Considering buying or selling a Chicago multi-family – 2, 3, 4 or 6 flat property? Here Best Chicago Properties Broker Associate Alex Cross offers tips for success with your Chicago investment properties.
Buying a Multi-Unit
Understanding what kind of buyer you are and your financing options is key. Are you a pure investor or do you plan, for example, to buy a Chicago 3 flat and occupy one of the units? The answer to these questions will determine your path(s) forward.
As an investment
As an investor your financing options are usually pretty limited. Typically a conventional loan is required and a minimum of ~25% down is needed.
As your primary residence
If you are going to buy a Chicago 2, 3, 4 or 6 flat to call home, your options are more voluminous. A conventional loan with ~25% down is one option but there are also FHA loans and other loan options that require as little as 3% down. While less than 25% down will require you to pay PMI there is a huge value in limiting the amount you need to put down.
“In either case if you plan to finance make sure you understand your options.”
An experienced mortgage broker or lender will be able to lay out all of your options which can vary based on the number of units in the building.
2. Finding and buying a Chicago 2, 3, 4 or 6-flat
Once you understand your budget and how you plan to finance the property you can start looking for properties.
The biggest thing you will need to determine when looking to buy a Chicago multi-family is how much work / remodeling you are willing to take on.
With just about any budget you will find properties that require a complete remodel to those that are move in ready. The sooner you can figure out what is acceptable to you the better off you will be. With any budget there are going to be tradeoffs.
If you are wanting something move in ready the location of the property might not be as wonderful as the location of the property that needs more work.
If you are willing to take on a project you can probably find something within budget that is in a more desirable area. The BIG caveat to that is you will then need more cash on hand for the remodel.
An agent who has experience with fixing up Chicago 2, 3, 4 or 6 flat properties, a working knowledge of the mechanical systems and understands market rents should make your search much less stressful.
“Having a sounding board and ally will help you feel confident when you are ready to put in an offer.”
3. From offer to closing
Purchasing a multi-unit is a little more involved than buying a single family home or condo.
Like all properties it is important to make sure you avoid overpaying when buying a Chicago 2, 3, 4 or 6 Flat. Your agent should be providing you with similar properties that recently sold known as “comps”. This can help you get a general idea of what the property is worth.
Calculate operating income
Another thing to take a look at is the net operating income of the property. Net operating income is the money left over after all expenses are paid. If the monthly & yearly rent is not greater than the monthly & yearly expenses it is not a good investment. If you plan to live in one of the units ask your agent what that unit should rent for and factor that into your equation.
Ideally there should be a 5-10% return on the money invested. So if you put $50,000 down and spend another $20,000 to get it fixed up you should hope to get between $3,500 & $7,000 in profit in year one. Over time as rents go up your profits should as well.
Check market rent rates
You should also confirm the rents being charged are in line with market norms. Sometimes rents are lower than they should be and additional revenue should be factored in. To buy a Chicago 2, 3, 4 or 6 flat of quality, you may need to be willing to just break-even in the first year knowing that your profit will come as you increase rents.
Inspect and review
Once an offer is accepted a thorough property inspection should be conducted. It’s important to verify the zoning vs. what is advertised in the listing. When buying a Chicago 2, 3, 4 or 6 flat be aware there are many buildings where the lower-level unit(s) are not legal. For instance, it’s really a 2 flat, but priced like a 3 flat.
Also, be sure to get the radon test and sewer scope done at the time of the inspection to mitigate as much risk as possible.
In addition, current leases should be reviewed and the tenant’s payment history should be understood.
4. Assuming ownership and becoming a landlord
Having a signed purchase contract is only the first step in this journey. As soon as you are under contract thinking about how you will manage this property and the tenants should be on your mind.
Here are some things to think about:
- Does anything need to be fixed? If so, what is the first priority? Do you need to line up contractors?
- If you are going to live in the property, which unit do you want? If tenants need to vacate, work with your lawyer to provide notice to tenants as soon as attorney review is over and the loan is finalized.
- What kind of relationship do you want with your tenants?
- Will you need to raise rents?
There are of course many more questions but this should get you started.
This article is about both buying and selling Chicago multi-family homes including buying and selling Chicago 2, 3, 4 and 6 flat buildings. So next up are tips for selling a Chicago multi-unit building.
Selling a Multi-Unit
If you are thinking about selling a Chicago 2, 3, 4 or 6 flat there are a number of things you can do to maximize the value of the property.
1. Optimize your monthly rent roll
In this case optimizing your rent roll does not necessarily mean maximizing your rent. An optimized rental structure for an investor means there is stability, flexibility and profitability.
A long-term tenant who cares for the property, pays their rent on time and considers it their home is extremely valuable. Not having to fill an apartment year after year reduces costs and eliminates vacancies.
