Buying Multi-Family Unit with FHA in Chicago?

14 Replies

I'm 23 and my wife is 21 and we'd like to buy a multi-family unit in Chicago with an FHA loan because of the low down payment.

1. How feasible is it to live in one unit and rent out another?

2. She's a teacher. Are there any benefits to this? I've heard they get good loan terms. Does this stack with FHA?

3. Would we need to wait until we own the property to start looking for tenants? This probably means losing at least one month of rent, right?

4. How does the getting pre-qualified for a loan process work? Do I give them a list of properties I'm interested in or something?

5. Should I work with a real estate agent? Do you bring them a list of properties you're interest in? Do you get pre-qualified before you find one?

Thank you!

1. It works its called house hacking. 

2. You will need to call a loan officer to see if that would work I don't know of any specific options with it. 

3. You can field tenants but i believe legally you cannot show it unless you have ownership.

4. Pre approval will be, License, two years taxes, 2 months pay stubs, and information on your open trade lines and DTI. Take that to any lender and you will get a pre approval amount say 230K then go shopping.

5. You can look either way with a pre approval or not. I say no to an agent cause some times they will press you to a more expensive property for the commission involved.  

Best of luck! 

Hi Art, 

Congrats on deciding to purchase a property. While I agree with most of Nick's comments,  I have to disagree with #5 (as I am a Realtor). It would be unethical to purposely try to get you to purchase a more expensive property just for a higher commission. I can't say it never happened, but I can say its not supposed to happen. Working with the right Realtor can give you the resources, tools, and knowledge you need to make the best decision, especially for first time homebuyers. I'd love to chat if you are interested in discussing further. 

And there are several options when it comes to purchasing a multi-unit. You can look for a property with a tenant in place or with a vacant unit. Several things to consider in both cases. 

And lastly, it greatly helps to have a pre-approval in hand before looking for properties in person. Most Chicago multi-unit sellers won't seriously look at offers without some proof of qualification. Luckily, getting pre-approved is relatively quick and usually is either free or very minimal cost to get. 

I hope to hear from you, otherwise keep us posted on your purchase. Good luck!

@Art Maydan

1. How feasible is it to live in one unit and rent out another? Very Feasible.  I did it, I have clients who have done it (I am a broker), and I know a ton of BP members who did it.  One of the biggest struggles I see that people have is the battle between what they want (location, amenities, ect) vs the performance of the property.  Because of the age of our buildings, it is pretty hard to find places with two bathrooms, walk in closets, washer/dryer in unit.  And sometimes that is hard for people to grasp.  To get the best returns, areas just around the hot neighborhood are best, and again, some people struggle with that.

2. She's a teacher. Are there any benefits to this? I've heard they get good loan terms. Does this stack with FHA? There are a few low downpayment programs. My lender can offer 5% down conventional for some qualified first time buyers. IHDA has a first time homebuyer downpayment assistance, and of course FHA loans are pretty prevalent.

3. Would we need to wait until we own the property to start looking for tenants? This probably means losing at least one month of rent, right?  If the property is vacant, then yes you have to wait until you own it until you can show and rent it.  But if you close after the 5th of the month, your first payment isn't for a few weeks (Say you close today, your first payment would be March 1) so that gives you some time.   Some properties are currently occupied, and you will have to uphold the current lease in place.  

4. How does the getting pre-qualified for a loan process work? Do I give them a list of properties I'm interested in or something?  You give them your taxes, paychecks, and banking information and tell them you are looking for a multi unit.  They will run the numbers and give you a approval, which will change depending on how much rent the property can generate.  

5. Should I work with a real estate agent? Do you bring them a list of properties you're interest in? Do you get pre-qualified before you find one? This is a personal decision and will depend on where you are looking. If it is the North side of Chicago, a vast majority of what you will look at will be on the MLS. That means either you have an agent representing you getting half the commission, or you let the seller's agent take the whole commission and get limited representation. As a newbie, I think the right agent can be a valuable resource to help you learn the ropes. Yes, you get preapproved before talking with an agent so you know how much you can buy

@Art Maydan , I did the same exact thing in 2010, 3% down on FHA loan for a 2 flat In North side chicago. I did most of the rehab work myself. Lived practically free for 3 years. Not to mention I had no previous investing experience. House hacking works and if you buy right, once you move, a nice part of the rental income goes right in your pocket. Good luck and best wishes!!!!!!

