Rookie investor here - Multi-family unit or condo/townhome?

Question

Hi All,

I want to start investing in RE , I am looking to buy in Chicago am contemplating a Multi-Family unit. But I do not know what the exit strategy for that would be. Can I sell them as easily as a condo or a townhome? Is a regular townhome or a condo better to start off? Is there a reason why I should pick one over the other?
The reason I am thinking of condo/townhome as an alternative is I would buy them in a good neighborhood in downtown and so is easily rentable and probably easier to sell if I want to (based on location). For the multi-unit I have to go a little away from downtown but still in good neighborhoods (meaning easily rentable).

Also I read about the 2% rule on this site and also the 50% rule. Both of them make sense and I learned a lot in the one day I knew about this site. But in Chicago downtown area I cannot see the 2% rule working at all. The rents for a 2 br are probably 2500 and I pay 250K at least for one. So at best I get a 1%. Should I not even consider the area then?

Thanks for any and all feedback.
- Paul.

Thom H. · Answer

Welcome to BP Paul. I own both... The multi unit should be a buy and hold strategy in my opinion. Just the nature of a multi unit is a higher priced investment, so you immediately narrow your buyers because it takes more money for someone to buy it from you when you're ready to sell. The are a lot more buyers for SFH's and condos because of price is lower...so many more buyers in that market. If you're looking to flip or sell relatively soon after purchasing go for the SFH over the multi. On the other side, recognize with a SFH or condo, when you have vacancies or tenants that don't pay, the lost rents tend to hurt a lot more (especially starting out if you have limited resources and need every penny to make mortgage payments.) However, with a multi unit, if one tenant is late or you have a vacancy, it's easier to absorb because the other unit(s) typically can cover the costs for that month. It all boils down to your objective. I started with a multi unit for the latter reason. I wanted a higher degree of confidence the rents would always cover my expenses and mortgages if there were vacancies. I still own that multi unit (years later) and it's very profitable to this day ( and have no intention of selling it any time soon). I've since bought both more multi units, SFH's and town homes and they are just as profitable, but SFH and town homes are definitely easier to sell if you need to exit. Just my experience...for what it's worth. Define your overall REI objective, understand your ability to financially cover costs if things don't go as you expect, and your exit strategy will probably define itself. Hope this helps. Good luck!

Paul S. · Answer

Thanks Bryan. I am in touch with a real estate agent (referred through a friend) who predominantly works in and around downtown. But I will contact some time if I need.

Bryan Balk · Answer

Paul, I work for a flipping company in Chicagoland area. I currently have a 2 unit available in Elmhurst. We own it but do not have possession yet. This is in a great area and will be a great investment. Give me a call some time and we can talk about what kind of goals you have and how we can achieve them. FYI we do most of our business in the suburbs but we do a little business in the city. I just got a call from someone with a 3 flat that is fully rented, hes getting $2,400 a month in rent but owns the property free and clear and wants cash to start a business. This property is not in a great area and is not something my company is interested in. The cash flow looks great but the management cost, vacancy and maintenance will be high.

Dave M. · Answer

Welcome Paul! You're unlikely to find 2% properties in good neighborhoods in Chicago. If you do, you'll still be entering a tenant friendly environment - definitely something to keep in mind. The rental market is strong, rents are up & vacancy is down.

Paul S. · Answer

Thanks for the reply. I am not considering the appreciation aspect of the equation yet, just to understand if the 2% rule better in my scenario. But for me to understand, what is the exit strategy for a Multi-family unit? Does it sell as easily as a SFR or a Condo? Does it appreciate as much as a SFR or a Condo? What should my expectations be? - Paul.

Joel Owens · Answer

Paul some areas are appreciation driven in combination with the rents. In those areas it is very hard to land 2%. You have to decide what you want appreciation only,cash flow,or combo of both.That will dictate the area more and how active or passive you have to be to get the return you want.