Purchasing my first rental please help!

22 Replies

Hi everyone, I need your advice. I'm making an offer on a 2 unit with a finished basement that is ready for me to occupy (house hack) The property is brick, very well maintained, move in ready,  newer heater, water tanks and roof placed 2009. The previous owners had it as a single family and took very good care of the building. Also has newer plumbing.  The purchase price $314,000. each unit has 2 bedrooms, 1 bath.  The basement where I will be staying has a kitchen and bath as well. BTW I'm currently living with a family member.   

Ballpark rents in that area are 1,100-1,300.

My mortgage will be around 2,100.

2nd floor pays for heat electricity and gas

1st floor and basement will share utilities.

The area is decent, not to far from the metra.

I'm not expecting cashflow, but it would be nice to live in a nice basement for free.

Should I purchase this property? It's about 25min to downtown Chicago, safe area, family oriented. When I plug the numbers into the BP rental calc. its negative cashflow and negative ROI, does this mean I should not purchase it? PLEASE HELP! = )

Have you done the comps in the area?  This does not sound like a good investment to me.  You still have capital expenses, maintenance, vacancy costs, etc.  Negative means, negative.  Positive sounds better to me.  I would keep looking.  The whole idea of a house hack is for the investment to pay for you to live there.  That's not the case in this scenario.   

@Federico Gutierrez , my other option would be to purchase a condo and pay for the mortgage, which I can do. And I don't have the funds to buy a fixer upper and renovate it, if I did that I know my ROI would be higher. An investor did the math for me on this property and I would only be pocketing maybe $200-300 a month (I would charge for parking and there's coin washer and dryers) So I would be paying little to no rent.

@Elsa M.  

You have more options, you just need to find them. Looking for a multi-family to house hack is a great idea. The deal that you have presented is simply not a good one from the numbers that you have presented.

@Scott Weaner   The total rent for the two units is $2,400, and the basement where I will be living has the potential to be converted to a legal unit that would rent for $700.  So the total would be $3,100.   The purchase price is $315,000, maybe I can offer $306,000. The property taxes are $5,700.   

As an investment it may not have great numbers but it would still be better than buying a condo, paying everything yourself, and have no income. You say you have no money for Reno but you could use a 203k loan since you will live there. You also need to look at the code for the area if you want to live in the basement. Since there is such a small margin on the cashflow side per month, I would also pay extra money each month into a reserve account (such as whatever you pay in rent now or what the basement would rent for) for when a problem arises so you have money set aside. Do this for at least 1 year, then you can start living "rent free" or close to it. Live there for 2 or 3 years then do it again.

@Peter M. For my very first property I don't really want to go through the  203k process.    Would you happen to know what are the requirements for turning a room into a legal bedroom? I ask because just in case I cannot turn my basement into a legal unit, maybe I can duplex it with the first floor for added bedrooms. Right now it has 2 escape windows and one entrance.  

You would have to look it up in your local property code. We don't have many basements here so I am not familiar with what that entails. But the 3rd unit really only affects resale or if you are taking it into consideration for financing reasons. If you can qualify for the loan as if you had one tenant and you lived in the other side, the bank is not going to care after the fact that you are living in the basement. They will only care about getting their mortgage payment. Try to find someone local to make sure it is alright but to me it seems perfectly legal for an owner to live in a basement. You would just be sharing a mailbox with one of your tenants. You could even go to the code enforcement office and explain your situation to them and see what they say. Just don't give them your full name or the property address and as long as you are courteous they are usually willing to help as long as you explain you want to do it right and by the book. You don't have to actually take their advice but you would get some free info.

Hey there everyone! I’m not sure how deeply any of you have gotten into the inner workings of the 203K loan, but in the spirit of sharing knowledge, I started a discussion on the subject here: The 203K Loan - Open Discussion. Lots of great stories from people who succeeded and had nightmares with this type of financing. Many pros, but also many cons if you are not prepared.

