1st Multi family house and planning to live in there

Chicago, IL · Member since 2020 · 20 posts · 6 votes

Hi everyone. Rookie to RE investment here. My family really needs a bigger space to live, my husband is a first time home buyer so we are planning to Take the low interest rate opportunity to get a multi family house. And maybe after a year or two we will move on to our next single house or something else. My kids are still both under 5 so we still have time before settle down on a certain school zone but we do want to stick to certain area close to hubby’s work. We plan to continue the buy and hold process down the road.

So my questions are: Would you still follow the 1 or 2% rule when selecting the property even though we plan to live in one of the unit for a while? I’m debating should we go though the renovation, and not sure what loan should we get? should we go to private lender in this case? Thank you!

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Jaysen Medhurst

Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes

If you want to keep the property as an investment after you move out, @Amily Yi-Chieh Tseng, then you need to do a full rental analysis of that property fully rented and with you living in one unit. You'll probably have to hit at least the 1% rule in order to cash flow, fully rented. No way you're going to find a 2% property in any part of Chicago you would actually want to live.

A live-in BRRRR is a great way to create value, but how big of a renovation do you really want to take on with 2 little ones in the house? I have a 3 and 5-year old and can't imagine willingly stepping into such a thing...that's just me.

As far a loan, you want to a normal owner-occupied residential loan. There are plenty of products that allow for low down payments. Talk to all of your local banks and CUs to see what they have. Avoid FHA, if you can. There's more paperwork and you don't automatically drop PMI once you hit 80% LTV.

I don't see any advantage of using a private lender unless you have some unique circumstances.

What price range are you considering? How much cash do you have to use for DP, closing costs, renovation? How's your credit?