@Art Maydan listen to Brie. Talk with a lender and get pre-qualified. Pick a neighborhood you want to live in and start looking for 2-4 units that fit your requirements. Positive cash flow will be tough while you live there, but find something that will cash flow if/when you move out.

What neighborhoods are you considering?

Originally posted by @John Casmon :

Art Maydan listen to Brie. Talk with a lender and get pre-qualified. Pick a neighborhood you want to live in and start looking for 2-4 units that fit your requirements. Positive cash flow will be tough while you live there, but find something that will cash flow if/when you move out.

What neighborhoods are you considering?

 Thanks for the advice, everyone. I'm open to anything, but Pilsen looks like it has some good deals that'll appreciate quickly. 

Originally posted by @Art Maydan :

1. How feasible is it to live in one unit and rent out another?

Living in one unit & renting the others has been done since the Mayflower.

3. Would we need to wait until we own the property to start looking for tenants? This probably means losing at least one month of rent, right?

Technically you can't look for tenants, which means showing the property to others, until you own it.

4. How does the getting pre-qualified for a loan process work? Do I give them a list of properties I'm interested in or something?

The bank, based on your income & cash available, will tell you how much you can afford. They will provide you w/ a pre-approval letter which can then be used for your offers

5. Should I work with a real estate agent? Do you bring them a list of properties you're interest in? Do you get pre-qualified before you find one?

You should hire a full time that can hold your hand all the way through the process, from providing you w/ referrals to loan officers, inspectors, general contractors & legal support.

@Art Maydan i would suggest looking into working with someone at your local bank or even a credit union. Sometime s there are specific programs that offer closing assistance for public school teachers. 

Originally posted by @Art Maydan :

 Thanks for the advice, everyone. I'm open to anything, but Pilsen looks like it has some good deals that'll appreciate quickly. 

Our office is in Pilsen.  When you hire your agent make sure they provide you w/ the latest sales statistics for Pilsen so you don't get frustrated when you start making offers.

Hey Art,

The FHA loan program is great for owner-occupants as it allows 3.5% down payments if you live in one of the units of the property. On the buy side of a transaction, why wouldn't you hire an agent to help you? They are free and are paid by the seller.

Here are the loan limits for FHA loans: 2 units 468,150, 3 units 565,900, 4 units 703,250.

What many people don't realize is that with 3-4 unit FHA loans, there is a test the property must pass called the "Self-Sufficiency Test". Make sure your agent and lender know about this test so that you only bid on properties that will pass this test. If they don't pass the test, it will likely be a dead deal.

See here for more info on the self-sufficiency test for 3-4 unit FHA loans:

http://chicagoreinvestment.com/2014/02/self-sufficiency-test-fha-loans-on-three-and-four-unit-buildings/

Do you think a 3-4 unit would be too much for a first buy? Should I start out with a 2-unit?

We'd like to move into a place by late June. What's my first step? Finding an agent?

Art- its a 2 step process to begin, the financing and finding the right agent. Getting pre-approved now will give you all that you need to know in terms of monthly payment, down payment and costs so you can decide what price point you want to purchase at. Once you have that down, you can hook up with an agent (I am a licensed Realtor) to begin scouting the areas you want to focus on. 

Sounds good. Do I need to pick a lender first or is there some site where I can enter my info and scan several lenders? Do I physically go somewhere or is this an online thing?

Also, when I'm pre-approved, am I approved for a certain time period or for certain areas? What constraints are there?

I appreciate all the help so far, thanks guys

I did this in 2014. For finding renters, honestly, you will need to close first and potentially leave it empty for month. Or, you can do what i did, which is line up renters ahead of time, and then potentially have to sign a rental contract for the whole place when your loan didn't close on time. Worked out, but if my loan fell through I would have been stuck with an expensive 1 year lease. 

Quick tip: raise your purchase price and ask for a corresponding seller credit towards closing costs (i did 10k). As long as your appraisal shows you have 3.5% built in equity, you can use the credit to reduce your downpayment. Maybe my lender did it wrong, but i only paid 2.5% out of pocket.

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