Buying First Multi-Unit in Tri-Taylor, Pilsen or Bridgeport - FHA

[Mark Cison]

Hi folks!

Over the last few months I've been on a mission to purchase my first investment property. During this time, I've been frequently using BP as a resource to help me along. You guys have some truly amazing advice and I Iove reading the forums, I'm excited to finally join the community. =) 

I'm a Chicago native born and bred, I know the city and it's neighborhoods very well but there's still a lot I don't know so I'm hoping you guys can help shed some light on the market trends in these specific areas. 

I'm going with an FHA + 203k loan and would prefer a 4 unit building but I will also gladly go with a 3 unit. I've narrowed it down to two possible scenarios, either purchase an existing 3-4 unit and do a gut rehab or purchase a 2-4 unit and completely demolish to build a-new. To clarify, my mortgage broker verified that both scenarios fall within the FHA guidelines and signed off on the approval letters for my offers so far, so we're all good on that aspect.

The primary neighborhoods I've been looking at are Tri-Taylor, Pilsen and Bridgeport. I'm set on these three areas because I feel like their great or soon-to-be-great neighborhoods where I can purchase/rehab/construct a property for a decent price while enjoying the higher rental incomes you see in Logan Square or Ukrainian Village (give or take). Also, these neighborhoods are mostly zoned for RT-4 and have moderate to low taxes which is exactly what I'm looking for. 

A standard Chicago lot is 25 x 125 which equals 3,125 square feet. Under RT-4 zoning, I have to allocate at minimum 1000 square feet per unit. So I'm limited to building a new 3 flat but the upside is I can duplex the basement with the first unit, effectively doubling the square footage of that unit because the basement area does not count towards the total building square footage. Here is an example of exactly the type of building I want to build or at least very close to it: 

2523 W Flournoy St.

Now the really frustrating part to my real estate adventure so far is that I put on offer on a 2 unit building in Tri-Taylor that was utterly distressed and needed a complete gut. They were asking 90k for the property which was perfect because I can demolish that building and construct my modern 3 flat. So I offered 90k and the listing agent responds saying the highest bid is slightly over 100k. Okay, so I offer 115k. Well the property went contingent, they accepted an offer that was lower than mine because it was cash. A week later the property goes back on market so I offer 120k! I wanted this so one so badly and they still refused my offer and went with the second highest cash offer instead. The property went contingent again and is now gone. This is the second property I lost where my offer was the highest but the seller went with the second highest offer because it was cash and they can close much sooner vs. my FHA loan which takes about 2 months to close.

So... this forced me to consider looking at higher priced properties to do the same exact project above. It also forced me to consider buying an existing building and just rehabbing it. I have not seen any deals as good as that in a neighborhood as good as that before or since losing this property. I feel that even if another deal surfaces, I'll probably lose that one to cash investors as well. Maybe the competition isn't as cut throat when listing prices are mildly higher? I wouldn't know...

So my questions for you wonderful people here are:

1. Has anyone carried out a project similar to this? I want to know ball park costs to build a 3 flat like the one above with the range of specs I mentioned. I want higher tier finishings but nothing too extravagant. I want to come up with a limit on how much I can spend acquiring a property. I'm now looking at properties in the 200-300k range..

2. Does anyone have experience being a landlord in these neighborhoods? Market analysis has revealed that for 2-3 bedroom apartments in the 1000-1250 square foot range have rents going for $1700-$2000 and even higher. These are of course either new construction units or beautifully rehabbed units with very good quality finishings. Can anyone confirm this? Are there people in these neighborhoods that can afford higher rent rates or would I have a hard time finding tenants?

3. Are there certain sections or blocks in these neighborhoods that are better than others? For example, in Pilsen is it better to stay more east by Ashland and Halsted or are the areas by Western Ave just as good in terms of crime and affordability?

4. Am I in over my head or is what I'm trying to do totally feasible and realistic? Should I consider just rehabbing an existing building because its more cost effective? I would love some advice on what would be the best route for me to take in these neighborhoods. 

5. Are there other options I could potentially take advantage of that I'm not aware of? 

Lastly, here's some financial background to give you some context: I have 25k to put as a down payment. So technically the highest I could go with FHA + 203k loan is about $700,000 total costs at closing since 3.5% down of $700,000 is almost $25,000. But I don't NEED to go that high, I want to keep my total costs around $450-$500k all said and done. I know I have to live there for at least one year per FHA guidelines so I'm shooting for a scenario where the rental income from the first two units will hopefully cover (or at least almost cover) the mortgage + PMI + Interest + property taxes + homeowners insurance + all other potential costs such as waste management, etc... Then after a year I move and I'm hoping the rental income from the 3rd unit will start yielding a profit.

I finished college about a  year ago and have a great career working as an IT professional. But my student loans are astronomically crippling so I'm simply trying to make a profit of around $1000-$1500 from my first investment property in order to help pay off my student debt. I feel that an investment property is my best shot at achieving a little financial freedom now and total financial freedom in the future with the possibility of acquiring a few more buildings down the line. Most importantly, it would help reduce stress because I'm currently scraping by making these payments.

My agent, architect and contractor have all been very helpful but at this point I feel overwhelmed and don't know which outcome would be the wisest and most lucrative. I also want to avoid over paying for a property and then be left in more of a financial hole than I began with. I'm still extremely motivated to do this, I'm just looking for a nudge in the right direction =DDD 

Apologies for the long post! I hope I did not confuse anyone, please feel free to ask if you need me to clarify anything. I look forward to hearing your advice and I truly appreciate your time and help, thank you so much!!!

Cheers

[Crystal Smith]

 You have a lot of info & questions in this post.  

• Location- Tri-Taylor, Pilsen & Bridgeport are great areas to execute your plan.  Since your plan is to live in the property I'd spend some time in each neighborhood figuring out where you want to live based on amenities that you find important.  W/ regards to crime statistics you can use Trulia crime map to review if a block is hot or not.  
• Competing- Your agent should be able to tell you if you'll be competing against cash offers at the higher price. (Hint: You'll still be competing against cash sales.) Another hint: Many of the offers whether at higher or lower prices may state cash but they are actually Hard Money loans that can close in 14 days or less, just like cash. Since you're already pre-qualified for an FHA loan, evaluate whether it make sense or not for you to use a Hard Money loan for the purchase & renovation then refinance once complete into the FHA loan.  Caution:  Make sure you fully understand the underwriting requirements & how much cash you'll need if you use this approach.  Also, make sure the loan is for at least 13 months. This will keep you out of seasoning trouble when it comes time to refinance.  You may not have to go to higher price properties if this approach makes sense after your evaluation
• Since you have a contractor he should be able to provide you w/ ballpark estimates for building or renovating a 3 unit building.  Regarding high tier finishes- Why?   If you're going to manage this as a business to create cash flow why are you starting out thinking that it should be high tier finishes?  You should be focused on low to medium tier finishes that look high tier.  
• Rental rates- You have a realtor w/ access to data & h/she should be able to tell you what the market will stand w/ respect to rents.
• Are you in over your head- My 1st reaction to this was yes.  But since you don't have a deal yet then the answer is no.  Since you know you need cash flow between $1K to $1.5K per month to meet your goals, stick to deals that either partially or wholly satisfy those goals.  Don't overbid for a property unless it still satisfies your goals.  Don't get emotional about a property.