1st Multifamily Deal in Chicago- How'd I Do?

Question

Hello all,

Long time reader 1st time poster. This site has helped me immensely. After a year of looking, I closed on a 2 unit (2 bed, 1 bath each) property on 4/16 and just finished slight rehab and I now have both units rented starting on 5/1. I really feel I got a great deal and I am in an up and coming neighborhood of Chicago (Western area of Logan Square). On top of the cashflow from the 2 units, there is a finished, 3 bedroom basement I will be living in so free rent, just utilities! For the sake of this analysis, however, I only included the 2 units. FYI, there is potential to make another $100 a month in parking if I rent them out. Critique my deal (or lack of one). I look forward to hearing from everyone. Please disregard the ARV, as I put that in there think of the value in a few years when I'm done rehabbing.

Michael R. · Answer

Your tenants can find out who owns the property if they are so inclined. In one of the podcasts it was mentioned that if your tenant wouldn't want to live in the same property as the owner, they may not be the type of tenant you want. I would tend to think on site management is a good thing. I hope that helps.

Account Closed · Answer

@Andrew - congrats.

I'm in the same boat as you - just bought a property in NYC, rented out 2 units and live in the basement. I live rent free and in addition net a few hundred dollars a month.

I was very happy with myself until I realized that I didn't really know whether my property insurance would cover any damage to the property. If there was a fire, would they deny coverage due to the illegal use of the basement apartment? (Regardless of where the fire started.) Have you looked into the subject? I'm pretty concerned about it.

Andrew P. · Answer

Thanks everyone for the advice! Going on into the 2nd month and everything has been going smooth. Probably put in a total of $1,500 after paint and some superficial fixups. Congrats @DavidReal for the deal. I'm not sure how that works out with insurance claims but it's a good question. The only thing I know is that I am not allowed to legally rent out my apartment because it doesn't meet the code for the city ceiling height. I think it'd be too expensive to dig it up and meet that requirement so I was thinking of possibly duplexing down from the 1st floor, depending on total cost and how much it would raise rent. For now, I'm happy to be living rent free, making close to $700 in cash after mortgage, taxes, and insurance, and build equity. Hoping to contest the city this year on taxes and knock out 1k a year off because of some mistakes in their assessments.

Daniel I. · Answer

I like this deal. Great area to buy in right now. I think you'll get some appreciation upside and living for free in a good neighborhood in the city is a huge bonus. Oh, and get that garage rented out for sure!

Erich Schmitt · Answer

I can only speak anecdotally from my research the past year or so. Here in Victoria, Canada, I'm told by local realtors/investors that you're lucky to break even to cash-flow up to $100 per unit. So anything in the + is considered "good" here. But that's because prices are high here similar to certain parts of West Coast USA.

In Alberta, Can, e.g. Edmonton, I've been told people aim for $200-$500 per unit, generally suited SFRs, and that you're doing pretty good to get $500 per suited house (2 units combined). Price/rent ratio is better there.

So obviously it's market dependant, I have no clue about your local market, but that should give you a rough comparison to up here! Again this is anecdotal and you can never rely on how thorough others are with their numbers.

Andrew P. · Answer

Also, I plan to contest my taxes because the valuation was too high for my closing/comps in the neighborhood. That will reduce it by hopefully $100/month.

Andrew P. · Answer

@NickPatterson Thanks for the advice Nick. I was wondering if I tell them I am not the owner, are they able to find any information online that shows otherwise?

@MichaelWorley I'm hoping to reduce vacancies by maintain the property. I was thinking of raising rent $25 a year but offering an improvement (new fridge, oven, etc...they are old and need to be replaced anyways so may as well use it as an incentive)

@EricHDScmitt This unit is "technically" an illegal unit so I could not legally rent it out when I move, although I've tossed around the idea of duplexing down from 1st floor OR meeting minimum ceiling an making it its own unit, but all that depends on cost benefit. It's tough to find a go CAP rate/returns in Chicago but I'm glad I have a property in a neighborhood where housing values/rental prices are appreciating faster than the rest of the city. I'm hoping to refinance in 2 years from FHA to conventional so I can drop the $`130/month  PMI.

Out of curiosity, what is considered low/average/good cash flow per unit?

Erich Schmitt · Answer

I think that's relatively good since, as the above posters have said, you're living for free. In the future, if you can find a similar deal, you could rent the 3rd unit (in this case basement) to really get a good CAP rate/returns. Also, have you considered getting 2 roommates to increase your monthly income, "house hacking" style as they call it? Would be a pain, but could help you get to that next property faster.But also, as they've said, time will tell as to the sustainability of those numbers with the vacancy rates and tenant quality, as well as CapEx items. Looks like so far so good, congrats!I'm in a similar situation, looking for returns as well as a place to live myself, so congrats!

Michael Worley · Answer

No way of knowing until after a couple of years. Vacancy is the killer with 1-4 unit properties. Just about every deal works out if you don't have vacancies or even just tenant turnover costs.

Vacancy aside, if you cash flow $400 a month and live rent free that's a good house hack start.