What to Look For When Buying Your First Two Flat

In this post, I want to share with you the most important things to look for when buying your first Two-Flat. Whether you’re a first-time homebuyer, or you have owned condos or single family homes in the past, it’s important to know these key factors that will affect the value of your two-flat. Since I’m a numbers guy, let’s start there!

THE NUMBERS:

In my opinion, cash flow is the most important financial measure of the building you intend to purchase. Even if you plan to occupy one of the units, the best way to determine potential cash flow for the building is to run the numbers at market rents assuming that both units are rented. That way, if you ever chose to rent the whole building out, you’d have a good idea of whether or not it would cash flow as a non-owner-occupied building before you bought it. If your intention is to occupy one of the units, it’s important to know what the cash flow would look like with only one of the units rented. My rule of thumb for cash flow is the following:

If with one unit rented, Monthly Rent > Monthly Principle+Interest then the building is at least a decent investment.

If with one unit rented, Monthly Rent > Monthly Principle+Interest+Taxes+Insurance+Water then the building is an even better investment. The reason for this is that one unit’s monthly rent covers all or close to all of your monthly expenses. That means if you rented the second unit, it would be all profit.

Other units of measure that are helpful are the cap rate, and cash on cash returns. But for first timers, focus on how much cash flow you expect your investment to make and ask your agent if your expectations are reasonable. If your expectations are reasonable, then ask your agent to only send you properties that meet your cash flow criteria.

LOCATION:

This is so cliche, but it’s absolutely true. Real Estate is all about location, location, location. Location will be a large determining factor in value, pricing, rents, returns and just about everything else. So knowing that this is so important, it’s smart to pick a location that you either know, or are interested in and become an expert (or hire an agent who is) on that area. In Chicago, as with other major cities, there are many different neighborhoods some of which are similar and some of which are very different. The best way to start is pick no more than three neighborhoods to search in. If possible, choose one for the best and quickest outcome. In the neighborhood you choose, distance from public transportation is important. If you want to command the highest rents in an area, then you will likely want to search for two-flats within five blocks of the local train stop. Not only will you be able to get higher rents, areas around train stops tend to develop first in up-and-coming areas and the units there are in high demand making them easy to rent. In some areas, being close the the highway (but not too close) is also great for tenants who commute in and out of the city every day.

Depending on your area, schools may be very important. If you have a child or are expecting one, make sure you know which public schools are tied to the areas in which you are searching. Save yourself time by finding out which schools you are comfortable with and only looking for a two-flat that flows into those schools.

Location can also refer to proximity to other landmarks or buildings. If there is a corridor of bars, shopping and restaurants, it may be more desirable to own a property nearby because tenants will enjoy these amenities while living at your property. Buying across from or near a park can be desirable for tenants as well. If your building is the only two-flat or multi-unit building in a neighborhood or block of single family homes, then this is desirable because tenants will enjoy living in a neighborhood that lives like a home with long-term homeowners nearby. You also have the potential down the road to remodel and convert to a single family home. If your two-flat is located on a block with other industrial buildings, this is typically less desirable for tenants and values because of the lack of aesthetic appeal industrial buildings have as well as potential pollution both environmental and noise related.

BUILDING CONDITION:

It’s very important to know the pulse of a building. Is it in rent-ready condition? Are the units current with market demands (such as stainless steel appliances)? How much money do I have to spend as soon as I buy this building to get it rent-ready or to repair deferred maintenance?

To answer these questions, you have to visually inspect the property and take note of what you see. It’s easy to go through a property at a showing, take notes in your head of everything that you see and forget everything as soon as you walk off the lot. Do yourself a favor and take pictures or write notes on you tablet at the showing. Especially with multi-unit property, it’s likely that this may be your only chance to see the property until the inspection due to tenants rights.

The main things you should look for are components of the property that cost the most to fix/replace. These are the roof, heating/A/C components, building structure (is it sagging, are floors relatively level or severely uneven?), tuckpointing/siding, and basement (any water, water damage, mold, foundation issues). Also, when it comes to remodeling or updating a unit, the major costs will be in the kitchens and bathrooms. So if these rooms need updates, don’t forget to factor the cost of remodeling in determining the purchase price for that property.

All in all, 99% of the time, your first two-flat will be a great investment because of the alternative plays available to you. You can keep renting and paying someone else your hard-earned money – not a very good alternative. You can buy a condo, receive no rental income to offset your mortgage, have little control over how your building is managed and pay monthly assessments to an association – a better alternative, but still not very great. You can buy a single family home with full control of the property but no rental income to offset the costs of ownership – an even better alternative, but still not as financially significant as the two flat option. Don’t forget that with a two-flat, you can take some depreciation against the rental income on your taxes further benefiting you each year beyond tenants paying your mortgage and building you equity. I started with two-flats and have seen great results, especially in the long term. Get out there and find one that works for you!

Learn more at my website, www.chicagoREinvestment.com.