Is this a good buy? Chicago 2 flat
Hello!
Is this a good investment? I would live in the basement 1st year and rent out all 3 units afterwards. Thanks!!
First time home buyer here, just put an offer on a 2 flat in Chicago. My offer is $184,000 and I am financing via FHA at 3.75% with 3.5% down. As part of the FHA terms, in my offer I am requesting a 3% closing credit from the seller. This is a Fannie Mae property. I am estimating that I will pay about $1,000 out of pocket to cover the rest of the closing costs.
Unit 1 and Unit 2 are the same - 2 BR, 1 Bath apartments. Basement unit is 2 BR, 1 bath but is smaller. Units 1 and 2 I can rent for $850 and the basement $650, totalling $2,350. Taxes are a whopping $3,800 per year (2014 data). Here is my BP analysis:
Looks like a good deal. Your repair figures seem low though. Is everything in the property new?
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Real Estate Agent Illinois (#475. 112189)
- 3126817487
- https://www.chicagodiscountproperties.com/
Thank you for you input! The property needs very little work done. It has New windows, new carpeting, new roof, new kitchen sets, nice driveway, nice garage, bathrooms look good. Outside is nice..BUT, There is a crack in the foundation and im just crossing my fingers that the home inspection finds it to be a non-structrural issue... other than that, it's in move-in ready condition.
Overall, this should be a really good deal for you. I also think the repairs numbers are too low. Even if it's been upgraded, you still want to aside money for the repairs and maintenance that will come along. I'd use $75-$100 per unit but those aren't enough to affect your numbers significantly. Make sure you set aside a separate account with your reserves so you won't be tempted to spend the money unless you really need it when a big ticket item breaks down.
Closing costs look low, too. I believe that you still need to come up with 1.75% of the loan amount upfront for FHA fees. This would be over three grand. What does your mortgage broker say?
Is this going to be a long term hold for you? If you're thinking at all about selling within the next five years, consider staying in the basement for two years so you can take advantage of the capital gains exclusion. If you sell a property that's been your primary residence for 2 of the last 5 years, you get to exclude $250,000 (if you're single) from capital gains. (I believe that would only apply to the one unit you were occupying but this could be significant.)
I want at least 8% on cash deals and 3 percentage points above my cost of money on financed deals. Your cost of money is 3.75% so I would want 6.75%. You seem to exceed that number so it would be a good deal to me. Whether it is to you depends on your required rate of return.
Good Luck.
Bill
Hi Andreas and thank you for your advice!! I will increase my repair cost per month and leave it in a separate fund. I'm not sure if I have to come up with 1.75% of the loan amount upfront, that's a good question that I will check with my broker about.
This would be a long term hold for me, yes. This property would be my foot in the door and I would hold it as long as I can. I'll also take a look into the capital gains exclusion. I'm married so I assume I could exclude above $250k? Even so, that's plenty for this property.
Another question I have is - if I make upgrades/repairs to any of the rental units, I can deduct that in my taxes correct? Is there anything else I should know tax-wise that I can take advantage of?
Lastly, what is the best way to screen tenants? I am willing to pay for a 3rd party to get me good, quality tenants (on paper.. in reality it's always a toss up, I'm sure).
Thanks!
Marvin
Originally posted by @Andy Mirza:
Overall, this should be a really good deal for you. I also think the repairs numbers are too low. Even if it's been upgraded, you still want to aside money for the repairs and maintenance that will come along. I'd use $75-$100 per unit but those aren't enough to affect your numbers significantly. Make sure you set aside a separate account with your reserves so you won't be tempted to spend the money unless you really need it when a big ticket item breaks down.
Closing costs look low, too. I believe that you still need to come up with 1.75% of the loan amount upfront for FHA fees. This would be over three grand. What does your mortgage broker say?
Is this going to be a long term hold for you? If you're thinking at all about selling within the next five years, consider staying in the basement for two years so you can take advantage of the capital gains exclusion. If you sell a property that's been your primary residence for 2 of the last 5 years, you get to exclude $250,000 (if you're single) from capital gains. (I believe that would only apply to the one unit you were occupying but this could be significant.)
Originally posted by @Marvin Anaya:
This would be a long term hold for me, yes. This property would be my foot in the door and I would hold it as long as I can. I'll also take a look into the capital gains exclusion. I'm married so I assume I could exclude above $250k?
You're right. $250k if you're single, $500k if you're married.
Another question I have is - if I make upgrades/repairs to any of the rental units, I can deduct that in my taxes correct? Is there anything else I should know tax-wise that I can take advantage of?
Yes and No. It depends on how you classify your repairs and upgrades. Typically, small ticket items are easy to categorize as "expenses" and are easy write offs. "Capital repairs" as I've known them (I think people here on BP refer to them as "CapEx" or "Capital Expenditures") are different. I believe that they are added to your cost basis and that you get to depreciate them over time. I'm sure there are lots of threads on BP that talk about this topic and others will have better and more accurate advice than me. Ultimately, you need to confer with your accountant to see what you can write off immediately versus what you can write off over time.
Lastly, what is the best way to screen tenants? I am willing to pay for a 3rd party to get me good, quality tenants (on paper.. in reality it's always a toss up, I'm sure).
Again, this is a topic that I'm sure you can find discussed in a lot of detail in other threads. My property management companies screen tenants for me. You want to get a complete and thorough application with the tenant's personal info, a credit check, verify that income is at least 3 X the monthly rent, and check references at the very minimum. Swinging by the prospective's tenant's current residence to "drop off paperwork" is a good way to see how they are likely to treat your place. You can check their social media profiles to get a better sense of their character. Check out threads here on BP that discuss this and you'll get a better idea of what you'll want to do. Take the time to do a thorough screening before the tenant moves in to mitigate your risk. Yes, they still can turn out to be problem tenants but the more work you do on the front end the less likely you'll have to do work on the back end if you have to evict the tenant and rehab a ruined unit.