How to finance 5 unit in Chicago

Question

I'm interested in buying a 5 unit property for about 875k in Chicago. I have around 10% that I can put down. I'm willing to live in one of the units if that will help me get financing. What kind of financing is available for this kind of property? Do I have to put 25% down since it's considered commercial? Any creative ideas to make this work?

Oleg Shalumov · Answer

@Ariella Sherman talk to seller about stellar finanacing for full amount or maybe 20-25% (downpayment).

You can also partner with someone who would bring downpayment money and go 50/50 on the deal.

Brie Schmidt · Answer

@Ariella Sherman - if it is a legal 5 unit it is commercial and owner occupied low money down loans are not available, only commercial

Michael Glaspie · Answer

Find a way to purchase this property as is. This will be one of the most beneficial learning experiences you will ever have. @Diana Muresan brought up a very important point of the NetWorth Requirement and 'experience' that many lenders would want to see. So, you can counter that by bringing on a partner with experience and capital. Maybe you can find a property management company owner who would be willing to partner with you. Just an idea.

Next is capital requirements. 20-30% is around where most lenders will expect a downpayment. Potentially you can talk to the seller and consider a few options:

1. Seller finance the entire note with whatever downpayment you can afford.

2. Seller finance a portion of the note.

3. Find PML for a portion of the down payment

4. Find an investor who can purchase the whole property. They retain majority ownership and you get equity just to be the boots on the ground representation and manager. (This starts your credibility)

5. Someone mentioned rezoning (interesting idea. Might be a waste of time, but you won't know until you start digging into that possibility deeper with local municipal zoning authorities)

There are a few more creative options. I recommend you dive deep into this one and take everyone's Ideas to heart. I am currently doing the same for an apartment complex in my area. I thought I knew a fair amount until I began to explore ALL the options that came to mind. It will be a great education process.

Best of luck.

Alex Bekeza · Answer

@Ariella Sherman I mean that commercial loans won't allow for the owner to occupy the building. Loans on properties where the owner is the occupant have 100 x the rules/regulations after the mortgage crisis compared to non owner occupied investment properties.

House hacking relies on conventional financing, cash purchase, private money or seller financing. ( I don't know many private money lenders willing to lose their pants by writing a note on a owner occ. property)

@Steve Hall has good questions because this is 1. A nightmare to Underwrite on the loan side and 2. hard to imagine a scenario where you would cash flow well.

@Diana Muresan Is correct as well.  Your opportunity to house hack will be much more realistic on 2-4 units.

Ariella Sherman · Answer

@Alex Bekeza Do you mean that I won't be allowed to live there at all, or just that it won't help get better terms on the mortgage?

@Steve Hall This seems like a good deal for the neighborhood. It has good cash flow, and we can live there for free when we outgrow our current home. One of the units is huge (6 beds, 3 baths) and can probably be split into 2.

The seller is not willing to finance the whole note, but I have asked them if they will be willing to finance a portion of the downpayment, will see what they say. I don't think rezoning it to 4 units would be worthwhile. One of the units is already huge, which makes it harder to rent out because at that point most people want to buy a house. Wouldn't want 2 huge units, rent wouldn't double.

Alex Bekeza · Answer

@Ariella Sherman You won't be able to owner occupy a commercial loan.  20% would be the minimum but 25-30% can often be necessary to cash flow.

As others have mentioned, perhaps seller financing could represent a low down payment alternative.

Steve Hall · Answer

My first question for you @Ariella Sherman would be WHY do you want this property? Does it have a great cash on cash return? Do you think you can flip it? Are you trying to house hack a 5-plex?

I don't know the Chicago market, but $175,000 per unit is too high for my interest. Have you looked at any comps? Unless you showed me some numbers that made sense, I would instantly be leary of this deal.

Diana Muresan · Answer

@Ariella Sherman on commercial, downpayment is 20-30% pending of property class: more importantly you need previous landlord experience and you need to have the same net worth as the loan amount. I suggest starting with residential 2-4 units owner occupied

Sami Davis · Answer

Another idea.  You can work a deal with the buyer to convert the 5 unit into a 4 unit.  This way you can get cheaper financing through conventional loan process.  Otherwise you will have to do commercial mortgage loan.  Typically expect to contribute 20 percent minimum.

Jeff Burdick · Answer

Unfortunately, owner-occupying does not benefit you on a five unit building as your financing will be commercial.  Is it a legal five unit building?  25% is most common with commercial, but there are some commercial lenders who will go below that.  Talk to a good mortgage broker.

How to finance 5 unit in Chicago

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