In our years of experience in the multi-family market, we’ve heard a lot of questions from our clients and want to provide a helpful guide for anyone who’s planning to buy a two, three, or four-flat in the Chicago area.
In our opinion, yes! Buying a multi-family is a great investment opportunity. You have the opportunity to collect rental income from units to help pay your mortgage and also have access to tax deductions for property maintenance and repair costs that apply to multi-family homes. One of the most unique benefits to multifamily properties is the steady stream of cash from rental income from multiple units that allows you to live in one of the apartments and still offset mortgage costs from rental income from the other(s).
Multifamily homes do come with maintenance (unless you pay for a property manager). They’re also more expensive, so you’ll need to come up with higher down payments and mortgage costs. However, the additional income and equity that build up over time are great advantages if you are able to put in the work.
If you’re interested in investing in real estate, it’s good to know the different types of multi-family homes on the market. Multi-family properties with 2-4 units are often referred to as “residential” multi-family. Properties with 5 or more units are “commercial” multi-family, require more upfront capital, and are subject to different requirements for financing and taxes.
For the purposes of this article, we’ll be discussing residential multi-family as an investment strategy. To keep it simple, we will use the term “multi-family” to refer to properties with 2-4 units.
Once you’re in the market for a multi-family, you’ll hear terms like “2 flat” and “duplex” thrown around a lot. While the two words are similar, they don’t mean the same thing when referring to Chicago properties, so it’s important to learn the difference.
The word “duplex” refers to a building with two units, but it doesn’t mean that both units are considered parts of the same property. A duplex in Chicago can be a building with two townhomes or condos that are separately owned and financed. To keep everything straight, we like to refer to two-unit properties as “two-flats.” Make sure to make it clear to your realtor which type of property you’re interested in to avoid confusion!
Buying a multi-family and making a profit from rental income sounds like the dream, and while it can be very beneficial, it’s worth noting that it takes work as well. You’ll be responsible for maintenance in all units, collecting rent payments, and finding new tenants when the time arises. To stay on top of your finances, you will want to save portions of rental income and schedule contractor work for parts of the house that need updating. You’ll also have to keep track of landscaping and mediate tenant conflicts when they arise.
It’s possible to get a property manager, but this also takes time and funds that otherwise go to you. While a multi-family is a good investment, it does add work to your days and isn’t the right investment choice for everyone.
What serves as a “good investment” largely depends on how managing property will fit into your current lifestyle. Do you have a smaller budget upfront and want a property with one unit to rent out while you live in and fix up the other? If you have a demanding day job, the ideal multi-family might be one that demands little-to-no maintenance so that all units can be rented quickly.
If you plan to occupy one of the units, you will also have to consider whether or not a building is a good fit for your own living situation: if you can commute to work if you need to, and if you’ll have adequate space to yourself. You’ll want to consider both your own needs along with the qualities of a property that make it good to rent.
When you buy a multi-family, you’re taking more into consideration than simply looking where you want to live. You will also want to be aware of what amenities potential renters look for in a property, like its proximity to public transit, neighborhood safety, and nearby grocery stores and shops. While buying in a neighborhood with high rent prices looks good, it might indicate a higher monthly mortgage payment and doesn’t actually guarantee a higher monthly rental income.
You’re not required to use a realtor to buy a home, but we highly recommend using one (of course, we’re a little biased). When it comes to multi-family properties, realtors provide local insights about rentability and the renter’s market that will help you assess the income potential of a property.
A good realtor will also help you verify the number of legal units in a prospective property, which is more complicated than it sounds. Confirming legal units not only ensures that the property is actually worth the price for which it is listed, but saves you legal trouble in the future.
To some buyers, foreclosed properties look like an attractive way to buy cheap and build value with some sweat equity. While foreclosures can be a great opportunity, they come with the potential for underlying complications that aren’t made clear to buyers upfront.
A property that has been neglected can have structural damage or issues with electricity or water that can’t be discovered until after purchase, and often you’ll find old trash, furniture, or belongings left behind that will have to be disposed of. It will also be harder to finance a foreclosed property with low-interest loans like the FHA loan, which has a set of quality standards that eligible properties must meet.
One of the primary benefits of small multi-families is that they are financed similarly to single-families and qualify for similar interest rates and loan types. If you plan on living in the multi-family, you can finance under an FHA loan, which allows you to put as little as 3.5% down, or a VA loan if you are a veteran. If the property is in need of rehab, you can also take out an FHA 203k rehab loan that allows you to roll rehab costs directly into your loan. This allows you to receive any monthly rental income from the get-go without having to put it all towards repairs.
If you have excellent credit and a good amount of cash saved, you can finance a multi-family with a conventional loan and put 15% or 20% down. This allows you to gain equity faster in the building. Keep in mind that the down payment for a multi-family will typically be higher than for a single-family in the same area.
In a city of old homes like Chicago, you’ll find plenty of converted apartments. These units are often in the attic or basement of a property and were added after the home was built. While many of these units are correctly reported and registered with the city, there are many that aren’t (you’ll hear them referred to as in-law apartments or illegal units).
Make sure that you confirm with the city that all units are legal as soon as possible during the closing process. Just because a basement is fitted with a full kitchen and bathroom doesn’t mean that the unit has been properly zoned. If the seller is selling a property priced as a three-flat but only two units are legal, you will want either to counteroffer or look elsewhere for another property.
Why? When it comes to financing, your lender will conduct their own investigation to confirm the legal units of the property. It’s better to do due diligence and confirm the number of legal units upfront to avoid losing financing and to save time in your property search.
It depends on your investment strategy, but oftentimes, no! It’s great to have rented units since it guarantees rental income until the end of the lease agreements, but as with any benefit, there’s a flipside. If all units are rented more than sixty days after close, you won’t be able to live in one of the units to claim owner occupancy, which prevents financing options like the FHA or VA loan. If you’re hoping to live in your building, make sure to request copies of any lease agreements to confirm that at least one unit will become vacant soon after your closing date.
With over a decade of experience helping clients buy and sell investment properties in Chicago, we understand the complications that come with the process. Feel free to reach out to our team with any questions you have, or check out our Advanced Search feature for local listings and start the search for your next property today.