Staggered lease end dates or leases that are month to month (MTM) can attract a wider array of buyers. If all leases are MTM an investor could choose which ones to extend or end and if they want to do a rehab, they would have the flexibility to start the project at a time of their choosing.
“Many buyers want to live in the property and having MTM leases would allow them to pick the most suitable unit for their needs.”
Generally speaking maximizing your rent roll will help your multi-family sell for a higher price. However, we do not recommend sacrificing stability and flexibility in the name of profit maximization if the current rents are at or close to market rents. To put it another way, in many cases a fully occupied property where all units are rented for market value or close to it is more attractive than a partially occupied property. Optimization is about finding that sweet spot where rents are strong but long term tenants still feel valued allowing stability and flexibility to persist.
2. Provide buyers with good information
Typically, buyers looking to buy a multi-unit property are going to be pretty savvy and want a lot of details. They are going to ask questions about utilities setup, appliances and recent building maintenance. As the seller it is not your sole responsibility to collect all of this information. An experienced agent can help you gather the necessary information.
Here is an outline of the information we recommend providing to buyers:
The number of gas meters, electrical meters, water heaters and furnaces that are in the building and who pays for each utility.
The existing appliances in each unit and the age of those appliances.
When were the following items (if applicable) last replaced or repaired? Windows, Tuckpointing / Siding, Roof, Lintels, Driveway, etc.
Working with your agent to collect this detailed information will help buyers make an informed decision more quickly. As surprising as it might sound this sort of information is seldom provided but it will set your property apart and leave a good impression on buyers.
3. Prep the property for sale
When selling a Chicago 2, 3, 4 or 6-flat, a well maintained property will go a long way in maximizing the property’s appeal and value. While spending $1000’s remodeling kitchens and bathrooms is always an option, our recommendation in most cases is to keep it simple and budget friendly. While the recommendations below are important in a rented unit they are critical in a vacant one.
Burned out bulbs, light bulbs that do not match or broken / barely functioning light switches is never a good look. You will be surprised how big of a difference a $30 light fixture and new light switches can make. Having these items in good repair also shows the property was cared for and shortcuts were not taken.
Outdated colors can make a space look old or unwelcoming. Applying a fresh coat of paint is always a good idea, just make sure it is the right color. We recommend a light gray!
Stained carpet, cracked tile or beat up flooring is not going to impress anyone. Out of the 3 categories in this section flooring has the tendency to be the priciest. However, there are options to keep prices down. Cleaning / replacing stained carpets or refinishing hardwoods are typically affordable options. If installing a new floor is necessary quality vinyl flooring is a good choice and ceramic tile is great in kitchens and bathrooms. Consistent flooring throughout the home is always encouraged.
Having everything in good working order and refreshed will also help your property show well, which brings us to our next topic…
4. Work with a motivated and experienced agent
Selling a Chicago multi-family property is a different beast than selling a condo or single-family home and the right agent will make all of the difference.
Be sure to work with a motivated and experienced agent who can deliver on these critical services:
This might seem like an obvious one but in the world of multi-unit property listings the vast majority of them are poorly marketed.
Whether it is not enough pictures, trying to figure out which pictures belong to which unit or the layout of each unit there is a lot to be desired. No need to take our word for it, click and search current multi-unit properties and go through the listings and see for yourself! There should not be fewer pictures for a 3 flat than a 2 bed 2 bath home.
Make sure your agent is willing to coordinate professional photos in all of the units. There is a tendency to just photograph one unit or take pictures of the common areas. That simply does not help prospective buyers make a decision. In this situation there is no need to make the pictures look perfect. Prospective buyers just want to see what the inside of the property looks like. It makes sense to ask tenants to tidy up a bit but if they don’t it’s not a huge deal.
“When selling a Chicago 2, 3, 4 or 6 flat, hire an agent willing to do a 3D home tour – this will really set yourself apart.”
Coordination and communication
Good communication with your agent is always important. However, selling a Chicago 2, 3, 4 or 6 flat typically requires much more coordination and communication. This is because there are usually multiple tenants living in the building and each showing will require communication with the tenants. Having an agent who is a good communicator, quick to respond and reliable will make your life easier.
You do not need your agent to be a licensed plumber, electrician or inspector. However, an agent who understands the utilities and knows how to determine the age of your mechanicals and appliances will go a long way. The buyers are going to demand information and your agent should be proactively gathering the necessary information up front. It will prevent a back and forth later on but more importantly it will stop buyers from getting frustrated or moving on when it takes too long to get the answers they are looking for.
Seeking help buying and selling Chicago multi-family homes? Want to talk to an expert on buying and selling Chicago 2, 3, 4 and 6 flats? Contact Alex.