Market Conditions: Are Multi-Unit Buildings Back in Vogue?
The Chicago Tribune recently reported on the state of the multi-unit property in Chicago. Multi-unit properties became all the rage in the last 10 years as investors bet on appreciation.
“Those were some of the first buildings people were willing to walk away from,” says David Hanna, president of the Chicago Association of Realtors. “The number of foreclosures on those buildings has really been high.”
Leaving prices relatively low. “You’ve got some two-flats selling today for the same price they sold for in 2000, 2001,” Hanna says.
Anup Bhattarai has been watching a lot of YouTube lately. Not that he has idle time on his hands — quite the opposite, in fact.
Bhattarai, 34, just bought a two-flat in Logan Square for $265,000, which he’s rehabbing himself: repairing leaky pipes, patching drywall, pulling up old carpet. “I have no training whatsoever,” Bhattarai acknowledges. “YouTube has videos for everything. I just watch and go along.”
If you’re going to live in the property, instead of simply buying as an investment, you can get an FHA loan for as little as 5% down.
“They’re a phenomenal investment right now,” says Stephen Northey, Koenig & Strey Realtor and owner of an Edgewater two-flat. “It’s a great way to get a leg into a better neighborhood than you could ordinarily afford.”
Northey and his wife, Debra, have owned their two-flat for five years. Within that time, they’ve rented the top floor to three different tenants.
“It’s a much more flexible investment than a condo or single-family home,” Northey says. “You live there and collect rent, and even if you outgrow it, you can rent out both floors and still borrow against it to buy a single-family or something bigger.”
Back in 1994, Steve Hobbs bought a Wicker Park two-flat for $150,000, fixed up the first floor and quickly found a renter.
“I rented out the first floor for $900 a month and my mortgage was $1,300,” Hobbs says. “My wife and I were living in the top floor for $400 a month.”
They’ve since moved to Sauganash, but he and his wife held onto the Wicker Park two-flat as a rental property. “Now it generates about $3,200 a month, so it’s sort of been a little ATM for me,” he says.
“I have no control over my 401(k) or mutual funds,” says Hobbs, who works as a Baird & Warner Realtor. “These guys are managing my money for me. Over the next 20 to 30 years, quite frankly, I feel like I have more control over my property investments than I do with my money at TIAA-CREF.”
“I personally would not spend my money on a condo if I had the ability to buy a two-flat,” Hobbs contends. “If I’m looking to spend 200 grand, I don’t want to live in a condo where people are going to tell me how to live. I’d rather pay 265 or 350 and get a tenant to cover the difference and me be the person who tells them how to live.”
Two-flat Comeback [Chicago Tribune, Heidi Stevens, June 28, 2009]
I thought that it was interesting the only people with working numbers were people who bought pre-bubble, people who bought $200 – $250K 2 flats can make those work, the fact that the average 2 flat was running between 6-800K in Lakeview, Lincoln Square, Wicker Park, Andersonville ect.
You have about 7 years of overpriced multi-units to work out of the market, I doubt this impact has passed yet
I saw 2 flats in Roscoe listed for $899 during the bubble and IIRC they got pretty damn near ask.
HD – you are right these sold for ridiculous prices in the last few years, I cant tell you how many times some realtor told me, oh the numbers dont work anymore, but thats ok you will make a ton off of appreciation
my guess is you will prob be able to clean up on these over the next few years buying them form the banks
“the fact that the average 2 flat was running between 6-800K in Lakeview, Lincoln Square, Wicker Park, Andersonville ect.”
Whole bunch of white-bread neighborhoods livin’ the low-down or no-down dream. Being able to walk to restaurants does not justify a 4x price premium to other, less trendy hoods.
No way any of these multis in these hoods are even remotely cash-flow positive. Can’t wait to see these mini-Trumps flame out in the years ahead.
I saw this link:
http://guidemehome2chicagoluxury.com/2009/1/14/wow-positive-cash-flow-is-back-in-chicago
and it looks like both of the properties referenced are still for sale and could be cash-flow positive… thoughts? If cash flow positive I could be interested in living in one for a couple of years then renting it out, etc…
BTW how do loans for a multi-unit that I plan on living in work?
I don’t trust Connie Engel’s article for the following reasons:
1) “the following assumed 20% down”, no analysis of opportunity cost for that cash.
