Thinking about how to buy a 2 flat in Chicago? Good for you! 2 Flats are the best way into real estate in my opinion, especially in the Chicago area. With a 2 flat, which is 2 unit property, you can build up equity in your property as well as get a nice cash flow in the process. For the sake of this article, when I refer to a 2 flat, I am also referring to properties that have 3-4 units, because they are considered “residential property” and are not too different when it comes to purchasing them. Any property with more than 4 units is considered commercial property, which is a completely different monster. First, lets start with some of the benefits of buying a Chicago 2 flat.
Reasons to buy a 2 Flat in Chicago
The first (and most obvious) reason to buy a 2 flat is because of the cash flow. Your tenants will pay rent a month, which can go towards your mortgage. The more units you have, the more money you can collect. Also, if you decide to live in one of the units, the rental income from the other units will practically offset all of your building expenses, leaving you to feel like you are living in the apartment for free. From my personal experience of owning a multi-unit property, let me tell you this is a great feeling.
The second reason is that you get to maintain all the benefits of owning a single-family home, such as building equity and property tax write offs. With a 2 flat however, you get another added bonus: you can write off a good portion of your repair expenses. Have to repair the roof, or a furnace? All of that is tax deductible, which is not the case if you live in a single-family home. The rule is that the deduction is based on the percentage of the property that you do not occupy. If there are two units in the property and you live in one unit, you can write off 50% of the repairs. If there 3 units, you can write off 66.6% of the repairs, and so on.
The third reason is that you can qualify for a higher mortgage if you are looking for a multi-unit when compared to a single family. The reason for this is because mortgage lenders can count the potential rental earnings to your income, which allows you to qualify for more money. If you cannot qualify for enough money to get the home that you want, ask your lender about getting a multi-unit home. You may be surprised as to how much more money they will lend out!
Downsides of buying a 2 flat
Now it would not be fair if I did not mention the downsides of owning a 2 flat, because it is not all good. The first and biggest downside is that you have to deal with tenants. If you have great tenants who pay their mortgage on time, then everything will be great. On the flip side, you can also end up with terrible tenants who do not pay rent, and also trash your property. Bad tenants can turn out to be a very expensive problem, so make sure you are prepared to deal with them. I will get into this a little more later on.
The second downside is that even though you can write off a lot of the repairs on your taxes, at the end of the day you are still responsible for anything that needs repairing in your property. With multi-unit properties, there are at least two sets of apartments that you have to maintain. That means two furnaces, two sets of appliances, at least two bathrooms, etc. This can all add up and leave you broke extremely fast if you do not know how to budget your money.
Financing
How that we have the pros and cons out of the way, we can get to what is really the most important part: how to get the money to buy the property. As I mentioned before, you can get a 2 flat using the same type of loan as a single family home, only you will be able to qualify for more money. You can view the different types of mortgage options here. With this option, it would be beneficial if you live inside of one of the units, because you will qualify for more favorable terms. Basically, your mortgage will be cheaper, helping you to same money. To qualify for the better terms, the mortgage lender will require you to live in the property for a certain amount of time, usually 1 year. After that, you can move on and do whatever you like and still keep the same mortgage terms. If you do not live in the property, lenders will usually require a much higher down payment as well as a higher interest rate.
I know there are a lot of articles out there telling you that there are many creative ways buy multi-unit properties with little to no money down. Can’t qualify for a mortgage (bad credit, not enough income, etc), no problem! I want to try and shed some light on this for you. On one hand, yes, it is absolutely possible to pull this off. However, this is not nearly as easy, or as frequent, as they make it seem. The bottom line for financing is this, you need to either have the cash yourself, or you need to find someone willing to give you the cash.
All of the “creative” options boil down to getting someone else to give you the cash. If you have what it takes to get some one else to finance the building for you, then you can do this. Also, borrowing money from others will most likely be more expensive than a traditional mortgage in the long run. They know that you most likely cannot get the money from a traditional source, and that makes lending you money riskier for them, so they charge a higher interest rate. Once again, I will stress that it is not as easy as they make it sound. Also, always remember that if something is too good to be true, chances are somethings wrong with. No one in real estate is looking to leave thousands of dollars on the table for no reason.
What to look for in a property
The first thing you should consider is what area you want to buy in. Some people like to buy in a low income area, some like to buy in higher priced areas. A good argument can be made for both. 2 flats in low income areas tend to have better cash flow when you compare the rent you collect vs your mortgage. It is harder to find good tenants in low income areas, however. They also tend to not treat your property as well. Higher income areas may attract better tenants, but the cost of building will start to offset the cash flow. It is not uncommon to see a 2 flat in high priced areas have a negative cash flow. The equity you can with this building is unmatched, especially if the area is projected to grow in value.
The second thing to consider is what other rental units are going for in the area. You need a good estimate of the potential rental income in order to make a good decision on the property. Also, are rentals in demand for the area, or are there a lot of vacant units around? Also, make sure to look at the condition of the units. With all else being equal, the better condition the property is in, the more rent it is going to pull in, so make sure you are keeping track of the rents of the updated properties as well as prices of the older units. If you need any help, you can always find a realtor to gather this info for you (they will do this for free, as long as you use them to buy the property, which doesn’t cost you a thing!)
One thing you should think about is whether you wish to use a property management company or not. While not as demanding as a full time job, being a landlord can be time consuming if you want to keep everything in tact. You have to advertise your rentals and keep them occupied as much as possible. There will always be little maintenance issues that randomly pop up at the worst time. Also, you have to make sure they actually pay the rent! If you do not want to deal with all of this, or are too busy, there are property management companies that will deal with this for you. They usually charge a percentage of the rent, so it may not be a bad investment to help clear up a lot of time and frustration for you.
If you are curious about the rest of the steps to buying a property, check out my article showing you the steps to buying a home for the first time.
As always, feel free to contact me or comment with any questions you may have for me. Thanks and have a great day!