Thinking about buying a 2 flat? Below are 5 things to look for when you take a looking at multi unit buildings. These tips can help you narrow down your search and start you down the path of selecting the perfect 2 flat that fits your needs.
Cash flow
The first thing to consider is the cash flow, or potential cash flow if the building is vacant. If there are tenants in the building, you want to see how much rent they are paying. Most importantly, you want to know if they are current on their payments. A building with non-paying tenants is a lot worse than a vacant building.
If the building is vacant, you want to check for similar apartments for sale to get an idea of how much you can rent the apartments for. Personally, I like to estimate the rent for each unit at $50 lower than whatever I think the average rent in the area for similar apartments for are, just in case I over estimate the amount of rent.
Once you have an idea of the amount of rent you can get, compare that with your mortgage for the property. Also, remember that you need to put aside some money for inevitable repairs that will come with owning a 2 flat, as well as the water/sewerage bill (which is usually the landlord’s responsibility to pay). For myself, I like to set aside 10% of the rental income I get for repairs. For example, if the apartment rents for 1500, I set aside 150 of that and use that for when repairs are needed.
If you plan on living in the building, then keep in mind that the monthly rental income will most likely not cover all of the mortgage. It should cover a good portion of it, and be a lot cheaper than renting a similar apartment (not to mention the tax benefits). If you do not plan on staying in the 2 flat, I would aim to have the rental income cover all the expenses plus the estimated repairs. Anything extra can go straight into your pocket!
At the end of the day, it really boils down to your goals, and what you are comfortable with. Put together all of your expenses, which includes your mortgage (which usually includes taxes & homeowner’s insurance), estimated repairs, and your water/sewage bill. Then, estimate your rental income, or the sum of all of your units, then look at the difference. That’s really it in a nutshell.
Condition of the building
While somewhat obvious, this is a very important part of choosing the right 2 flat for you. What condition are the apartments in? Have they been updated, or are they just in “move in ready”? What about the common areas, such as the hallways? Is the exterior of the building in good shape? The condition of the property can be the difference between hundreds of dollars in monthly rent. Also, the better condition the property is, the better the tenants tend to treat your property, because they can see you care about your property.
One of the most important yet overlooked parts of the home is the shape of the basement. First, you want to check the walls for any leaks or water marks. Also, you want to look at the utilities, such as the furnace & the water heater. Is there a furnace for each unit? If not, then that means the heat is shared between both units. In other words, one of the units cannot control their own heat, so that is something to consider.
Tenants
Tenants are what make your 2 flat worth it. Also, they can be the one thing that turns your 2 flat into a money pit. First, check to see if the 2 flat is fully occupied. If it is, chances are it will be your responsibility to get one of the tenants to move if you wanted to live in one of the units. Why? Landlords do not want to leave a unit vacant, because then they will be stuck paying the mortgage. Also, to properly remove a tenant, they will need to be given a 30 day notice. However, the process to buy a 2 flat can easily take 45 days to get it to close. Since there is no guarantee that the buyer will be able to close, no landlord wants to risk getting rid of a tenant just to have a buyer back out of the deal. The seller may give them the 30 day notice, but you will most likely have the task of making sure that the tenant actually leaves.
The next thing you want to make sure of is that the tenant actually pays on time. Have your agent or your attorney request documentation showing the tenant is paying monthly (and the full amount as well). You do not want to be stuck with a bad tenant who doesn’t pay, because it can take months to get them out of the unit.
Location
Location, Location, Location. Location is definitely important when considering what 2 unit to buy. Buying a 2 unit in a bad area may result in a building that is very hard to rent, because no one wants to live in the area. Also, as a rule of thumb, bad areas tend to attract bad tenants. The area doesn’t have to be the best neighborhood with the best school districts, especially of you aren’t planning on living there. However, you do want to make sure the area can attract enough tenants so you don’t have to worry about vacancies.
Also, while there are differing opinions of this, I would also say to be cautious of building that are in very expensive areas. I would be especially cautious if this building was the only multi-unit in the area. This 2 flat could end up being too expensive for potential renters to want to stay there, which would lead to longer vacancies. If you then try to lower the rent, then the rental income might not cover the expenses that come with owning a 2 flat in an expensive area.
Number of units
Throughout this article I mainly talk about 2 flats, or a property with 2 units. However, you can also purchase a building with up to 4 units with the same type of residential loan. Anything with more than 4 units will fall under commercial property, which requires a commercial loan. As with a 2 unit, you want to make sure that the income can cover all the expenses of the building. Also, the more units a building has, the more extra cash flow you should have in your pocket.
There is one difference with a getting a loan for a 3 to 4 flat versus a 2 flat. With 3 to 4 units, your mortgage lender will require you to have 3 months of reserves saved up, on top of your other expenses of the loan (such as closing costs, loan fees, etc.) That means if your mortgage is going to be 2000 per month, you have to have 6000 saved up on top of everything else.
Feel free to reach out to me with any questions or comments. To find a list of 2-4 units for sale in Chicago, you can click here. Thanks and have a great day!