What is the one thing on anyone’s mind that is looking to buy their first multi family home in Chicago? How much money is it going to cost me? I mean really, how much will I need when it is all said and done? When I started out, I used to research for days on end to try to predict all the expenses I would have. Unfortunately, once I finally got my first property, I found out that I still underestimate the costs. Now, I can show you from not only from my own personal experience, but from the experience of clients that I’ve worked with. Below are some of the expenses that you should make sure you should save up for.
The Costs of Buying the Property
The first cost of buying a multi family home is the down payment. The down payment is a percentage of the purchase price of the property. The percentage depends on the type of loan you have as well as your lender. FHA loans (loans for first time home buyers that gives you down payment assistance) require 3.5% of the loan. (secret to get rid of the down payment) Your average conventional loan can be anywhere from 5%-20% of the purchase price.
Now for the hidden costs that you don’t often hear about. In order co purchase a building. Every bank or lender will require you to pay closing costs. The actual closing costs will vary from lender to lender, but they usually average between 3-4% of the purchase costs. In other words, you will need double of the down payment if you want to buy! So to track the costs, if you are purchasing a 200,000 2 unit home, you will have to have at least 7000 for the down payment (which is 3.5% of the price), and at least 6000 for closing costs (which is 3% of the purchase price). So that is 13,000 total that you would need to save up to be able to purchase a property! Once again, there is a way to get around at least some of these costs, if not all of them…
The next cost you may not think about is the cost of the inspection. Though not required, it is always recommended that you get a professional inspector to look though your potential property for things that you may have missed. They are pretty good at finding things that you haven’t even thought of looking for. Prices for inspections can vary depending on the property, but plan on spending at around $400, if not more.
The last hidden cost for buying a property is the appraisal fee. Any time you buy a property with a mortgage, your lender is going to send out an appraisal to make sure that the home is worth the money that they are lending out. Appraisals also range around $400, so make sure to prepare for that as well.
Cost of Maintaining your property
Next, I want to go over the expenses you will have to deal with after you buy the property. These are the expenses that no matter how much I researched, I still wasn’t prepared for it. While they can vary, here the expenses that I personally deal with regularly.
The first costs you should prepare for are the regular maintenance costs & bills. First up are the costs for lawn care, snow shoveling. If you live at the property, chances are you can most likely taking care of this yourself. If it is a building you don’t live in, you are going to want to pay someone to do this. I can usually find someone to do this for $30 every two weeks for the lawn (until it gets cold), or the side walk needs to be shoveled.
Next up is the water/sewer/garage bill. With any building you own, you are going to have to pay for it. My building in Chicago averages 600 dollars a month for every 6 months, so plan on setting aside $100 a month for this. Otherwise this bill will sneak up on you and leave you hurting. Take it from me.
Next up are the random repairs that always seem to happen when managing investment properties. While they always seem to pop up out of nowhere, there are ways to plan ahead of it. Here are a few examples minor repairs that I deal with often.
Minor Plumbing Repairs
The most common minor repairs that I deal with by far are minor plumbing repairs. Either something needs to be unclogged, such as a sink or a bathtub, or a drain underneath the sink is leaking and needs to be repairs.
I realized this quickly while managing my properties, and I found it very expensive to hire a licensed plumber to take care of this every time something went wrong. One plumber even told me that he won’t even get out of bed for a job if it is less than $200!
For this, there are 2 solutions that I would consider. 1st, find a handyman who can take care of these minor issues for a lot less than a licensed plumber. They don’t need to be a licensed, just someone who knows their way around a sink.
The 2nd solution (the one I used) is to simply teach yourself how to take care of these issues. You would be surprised how many things you can learn on youtube! A lot of issues you run into are actually pretty common, so chances are someone made a video showing how to fix the exact problem you have. Once you learn that, the only costs out of your pocket are the materials, (which are usually less than $50), and your time.
Appliance Repairs
The next repair that I often deal with are appliance repairs. Maybe the oven in the stove stops working, the refrigerator stops cooling, etc. For myself, if the repair involves anything that involves taking the appliance apart, I just leave it up to a professional. Find a company that deals with appliance repairs. A lot of place that sell used appliances will usually do this for a decent price. As I’m writing this, I’m currently getting a dryer repairs for $100. That’s a lot better than complete replacing a dryer, which can cost $500 for a new one!
Major Repairs
Now for the major stuff. I would say the major stuff is something that cost more than $500, and it is something that must be repaired. A good example of this would be a leaky roof, or needing a furnace replaced. There is really no good way to predict this, so the only thing you can really do is set some money aside for when these occasions arise. Also, remember that if the repair costs are too high, that’s what you have home insurance for, so don’t worry about running into a 10,000 repair cost. In that case, you will only have to pay your insurance deductible.
For example, I had a case where a someone apparently stole a van and crashed it into the backyard of my property, completely destroying the fence in the process. The estimate of the fence came out to around 4000, but all I paid was my $500 deductible. The insurance take care of the rest.
So how do you prepare for all the random costs you have from managing the building? The rule of thumb is that the repair expenses normally come out to about 1% of the property value. So if the property is worth 200,000, you should set aside 2000 every year. If you split that into a monthly cost, it comes out to roughly $168 per month. When you do this, remember that you will have months where you don’t have any repair or maintenance costs. If that’s the case, then good for you! Make sure to set that money aside for when you do occasionally run into those costs.
Any questions or comments, please feel free to reach out to me. Thanks and have a great day!