paint job, driveway resurfacing, snow removal, constant plumbing issues in these old houses, the list goes on and on. Elgin requires annual inspections of rental units and they ALWAYS find SOMEthing they want fixed. On the other hand, I can pay the principal, interest and insurance on the rent from the largest unit.

[rparz]

Only inspections I know of (other than prospective tenants--in the city) is when you want to rent it out section eight.

Two flats are easily bought under standard residential mortgages. Little money down, credit checks and approval.

Three flat (legal) requires commercial type loan. The current rents of all units have to cover 75% (something like that -- can't remember) of the total mortgage, taxes, and property insurance. Basically, it becomes idiot proof to be cash flow positive.

On the flip side, you're in a crowded investor market where cash is already king. You'll be paying a hefty premium in the form of points on the mortgage, or likely the down payment to make this ratio in the most desirable of areas. Figure at a MINIMUM 20% (for mortgage underwriters) down and keeping 5-10k (my advice) per unit in your pocket for rehabbing, fixes, etc. Not to mention you'll have to show where all this savings came from and prove that it is yours and not a loan of some type.

I have a great agent who specializes in this type of property if you're interested, but first you'll have to research the mortgage approval process as it's a lot more complex than a standard single family home purchase. (You'll also get hit with a higher interest rate since it's commercial, I was hit with a almost a whole point over prime interest with excellent credit.)

Disclaimer: I bought my 3 flat in the middle 2010 after the crash, but at the height of armageddon when prices were still falling and no one was buying. (Obama even gave me $8k to buy!) The underwriters and mortgage process was excruciatingly brutal, and I got a killer deal.

I've seen a lot of investor movement in the past 12-14 months, (fix/flip etc) so I'd expect that all the deals are gone and the market is already crowded with people thinking like you.

[chicagoyp2013]

[SIZE=3]@rparz … thanks for the comments. I wasn’t aware that there is different financing required for 2 vs 3 flats. I’m not opposed to either, but would want positive cash flow. I agree with you that it will likely be challenging just finding a unit. But, I guarantee there are still some out there. I think that many deals/sales close so quickly that they don’t even hit the market for that long or show up on Zillow, agent’s websites, etc.

So I think if I am going to pursue this it might be in my best interest to have an agent looking for me that specializes in these properties because they might have the insider word on properties coming to market. Can you PM me your agent's information? [/SIZE]

[knitgirl]

Actually, I am a mortgage loan processor and you can finance up to 4 units with a conventional loan. The rates aren't as good as buying 1 unit, but you can do it. 20% down on a 2-flat, 25% on a 3 or 4 unit. If you'll be occupying one of the units you'll definitely get a better rate than if it's strictly an investment property. Or you can do what I did and go FHA. At the time (17 yrs ago), we only put 3% down. I'm not sure what the FHA rules are for multiple units, but they may still be better than conventional. Also, the maximum conventional loan amount goes up with the number of units. I would have to do some research, so pm me if you have more specific questions.

[rparz]

I remember it being extremely painful working through the mortgage approval process and I met all the requirements.

If you go FHA, I can almost guarantee you won't be cash-flow positive and you'll be paying a premium for something that is FHA approved. Not to mention the PMI insurance hit along with the post-crash tightened lending standards.

[chicagoyp2013]

I do have enough substantial cash available for a downpayment. I would put down the minimum amount to avoid PMI.

It seems like these two/three flats are awesome investments if you can get through/around the quirks. It seems like the good ones are hard to find/close on. But once you have it, it seems like it would be a cash cow. Assuming the numbers worked and you have enough reserves going into it, and % extra each month off the cash flow to set aside for future reserves, it seems pretty smooth sailing.


[SIZE=3]Maybe I’m being naïve but this is the way I am viewing it, anyway….[/SIZE]

[rparz]

Originally Posted by chicagoyp2013

I do have enough substantial cash available for a downpayment. I would put down the minimum amount to avoid PMI.

It seems like these two/three flats are awesome investments if you can get through/around the quirks. It seems like the good ones are hard to find/close on. But once you have it, it seems like it would be a cash cow. Assuming the numbers worked and you have enough reserves going into it, and % extra each month off the cash flow to set aside for future reserves, it seems pretty smooth sailing.


[SIZE=3]Maybe I’m being naïve but this is the way I am viewing it, anyway….[/SIZE]

Since you have the cash available, your only limitation will be finding the place you want. (put down enough so your rents cover your bills and your life will be idiot proof) Let's hope your experience is similar to mine and it turns out to be a home run six ways from Sunday.

[knitgirl]

"If you go FHA, I can almost guarantee you won't be cash-flow positive and you'll be paying a premium for something that is FHA approved."

Not quite right, 2-4 unit buildings don't need to be approved by FHA, CONDOS do. Any FHA loan does need to have an appraisal done by an FHA approved appraiser and they are concerned about a few things that they aren't for conventional loans, namely termite inspections and peeling paint. This isn't an issue for the OP, but didn't want others to be confused on that point.

[rparz]

While there are some FHA inspections, I was touching more on the fact that the pricing of the property and your loan costs will blow you out of being cash flow positive. You'll be paying a higher mortgage and have higher expenses and I can't see rents covering that cost.

If you can find me some properties that are move in condition walking distance from an el and cash flow positive with 3% down I'll seriously consider buying them YESTERDAY. I'll even let you close on the mortgage.