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Jacob, Other/Just Looking in Chicago, IL

Rental property (two-flat) vs. condo

Asked by Jacob, Chicago, IL Sat Jun 16, 2007

I'll be a 1st time owner looking to buy/live in a southside property (U of chicago/ bronzeville/ southloop areas). The plan is to get a 3-flat, live in one unit and rent the others out, covering at least a bulk of my mortgage. But its easier said than done. Props are hard to find and not cheap with the Olympic talk. Maybe I'm better off starting w/ a condo? Thoughts?

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I specialize in the south lakefront neighborhoods you mentioned. You can absolutely find a multi-unit building in bronzeville or woodlawn (just south of U of C), but the real question is "how much work are you willing to do?" The best deals are going to need some rehab work for which you would need a purchase/rehab loan.

Now, the upsides to this strategy would be 1) the obivous & immediate increase in value once work is complete (though it's important to run the numbers to make sure you're staying realistic), and 2) the possibility of doing your own condo conversion down the line as an exit strategy for big profits (we're talking several years out, after much of the current condo inventory has been absorbed...in my opinion, you don't want to try to become a first time developer at this stage in the game).

If all of that sounds like a bit too much, you might be better off with a condo. The key here is to be selective in what kind of unit and location you buy. Ideally, you'd be able to grab something unique in terms of floorplan, finishes or location (this helps value) or undervalued (think foreclosures or fixer uppers that you can add value to).

I can help with any of the above strategies if you're still in the market.
3 votes Thank Flag Link Sat Jul 14, 2007
Condo v. multi-unit?

As the owner-occupant of a 2-flat in Chicago (with 3 units), I can tell you that a multi-unit is a wonderful way to build equity. It affords you the opportunity to take on a higher value property that you might not otherwise be able to acquire because a portion of your mortgage is paid by your tenants. Although you can always rent out a condo, doing so means you will be living in another property with likely another mortgage to consider. A multi-unit can be your home as well as rental property at the same time.

However, there are things to consider with multi-units:

You must account for vacancies. Although 75% of your projected rental income will be taken into consideration by a lender when qualifying you for a loan, you must be also project times when the units will not be occupied. You must either budget for those times and have a cash cushion to cover the portion of the mortgage normally made up for by the tenant(s), or be able to comfortably afford it before you purchase.

Landlord duties. Sure, it's your building, and you will want to take the best care of it as possible. Owner-occupied multi-units tend to have 'better quality' tenants simply because the owner is there to monitor situations. However, know that this puts you in a certain role, and be sure you want to take on this role. Even though you are the owner of the building, you will lose a certain amount of privacy and freedom as the owner-occupant of a multi-unit because many times the comfort of your tenants will have to come before your own. After all: They ARE paying you to live in your building. I speak from experience on this!

Consider the capitalization (cap) rate. Cap rate, by definition, is "Annual net income divided by the value of the property. A cap rate of 5% means you are earning 5% of the property’s value each year from rent." When you will be holding a property long-term, it is usually recommended that you buy a building with a 6-8% cap rate. Of course, the longer you hold it, the larger your eventual return is. Here is a useful resource regarding cap rates: http://www.bankrate.com/brm/news/real-estate/20060518b2.asp

It is still possible to find a good solid multi-unit in the area(s) you mentioned. You may have to consider some work, and you will have to take that into account when formulating your cost v. value. Here is another great resource to help determine the value of a building purchase: http://www.real-estate-proforma.com/quick-proforma.php

If you have any questions at all about how to use these resources, I'm happy to help.
1 vote Thank Flag Link Tue Nov 6, 2007
As usual, there's another option you might consider - buy a condo that's larger than what you need and rent a room or two to roommates.

This cuts your costs down and gets you some small experience in being a landlord. You'll get a better feel for whether you're cut out to be in that business - and it is a business even with a 3-flat.
Web Reference: http://yochicago.com/today
1 vote Thank Flag Link Tue Jun 26, 2007
My husband and I had the same idea when we first decided to move to Chicago, specifically on the south side. We ran into the same problem, and have since decided to purchase a condo in the bronzeville area. My feelings are that if you are trying to get into the real estate market, you've got to start somewhere. The south side is the fastest growing area in Chicago, so we feel it is a good investment. Once you gain appreciation in thye condo, than you can start investing elsewhere.

I'm originally from NYC, live in LA for the past five years, so I've seen the real estate "bubble" in some major cities. Chicago's real estate is only on the rise.
1 vote Thank Flag Link Fri Jun 22, 2007
Are you kidding? Discount properties are a dime a dozen in south neighborhoods like Bronzeville. In fact, I just bought and sold an 18 unit down there for a gigantic discount. Especially in Bronzeville, there are so many developers holding on to unsold inventory, you could easily find a seller in distress. Contact me, I can do a short sale on a wide variety of properties down there for you right now.
0 votes Thank Flag Link Wed Dec 12, 2007
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