2) No mention of ask prices on the properties (leading me to believe the 20% down is significant)
3) Connie does not account for vacancy rates and seems to only compare gross rents, assuming 100% occupancy
4) Connie does not account for planned capital expenditures in terms of keeping the units in good condition
First off I havent seen anyone offer me a loan with 5% down for a multi-unit, its 20% on 2 flats and 25% on 3 flats. If you arent going to live in it most banks are also looking at cash reserves, and most banks will also assume 25% vacacy rates
in the case of the one on Barry, it works assuming the rents are right (most realtors lie about them), and you have $150K for the DP you would make on Avg about $700/month
Having been an owner-occupant of a three-flat for five years, I note that it takes a certain personality (and much patience) to be a “landlord-occupant” neighbor of your tenants. We owned a jumbo three-flat that required some renovation for our neglected unit, but was in “nice apartment” condition for the Edgewater neighborhood. My experience as a landlord gave me many funny stories to tell as dinner conversation, but the experience was a mix of nanny/teacher/parent modes. We weren’t busybodies, but we did inherit two aging hippies with no income and some visible signs of mental illness, who caused us some degree of anxiety and aggravation. Marketing a vacant apartment brought us many hard luck calls and encounters with people who weren’t “good neighbor” material.
“I don’t trust Connie Engel’s article for the following reasons”
You left out the unlikelihood of maintaing the gross rent amounts on future leases.
And the asks for those two are $750k and $1.25mm.
There are a couple of two-flats near me for sale for $599k each, both are currently vacant and fairly rough inside (i.e., they’re really reno/teardown fodder). Apartments in similar buildings nearby are on offer for $1300-1400 per month. Taxes are probably $8k. They’re still pricing in a speculative land value of ~$300k+.
Based on cursory internet searching, I did not see any livable 2-flats within I know that within reasonable walks of an EL stop in Logan Square or Lincoln Square
Post cut off but…If I could have found a 2-flat for less than $350k in a nice enough area I would given it serious thought. From internet searching any Logan Square or Lincoln square options were just too far from the El. Instead I’ll be renting out my 2nd bedroom in lakeview..anyone interested?
“If I could have found a 2-flat for less than $350k in a nice enough area I would given it serious thought. From internet searching any Logan Square or Lincoln square options were just too far from the El.”
Of course not. This is because the favorite options for land speculators are white bread hoods near the El. Thats basically the best proxy for the most ridiculously overvalued properties right now.
On a sad note looks like not only is Timmy G a passive speculator, but so is Sheila Bair of the FDIC. Having paid 355k in 2002 and now expecting $695k in 2009 because they did some “renovations”.
http://online.wsj.com/article/SB124599042845859003.html
When even people at the helm of our government responsible for fixing this crisis are themselves passive RE speculators it really does give one pause to think exactly how deep we’re in this mess with little confidence it will be fixed any time soon.
It is amazing that the people in the highest levels of our government are all a bunch of FBs. Obama is an FB too, paying a million dollars for a house with lot in Kenwood of all places. Do you think he’ll ever get his money back? The world is upside right now, it don’t make any sense.
Yeah but Barry need not worry: there’s lucrative career options for ex-presidents. As for Sheila and Timmy perhaps they need worry: not a large job market for ineffective/failed former bureaucrats.
Agree with Architect…being a landlord has its financial rewards but can be a royal pain in the a$$. Did it for 5 years in the 80’s. You have to be ultra-careful who you rent to, and despite the best due diligence things can go bad. And evicting a bad/nonpaying tenant in Chicago is an absolute nightmare.
“not a large job market for ineffective/failed former bureaucrats”
HAHA. You mean **IF** Bob ran the world, there’d be no job market. Barring a felony conviction, both of them will walk into job more lucrative than either of ours as soon as they wnat after stepping down.
“evicting a bad/nonpaying tenant in Chicago is an absolute nightmare”
It is easier if you live in the building. Also much easier to exclude w/o threat of lawsuit on the front end. Not easy, just easi-ER.
^^^^^
Ehh I guess I deserve the idealism to be stomped out of me on occasion too, as I enjoy doing the same to idealists.
Another reason America is in deep poo apparently: once you’re semi-famous, nothing really matters as you can still parlay your persona into some consulting field or whatever else. You’re right–Sheila will probably wind up as head of risk mgt at one of the i-banks and Timmy at some beltway consulting firm.
anon(tfo), How is it easier to evict if you live the building? I actually find it more difficult because the owner is emotionally involved.
and secondly, there was an article a few months back about how a significant number of Bush appointees were having difficult time finding employment, attorney general gonzales, and quite a few others. So it’s not as easy as you think.
No these guys won’t end up working for risk management for i-bank because these candidates are ineffective and worthless. They’ll end up at thinktanks or lobbying firms.
