Crazy prices on 2 and 3 flat buildings in chicago

[Mordy Chaimovitz]

Can someone please explain to me why people are buying 2 flats that rent comps show $4,600 a month in income for 665k+? The income doesn't really cover expenses plus debt service. 

Even if you tell me they are paying cash or very high down payments , shouldn't the price of multifily buildings reflect its NOI/cap rate?

Also, am i imagining it, or is there is no way these buildings will hold onto these values. 

Would you forecast that there will be some big discounts on these in a few years as people realize that they cant afford to hold onto them

thank you!

Mordechai Chaimovitz

[Henry Lazerow]

Chicago cap rates are actually much higher then other comparable sized cities. Here you can get a little cashflow + appreciation + mortgage paydown while other areas are just the former two. 

I have already sold 4 million this year of multi units. Many of which are savvy BP type clients who are doing updates/raising rents and then the buildings do cashflow positive even with lower down payments which produce amazing returns (at 3.5-5% down you get close to a 50%+ return a year just off mortgage paydown). 

You definitely can't just buy a building low down, do no work to it and keep old rents and expect to profit. 

[John Warren]

@Mordy Chaimovitz cap rates and NOI are commercial real estate terms, and 1-4 units are not really valued in the same way. Two flats are essentially just houses.... they trade like houses and there is a lot of emotion involved. Most of the buyers are just regular folks looking for a home, so they are not at all thinking about cap rates.

Three and four units properties tend to be slightly more investor facing, but there are still a lot of regular buyers that pick up three and four units as well. This is what I love about this asset class. You can sell these things in an up market and make an absolute killing. I have helped quite a few investors dispose of their 2-4 units this year and they have been cleaning house. 

[Daniel C.]

@tom shallcross summarized this well in another post and just inflate your numbers up for a $665k purchase price and $2300/mo per unit for rent.

Borrow 80% which is like $3700/mo for Principal, Interest, Taxes, and Insurance. Subtract $2300 for one unit and they're paying $1400+expenses to live in a $2300 month apartment and area. Now let's say one or both people making the purchase owned a condo previously where they roll over the proceeds/equity into the new purchase and put 40% down. Then it's even cheaper. Or maybe the units aren't equal and one rents for $2800 covering most of the cost of living there. From the sentiment of your post it seems like you're viewing the buyers as strictly investors when they may lean more towards traditional homeowners looking for a quality of life improvement or an improvement on their current financial situation today.

Let's say the buyer pays 465k and has a 5% interest rate. That's a 2,2500/m pmnt assuming 10% down. If tenant below is paying 1,500/m he's living in area he wants for roughly 750/m P/I payment. You obviously won't find anything ifor 750/m P/I payment in the area and you won't even find rent for double that amount if you want to keep renting. And that's just a 2 unit, obviously the numbers creep closer to actual investor-numbers with a 3 or 4 unit pumping in more rent.

I'm not saying "wow, what a deal" or to copy this I'm just saying when compared to SFH or continuing to rent, the 2-4 unit househack is very appealing and thus demand is strong.

[Paul De Luca]

@Mordy Chaimovitz

Great points made above along with what @Daniel C. said referencing @Tom Shallcross's post on another thread.

The context and variables for each individual investor will vary but many people are comfortable with getting a 2-4 unit that will reduce their out of pocket expense compared to their previous rent with the intent to do rehab and raise rents over time. Plus with rising inflation investors are going to want to park their money in hard assets since historically it's generally a good hedge against inflation. We've also been riding the wave of low interest rates for years and now that rates have risen investors have to be a little more creative with their investment plans and take a longer term view of stabilizing the building to make it a nice cash flowing property.

Where are we going to find more 2-4 unit properties? There's a lot of dollars chasing too few buildings. 

[Jay Hinrichs]

Quote from @John Warren:

@Mordy Chaimovitz cap rates and NOI are commercial real estate terms, and 1-4 units are not really valued in the same way. Two flats are essentially just houses.... they trade like houses and there is a lot of emotion involved. Most of the buyers are just regular folks looking for a home, so they are not at all thinking about cap rates.

Three and four units properties tend to be slightly more investor facing, but there are still a lot of regular buyers that pick up three and four units as well. This is what I love about this asset class. You can sell these things in an up market and make an absolute killing. I have helped quite a few investors dispose of their 2-4 units this year and they have been cleaning house. 

 we had a few left in our inventory and they each were sold to a house hacker.. great investment for a house hacker. 

[Jonathan Klemm]

Hey @Mordy Chaimovitz - It sounds like you are talking about Chicago's NW side because there are definitely tons of areas in Chicago where a 2 flat can cashflow well.

I know for me buying on the nw side was critical to my personal well-being and life happiness.  I wanted to invest where I wanted to live and I am also from Elgin so am constantly headed further nw.  I personally also bought a couple two flats to get started and I always looked at it from an overall expense view.  Am I overall lowering my expenses if I buy a two-flat and rent out one unit?   

If it didn't cash flow perfectly none of that mattered to me because I was buying buildings in good neighborhoods for the long-term generational wealth they'll create 5, 10, or 15 years down the road.

[Eudith Vacio]

@Mordy Chaimovitz - it is happening. Individuals are purchasing these properties, rehabbing them, and raising rents. They are getting creative with their deals. But, if the comps don't work for you in its current state, why not look elsewhere? I'm a pretty big advocate for the south side of chicago where you can find properties half that value and cashflow really really well in turnkey condition. 

[Michael K.]

Quote from @Mordy Chaimovitz:

Can someone please explain to me why people are buying 2 flats that rent comps show $4,600 a month in income for 665k+? The income doesn't really cover expenses plus debt service. 

Even if you tell me they are paying cash or very high down payments , shouldn't the price of multifily buildings reflect its NOI/cap rate?

Also, am i imagining it, or is there is no way these buildings will hold onto these values. 

Would you forecast that there will be some big discounts on these in a few years as people realize that they cant afford to hold onto them

thank you!

Mordechai Chaimovitz

Two-unit owner-occupied falls into an odd category, really any 2-4 unit with a nice owner's unit for that matter. You will have people who might have been looking for a single-family home / not as savvy on the investment side coming in. They will look at it compared to buying a giant single-family where they have to pay the mortgage all alone and feel that its a great deal (and in a way they are right). You are smart to be aware of these landmines, they might be good if you are just looking for a nice place to live but not great if you want to build a portfolio.  Positive cash flow is what's going to accelerate your REI business. 

[Michael K.]

@Mordy Chaimovitz also should have mentioned. You can use FHA and low-down payment options with duplexes, which inflates prices. As you get into bigger buildings it's harder to bring any less than 20 or 25%