Elsa, I wouldn't be so fast to walk away from this deal. For those chiming in from out of town, this might not seem like a great deal for their market....but by Chicago standards it could be, and could have untapped potential. I have a ton of questions that would help me better gauge if I were in your shoes, including:

1) What area is this in?

2) Sounds like there are 2 legal, conforming units and then a grand-fathered/accessory garden unit where you would live?  3 units total?

3) Are the other 2 units under-rented? What value add opportunities exist to improve the property and raise rents?

As for a condo vs 3unit, it's a no brainer for me....especially as a 1st time buyer, primary occupant. And I don't necessarily agree with the comment of living at home for free vs buying. I started my real estate portfolio over 15 yrs ago, and could have sat on the sidelines and lived at home for free, but that's not how you build wealth and leverage assets. Has to be done intelligently, but in a rate inclining market time is typically working against you. Real estate is most often a long game, and using low down payment options and low rates to your advantage helps with that long game. Some will argue of a bubble and just to wait, but I disagree for the most part. The demand for 2-4's has never been higher in my career. I have clients waiting in line to purchase these very desired property types, with very little new construction taking place.

My 2 cents...

Originally posted by @Elsa M. :

Hi everyone, I need your advice. I'm making an offer on a 2 unit with a finished basement that is ready for me a.

Should I purchase this property? I When I plug the numbers into the BP rental calc. its negative cashflow and negative ROI, does this mean I should not purchase it? PLEASE HELP! = )

Should you purchase the property?   What I would do is determine if the property will meet my cash flow requirements if it was fully occupied (Not a house hack).  This would also mean estimating what it would take to make the basement conforming & separating the utilities between the 1st floor and the basement.   If the property does not cash flow after running those numbers I would not buy it.  If the property meets my cash flow requirements then I may purchase, live in the basement accepting the negative cash flow.  Renovate while living there, then when it's time to move out, hold the property for positive cash flow.  I would also have an option of selling to another investor a property that would cash flow with all three units occupied.

Originally posted by @David Hines :

Sharing utilities with your tenant doesn’t seem like a good idea either. You’re just begging for conflict.

 Sharing utilities with tenants is common Chicago as the housing stock is often 100 years old and often utilities are so intertwined, it would cost you a fortune to have an electrician come and sort it out(which I did have to do for one property I own...it was a 10K expense to the electrician).   In another property, I have two units that their electrical is completely mixed together and combined.  I pay for the electrical myself and market the units as "electrical included" so that no tenant is paying for someone else's electricity.   Its the same with heat...a lot of properties have one boiler which heats the two-four units.  Those get marketed as "heat included." 

Originally posted by @Elsa M. :

@Peter M. For my very first property I don't really want to go through the  203k process.    Would you happen to know what are the requirements for turning a room into a legal bedroom? I ask because just in case I cannot turn my basement into a legal unit, maybe I can duplex it with the first floor for added bedrooms. Right now it has 2 escape windows and one entrance.  

 Hey Elsa, I am a fellow investor in the city of Chicago.  Legality of units is very local...each city generally has their own regulations and codes.  Is this property within the city of Chicago limits?  I have quite a bit of experience with Garden(basement) units here.  PM me if you'd like to discuss further.  

@Michael Facchini It's in Berwyn, and I'd put  5% down and the rents would cover mortgage but wouldn't really generate any cash flow. Not sure if I should purchase or wait and see what else is on the market. Yes, it's a 2 unit but I don't think it could be converted to a 3 unit, but it could work as an extra bedroom for when I move out.

Taxes insurance vacancy repairs utilities -so much we don’t know to make an accurate calculation . Based on what you did show though it appears to be a very poor investment . I personally can’t understand why anybody would waste their time or money when your rents can barely pay the mortgage payment .. to each their own

Are you saying rents would cover your PITI and then you'd be living in the basement for free? If so, I'd say this sounds like a pretty decent starter investment from what I understand so far (especially given 5% down). There are lots of ways to create a value-add on this one...again, from the sound of things. I'd be more interested in knowing more about the property and exact block of Berwyn, but so far I wouldn't walk from this one. Happy to chat through it with you if you want to PM me.