Let me speak from experience. Bought a 3 unit in Logan Square Last year. At that time 3.5% down FHA loans were possible for owner-occupied buildings. We did not go that route so I’m not sure on the specifics. the bank did only count 75% of the rental income and they ran us through the ringer on the application. (like they should)
We found a pre-foreclosure building. At closing the owners ended up bring $2K to the table. They lost their equity and substantial improvemnt costs.
Cash positive is possible. If I rented out my unit I would net $400/month. But I’m happy to live there for less than a similar condo would cost me. My wife and I had the same thinking as in the article. We were able to get more home for the same out of pocket cost as a smaller condo. Plus we have no one living above us, a yard, and a garage, and the ability to pick our neighbors.
Obviously there a negative and I wold not recomend it to everyone. There are maintenance issues and tenant issues; 2 weeks ago my tenant got her purse snatch on the el so I ended up changing locks at 2am. Being an experience “slumlord”, I told my wife that I would charge her for the keys and a resonable ‘lock-smith’ fee for my time. She said that was dispicable and that the girl ‘had already been through enough’. So, my biggest headache is a wife that is too nice to the tenants.
Most important thing is due dilligence in finding tenants. I grew up in a 6-flat so I experienced the lows of rental property and tenants. I’m sure there are a lot of new landlords who don’t even run credit checks.
I agree w/ JPS that eviction in Chicago is a nightmare. They best thing to do is screen the tenants properly- an make sure they know the consequences of non-payment.
You don’t think Vikram Pandit at Citi would hire either Sheila or Timmy in a heartbeat? Howabout John Mack at MS? What about the countless other financial services execs who were borderline in terms of getting TARP money or being taken over but weren’t.
Remember these guys are playing god for these firms and determining who survives and who fails, on a arbitrary basis at times. If you don’t think there will be a quid-pro quo in terms of returned favors from the surviving institutions thats a bit naieve.
“anon (tfo) on June 29th, 2009 at 10:54 am
It is easier if you live in the building. Also much easier to exclude w/o threat of lawsuit on the front end. Not easy, just easi-ER.”
can you explain this??
“attorney general gonzales”
He’s a lawyer who, under oath, said “I don’t know” and that he had no control over decisions made in his name. He might do a better job than your lazy clerk, but maybe not. But I wouldn’t want him doing any lawyering for me.
Any of the others head of anything?
“How is it easier to evict if you live the building?”
Excluded from most of the protections of L/T laws, so long as the building is 6 or fewer units. But the personal involvement issue, yeah, I can see that.
anon(tfo), for once you are wrong. I will give you credit that you are almost always correct with your legal posts here but this time I think you’re confusing the civil fine provisions of the Chicago Residential Landlord-Tenant Ordinance with the Forcible Entry and Detainer Act. Eviction occurs under the latter not the former. The RLTO provides for civil penalities against the landlord while the Act controls evictions.
Owner-occupied has no bearing whatsoever on evictions under the Forcible Entry and Detainer Act but it is completely relevant to the protections required under the RLTO.
“Owner-occupied has no bearing whatsoever on evictions under the Forcible Entry and Detainer Act but it is completely relevant to the protections required under the RLTO”
Yes, *but*:
–Tenant has fewer defenses: no need to comply with RLTO; harder to prove that the unit is sub-standard when LL lives in the building.
–Service of termination notice easier–you know when they’re home; you know if there are “unknown occupants” to also/alternately name.
–If eviction is for other than non-payment, more believeable when you assert the T’s violations of lease.
Like I said, not easy, but easier.
Lots of great deals on two flats in West Ridge.
They may be a little further from the train, but you can get a lot for your money right now.
I actually toured this place a while back and it needs some Kit/Bath and cosmetics, but is in overall good shape and only $311k for a full three flat!
http://www.realtor.com/realestateandhomes-detail/6433-Hamilton-Avenue_Chicago_IL_60645_1110417716
I don’t know what you do for a living anon(tfo) but you sure are a jack of all trades.
dahliachi, that intersection is like living on another continent. Western and Devon, you’re joking right? Could you imagine living there or renting? I hope you like the smell of spicy food….
not that there is anything wrong with that it’s just that Devon/Western is the exact opposite of Lincoln Park.
I love Indian food and live in a huge three flat right on the park up here-so yes, I could imagine living here.
hd,
If you want to make money as a landlord thats one way to do it. And IMO a much better area than some of the other cheap multis in much more shady hoods.
Would I live there? No. But around 100k per 3br seems like you could definitely make that work provided its not totally trashed on the inside.
That’s the thing-this hood isn’t shady-just cheap. That’s why I’m letting all of you people bemoaning the lack of affordable multi-units know.
Come up here for some Indian food and walk around after dinner. Also some very nice brick bungalows North of Devon between Western and California.
there are some amazing building around indian boundary park as well.