Buying first multifamily property in Chicago

[Ivana Racic]

Hello, looking to buy my first multifamily property ( 3 flats) in Chicago

What is considered as a good cap rate in the area?

Also, is there any recommendations for the multifamily lenders?

Any tips for beginners ?

Thank you

[Maria Kostadinov]

Cap rates can be a little tricky because if the cap rate is high, then the property may be considered a “high risk” investment. Typically if it a a “low risk” investment, the cap rates are lower. 
Good cap rate is around 6-8  

Be careful in Illinois - taxes have gone up tremendously this year  - keep that in consideration when running your numbers because  “Zillow/Redfin” are showing prior years tax figures. 

[John Warren]

@Ivana Racic welcome to the forums! I don't personally use a cap rate when evaluating 1-4 unit properties. Normally, I would focus on the cash on cash returns of a building. If you are planning to house hack, you need to consider the building post move out to really get a feel for the returns since you would get the benefit of the "free" rent. 

I would recommend that you connect with @Joshua Jones. Josh has helped me personally with nine residential loans, and he has helped dozens of my clients. He is the best lender I have ever used. 

[Mark Ainley]

@Ivana Racic I just DMed you some good resources. 

[Joshua Jones]

Thank you @John Warren. @Ivana Racic if you want to talk more about lending, please let me know. When it comes to multi-units, there are a handful of lending rules we have to be aware of.  I also own 9 rental buildings. Having a great team is imperative to set you up for success on this deal and your future ones if that is your goal.

[Crystal Smith]

Quote from @Ivana Racic:

Hello, looking to buy my first multifamily property ( 3 flats) in Chicago

What is considered as a good cap rate in the area?

Also, is there any recommendations for the multifamily lenders?

Any tips for beginners ?

Thank you

 My tips for you as a beginner:

1. Good CAP Rate- Every investor has their own definition of what is and is not a good CAP Rate. For those investors who are willing to take on more risk, a good CAP rate must be in the double digits. For those who want more certainty in their investment, a good CAP rate is 5%. Bottom line- you have to determine for your business what is and is not a good CAP Rate. If you're willing

2. A good CAP Rate for the area- I've bolded area because Chicago is the 3rd largest MSA in the country with over 100 submarkets.  And the CAP rates range from 20% down to 3%.  My tip:  Study the submarkets and make a determination about which submarket fit your risk tolerance.

[Tyler Peddle]

Hey @Ivana Racic - I have some connections for multifamily lenders here in the area. If you would like their information, I could certainly send it over. 

As for tips, a rental property is only as good as the tenants you find for it. A tenant that pays on time means everything. I work over in property management so if you need any tips on how to find a great tennant please reach out.

[Landon Hoon]

Hi Ivana! Happy to help answer any question's you have. I financed the most 2-4 units in the greater Chicagoland area last year and a big part to it is our low down payment portfolio options that other lenders do not have access to. Feel free to message me and I would love to help out!

[Michael Smythe]

Be prepared to be ... patient!

Don't rush in and only make offers at prices that make the deal meet your target requirements.

[Ivana Racic]

Thank you all for your helpful answers.

I found 3 unit multifamily property, good area, price is $580,000 ( 2 units are 2bed/1 bath and 1 unit 1 bed//1bath) They can rent for $1700 (2 bed) and $1100 (1 bed). Total: $4500/month

I can come up with 25-30 % for downpayment, but still rates seems high.

Expenses that I'm aware of property tax: 8K/yr

Property insurance: estimate $1200/yr

To add the cost of vacancy and maintenance (10% total of the annual rent)

Any other expense that I'm missing?

[Paul De Luca]

Quote from @Ivana Racic:

Thank you all for your helpful answers.

I found 3 unit multifamily property, good area, price is $580,000 ( 2 units are 2bed/1 bath and 1 unit 1 bed//1bath) They can rent for $1700 (2 bed) and $1100 (1 bed). Total: $4500/month

I can come up with 25-30 % for downpayment, but still rates seems high.

Expenses that I'm aware of property tax: 8K/yr

Property insurance: estimate $1200/yr

To add the cost of vacancy and maintenance (10% total of the annual rent)

Any other expense that I'm missing?

You'll want to budget for utilities. Water, common area electric & heat, and whatever utilities are not separately metered for the tenants. You also should budget for CapEx. I think your insurance estimate is a bit low. I normally estimate $45-$55/unit per month.

[Jack Matthias]

Quote from @Ivana Racic:

Thank you all for your helpful answers.

I found 3 unit multifamily property, good area, price is $580,000 ( 2 units are 2bed/1 bath and 1 unit 1 bed//1bath) They can rent for $1700 (2 bed) and $1100 (1 bed). Total: $4500/month

I can come up with 25-30 % for downpayment, but still rates seems high.

Expenses that I'm aware of property tax: 8K/yr

Property insurance: estimate $1200/yr

To add the cost of vacancy and maintenance (10% total of the annual rent)

Any other expense that I'm missing?

If you live in one of the units for a year, you'll be getting a way better rate than if you rent out all 3. Send me an email and I'll try to help point you in the right direction.

[Jonathan Klemm]

Welcome to the Chicago BP forums!

If you can, definitely consider moving into the property @Ivana Racic!  Like @Jack Matthias mentioned you will have much better lending options.

My friend @Landon Hoon above has a great 5% down program for 2-4 units.

My biggest beginner tip would be to not worry about cap rates and work to get your first property as fast as possible...you aren't going to find the perfect property right now so be okay with that and know that gaining experience will get you further faster.

[Jay Thomas]

Quote from @Ivana Racic:

Thank you all for your helpful answers.

I found 3 unit multifamily property, good area, price is $580,000 ( 2 units are 2bed/1 bath and 1 unit 1 bed//1bath) They can rent for $1700 (2 bed) and $1100 (1 bed). Total: $4500/month

I can come up with 25-30 % for downpayment, but still rates seems high.

Expenses that I'm aware of property tax: 8K/yr

Property insurance: estimate $1200/yr

To add the cost of vacancy and maintenance (10% total of the annual rent)

Any other expense that I'm missing?

Make sure to check if the current owner is getting homeowner exemptions. This may affect your bottom line if you don't plan on living in the property.

$1200 is too low. You should be getting this number from an insurance agent. I wont be surprised if you are quoted triple your estimate $.

You are forgetting about utility cost. Are you planning on passing the cost over to your tenants.

[Abbey Humphreys]

Hey Ivana- sounds like a great opportunity for a new investor. Do you plan to live in one of the units? That will effect the financing that you are able to obtain.

[Joe Freeman]

Make sure you run your numbers using multiple exit strategies such as LTR, MTR, and STR. Cap rate isn't something you should focus on with a 2-4 unit property, focus more on what you are coming out of pocket each month to cover the remainder of your mortgage payment. If you're coming out of pocket let's say $800 per month for your mortgage, think of how great that sounds, even if it's not profitable right away, you're building a cash machine you'll reap benefits from for years to come.

The days of the 2-units rent covering the cost of your mortgage are  over, and I would say focus on appreciation and the cash-flow you'll receive after you move out of your unit and rent it out. For example, if your mortgage is $4,500, and 2 of the units cover $4,000 of that, when you move out and rent your unit for another $2,000, you'll be cash-flowing at least $1,000 per month and gaining appreciation while your equity goes up.

I would wait 3-5 years before you begin looking to live elsewhere, rents will have increased quite significantly in that time, and you have the opportunity to refinance to a lower interest rate, ultimately leading to more cash flow.