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Jaysen Medhurst
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
6y
If you want to keep the property as an investment after you move out, @Amily Yi-Chieh Tseng, then you need to do a full rental analysis of that property fully rented and with you living in one unit. You'll probably have to hit at least the 1% rule in order to cash flow, fully rented. No way you're going to find a 2% property in any part of Chicago you would actually want to live.
A live-in BRRRR is a great way to create value, but how big of a renovation do you really want to take on with 2 little ones in the house? I have a 3 and 5-year old and can't imagine willingly stepping into such a thing...that's just me.
As far a loan, you want to a normal owner-occupied residential loan. There are plenty of products that allow for low down payments. Talk to all of your local banks and CUs to see what they have. Avoid FHA, if you can. There's more paperwork and you don't automatically drop PMI once you hit 80% LTV.
I don't see any advantage of using a private lender unless you have some unique circumstances.
What price range are you considering? How much cash do you have to use for DP, closing costs, renovation? How's your credit?
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Jonathan GreeneBusiness Member
Real Estate Consultant · Madison, NJ · Member since 2016 · 6k+ posts · 7k+ votes
6y
Good advice above. Even though you are living there, if you plan on keeping it when you move, you should be doing a complete rental analysis and expanding that for long-term gain. But you also need to look at properties that suit your family. Too many investors house hack into bad layout with kids and then it doesn't work and they have to sell or dip out early. When you are house hacking with kids, you have to place your family's comfort level first and the investment second. Ideally, you want to match both so that it's a win-win, but that can be tough. If you find an uneven multi (one unit bigger than the other), you can live in the big unit and rent the small one and then when you leave you will get a significant bump from renting out the big one.
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Amily Yi-Chieh Tseng
OP
Chicago, IL · Member since 2020 · 20 posts · 6 votes
6y
Thank you @Jaysen Medhurst for the advice. As you said, it's hard to find 2% property in Chicago especially if you don't do some degree of repair. That's why I'm debating about the renovation. So far all the move-in ready properties that we have our eyes on are most likely not even close to the 1% (although the market IS currently dropping...). After searching for a while, I'm slowly accepting the fact I might need to do some cosmetics repair at least. But finding the right handyman/contractor is another headache.
Thanks for the heads up on FHA. We're looking at the price point around $500K if without repair, assuming we can get a low DP loan with at least one existing tenant. That being said, we really have limited inventory in the northern Chicago area. We also don't want to go into Chicago too far as it's a very competitive rental market. We have about $30K cash, if necessary I can take out some 401K and stock (right now is just not the best time to do so though). Hubby has a full-time + part-time job, credit is around 680. Mine is above 800 but I'm currently self-employed (within two years) without stable income track of record. I also have a paid off rental property, not sure if this would help much with our situation.
Once again, highly appreciate the input!
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Jaysen Medhurst
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
6y
@Amily Yi-Chieh Tseng, $30k might be tight. Look into taking a loan from your 401(k). You can take up to $50k for purchasing your first home with a 10-year term. Anyway you can leverage the equity in your current rental?
Work on your husband's credit. Gotta get that sorted.
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Amily Yi-Chieh Tseng
OP
Chicago, IL · Member since 2020 · 20 posts · 6 votes
6y
Thanks for the great advice @Jonathan Greene. The comfort of my family is definitely on top of my list! After all, I believe we are all investing because we want a better life for our families, not the other way around! Will definitely keep your suggestions in mind!
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Amily Yi-Chieh Tseng
OP
Chicago, IL · Member since 2020 · 20 posts · 6 votes
6y
Talked to Chase a couple of weeks ago, the officer said I can use the rental property for Cash out but not a line of credit. Obviously the rate would be higher. Between the cash-out and 401K, which one would you suggest going with? I'm clueless when it comes to these two options.
BTW, hubby's credit has gotten a lot better now compared to a year ago. But after a while, the growth just slows down. Would you suggest to wait even though the interest rate is so good now?
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Gloria Wiekert
Real Estate Broker · Chicago, IL · Member since 2017 · 23 posts · 16 votes
6y
Hi @Amily Yi-Chieh Tseng! You should give @Michael Facchini a call, he's the branch manager at Fairway Mortgage in Chicago. He's helped dozens of my team's clients fund a low downpayment "house hack" multi unit purchase in Chicagoland and could walk you through your best options. He's an investor himself so he knows all sides. Chase isn't bad, but my transaction experience with multi unit clients who use Chase hasn't been great. Their loan officers don't typical specialize in this type of purchase and there are a lot more moving parts compared to a condo/SFH.
What neighborhoods/suburbs are you looking in?
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Jaysen Medhurst
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
6y
@Amily Yi-Chieh Tseng, there are plenty of lenders that do HELOCs on investment properties. The big banks don't do them, though. Check out the bottom of this post where @Kerry Baird compiled a great list.
I would consider HELOC first (ideally you use it short-term), refi second, and 401(k) loan last. If you go with a HELOC, throw as much cash at it to pay it off ASAP.
I would not wait. Take action. Who knows what's going to happen with rates, but it will take time to get prequalified, do the paperwork for HELOC/refi/401(k), and, of course, actually find a good property.
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Amily Yi-Chieh Tseng
OP
Chicago, IL · Member since 2020 · 20 posts · 6 votes
6y
Thanks for the recommendation @Gloria Wiekert. I'm near Jefferson Park and looking for the surrounding suburb.
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Amily Yi-Chieh Tseng
OP
Chicago, IL · Member since 2020 · 20 posts · 6 votes
6y
@Jaysen Medhurst awesome suggestions. Thank you! You pointed out some of the info I have not yet learned. The funding part is probably the most confusing and nerve-racking part for me (and probably for most beginners). This is super helpful!
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Michael Facchini
Lender · Chicago, IL · Member since 2017 · 438 posts · 193 votes
6y
@Amily Yi-Chieh Tseng, there is a bit more that goes into the analysis here, both short-term and long-term. Happy to advise!
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Crystal SmithPro Member
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Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes
6y
Originally posted by @Amily Yi-Chieh Tseng:
Hi everyone. Rookie to RE investment here. My family really needs a bigger space to live, my husband is a first time home buyer so we are planning to Take the low interest rate opportunity to get a multi family house. And maybe after a year or two we will move on to our next single house or something else. My kids are still both under 5 so we still have time before settle down on a certain school zone but we do want to stick to certain area close to hubby’s work. We plan to continue the buy and hold process down the road.
So my questions are: Would you still follow the 1 or 2% rule when selecting the property even though we plan to live in one of the unit for a while? I’m debating should we go though the renovation, and not sure what loan should we get? should we go to private lender in this case? Thank you!

Throw out the 1 or 2% rule. If you're seriously thinking about purchasing multifamily to live in for the short term, followed by moving & cash flowing the property for the long term I recommend getting smart on analyzing properties in the neighborhoods your targeting. This includes understanding the implication of taxes, insurance, maintenance, expected rents.... or partnering with a broker that will help you with analysis. Just using the 1% rule will get you in trouble in this market.
Regarding going through a renovation- Get qualified for both a regular loan & a renovation loan. Getting approved for both just opens up the possibilities for properties to invest in. If you find the perfect property that needs no renovation and meets all your living & financial goals, then it's the icing on the cake.
The cost of money with a private lender is usually higher than using a mortgage broker and/or bank. Private lenders may give you a bridge loan to acquire and renovate but you'll have to make sure you have another lender ready to pay off the private lender and put you into a regular loan.

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Michael Facchini
Lender · Chicago, IL · Member since 2017 · 438 posts · 193 votes
6y
@Crystal Smith is spot on, it's not as simple as the 1% rule. Much more to factor in!
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