Top criteria to evaluate Multi-Family Property in Chicago?

Question

Hi BP community!

In Chicago, what would be your top 3 criteria to choose to buy a multi-family house in Chicago?  (for buy & hold)

(for instance, does the 2% rule even work here?)

Brie Schmidt · Answer

@Guillaume Fortina - South of Fullerton east of the river expect to be getting .5% rent rule.

You will be in the $3 million range for 5+ units and a 4% cap rate - requires 25% down

You will be in the $1.5 million range for 2-4 units and a 4% cap rate - requires 20% down

Scott Skinger · Answer

@Carlos Matos The 50% rule is just that, a "rule of thumb", yes it applies in the Chicago market (or any market), it much more building specific. To be clear, you might use it to do a very quick front end analysis to make a yes/no decision on whether to look at a building further. This does not mean that your expenses will be 50%...you need to underwrite actual or quoted expenses to get to as close to a real figure as you possibly can. Otherwise, you are not underwriting conservatively/smartly and you will have a losing investment on your hand, especially in this tight market.

The 70% rule? Not sure what that even is.

@Guillaume Fortina As @Brie Schmidt points out, you will very hard pressed to find a buy/hold investment in the neighborhood that you mentioned that even cash flows (at all) right now, assuming you are using debt. It seems that most of the buildings in the decent Chicago neighborhoods are either heavy construction/repurpose plays or appreciation plays.

Steve Kehoe · Answer

Totally depends on your strategy. Location is an obvious one, but there are a lot of good neighborhoods in Chicago. I work with clients mostly on the north side of the city. Your search can definitely be narrowed down by budget, and then secondly by what you are looking for in risk/return. If you are going to owner occupy and put low money down, then it'll also narrow your search down quite a bit due to lending restrictions - you may also have a preference on what neighborhood you want to live in.Also, are you looking for turnkey or value add properties? My recommendation for your first one would be to not do a total gut rehab.I wish there was a simple answer for you, but every person's situation is different. At the end of the day, the numbers have to make sense.  If you want a better snapshot of what to expect, just let me know and I'll walk you through it all based on what your situation and goals are.

Jeff Burdick · Answer

What sort of property are you looking for?  And where in Chicago?  Chicago is a massive market and things vary significantly from neighborhood to neighborhood and suburb to suburb.  In the city of Chicago, you're not going to find anything that meets the 2% rule unless you're looking at class C-minus or D sort of properties in some of the tougher areas of the city.  On the north side(class A and B), finding something that meets the 1% rule can be a challenge, but can be done...especially if you're creative with maximizing your numbers.  If you share more about what your budget and objectives are...I, and others on here, can give you more specific advice.

Brie Schmidt · Answer

Are you talking residential multifamily (less than 4 units) or commercial multifamily (5+ units)?  On the north side where I work a 1% propery is a home run

Ray Harrell · Answer

I would look at location more than anything. You can find a solid brick building where the rents are seemingly market rent, but you find out that they are section 8. In Chicago you really have to know what your strategy is and what community you want to invest in.

Nghi Le · Answer

@Patrick Charles

I agree with your first paragraph, but not your second one.  First, you'd be hard pressed to find a hard money lender that provides 100% financing of your total costs.  Usually they want at least 10% down payment (or at least 20-30% for commercial 5+ units).  So the loan would be at most $63k in most cases

Second, ARV minus purchase minus rehab is not how you typically calculate profit for a flip.  10% will account for buying and selling costs (closing costs, realtor commissions, taxes, etc), and another 5-10% will go towards your financing and holding costs.  Normally your profit is 10% of the ARV with the 70% rule.

@Brie Schmidt

The 70% rule is also useful for the BRRRR strategy.  If you buy a deal using the 70% rule (where purchase and rehab is at most 70% of ARV), you'll likely be able to pull all your money out (or maybe even make money) when you refinance at 75% LTV.

Jeff Burdick · Answer

I think finding anything that meets the 1% rule in that area is unlikely.  If something like that popped up on the market, it would likely have multiple bids over asking price pretty quickly.

Dan Gongora · Answer

Hi Guillaume,

welcome to BP!. The 2% rule is more like a guideline but each local market has its own "2% rule sort of speak" for example with time you will know what the rules is for each of the markets you analyze. 3 criteria you should look for Chicago are, rents in specific zip codes "this is key because dif zip codes can be vastly different", taxes, and number of beds/baths per apartment that is most popular in that zip. I am local real estate investor focused in Elgin, IL and also buy multifamily properties for rent and hold I house hacked my first two properties. Closed on my second house hack last may. I am also a real estate agent so let me know if you have more questions, or if i can help you find a good deal! i hope i can help!

Patrick Charles · Answer

@Brie Schmidt The 70% rule in rehabbing refers to the ARV (After Repair Value). Say you are evaluating a house that cost 50k,  after you estimate repairs to the property say 20k, the value after repairs is 100k based on comps in the area.

The hard money loan would be 70% of the 100k ARV (After Repair Value) or 70k.  50k to purchase and 20k for repairs. Sell it for 100k, 30k in profit.  So basically you have to purchase the property and  rehab it within 70% of what it would be after all the repairs. It's just a quick way to analyze a property for flipping.

Top criteria to evaluate Multi-Family Property in Chicago?

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