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.
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 propertyâ€™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.
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.
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.