Chicago - Multi Family 203k loan first purchase!

[Catherine Moran]

Hi All! Brand new here and am loving reading all the posts and answers. Figured it's about time to start my own because after about six weeks of Bigger Pockets webinars and research I have a lot of questions.

Immediate Goal (within 15 months): Use FHA 203k loan to purchase multi family in an affordable but relatively safe area of the city - Lincoln Square and North Center are ideal but potentially too pricey; willing to look in Avondale, West Irving Park and further south (Logan Square/Bucktown/Wicker Park/Humbolt Park/Pilsen) if it's a safe enough area for a single female to owner occupy. Cook county FHA loan maxes are $565,900 for a tri-plex and $703,250 for a four-plex. I'm a northsider at heart but willing to make a sacrifice for a year or two - as long as the property cash flows in the short term and will appreciate in the long term (planning to buy and hold for my first purchase).

Questions:

1. Besides closing costs, 4 months of mortgage payments saved up front, plus $5k repair/capex per unit by the time I move out of the property - how much cash on hand should I have for construction costs that exceed my budget and/or loan? Is 10-20% of total construction budget enough? I realize the FHA loan takes a 10-15% contingency into account for this purpose, but I am an underwriter by trade and want to approach this as prepared and well funded for disasters as possible. I am utilizing the analysis calculator on this site for CF analysis, but have a demanding job and want to walk into this situation with enough cash to sleep well at night when things don't progress seamlessly.

2. I have read many posts about the next areas in Chicago to gentrify and have come up with three favorites that could work for me - Avondale, West Irving Park, Pilsen. IF I can get into North Center, Lincoln Square, Bucktown, Lakeview or the outskirts, should I do so at a higher purchase price? Or should I strictly seek a great deal and hope that the areas I mentioned will gentrify by 2030?

3. Why does everyone say duplexes don't cash flow in Chicago? This is why I have been focusing on tri/fourplexes - but if the numbers work don't they stand for all scenarios?

4. Does the FHA loan allow me to renovate a 2 unit into 3 units and to therefore go by the tri-plex loan max? A lot of what I'm seeing is 2 unit but has enough square footage for 3 units if the unfinished basement/potential garden unit is legal (assuming this would cost a pretty penny to make legal if not). Not sure how zoning/building codes apply here - I am in the process of finding 203k certified GC's (or CM with architectural capabilities) so haven't checked yet.

5. Is it still possible to get closing costs refunded if I make energy efficient upgrades like windows/doors? What about seller financing? What are the chances I can capitalize on these perks without having a full cash offer out the gate?

Sorry for the long winded questions - and thanks in advance for any insight you can provide! I appreciate it more than you know and am happy to help out in return with a second set of eyes on your rental contracts or with any other insurance advice I can provide. *Disclaimer: I am not licensed as I don't sell insurance, but do have my AINS, AU, CRIS, ASLI & CPCU.  - I am a company underwriter so my knowledge is more specialized from a macro level. Just want to point out I won't be trying to sell you anything - just can offer friendly advice based on my experience. 

Cat

[Eric La Pratt]

Hi @Catherine Moran ,

To answer yours and @Kenneth Cowan 's inquiry regarding 203k in the city, I'm shoulder deep in my rehab now that I closed on in February and @Brie Schmidt was actually my realtor. Here are some things that have come up in my rehab that were unforeseen in the many walk throughs with our 203k consultant, 5 GC's and me:

• Plumbing system had been frozen EVEN THOUGH the property was winterized. This required a replacement of the entire system. =$20k
• City of Chicago plumbing inspector shows up and sees beautiful new plumbing all done perfectly and states: "Great work with the new plumbing! But now you're fancy new plumbing system won't be so good with the 1" water service line you have coming in to your house from the water main. So that needs to be upgraded to 1.5" now that you've done this beautiful new plumbing." If you are planning on doing plumbing work, adding in unit laundry or whatever, just plan on this. Next time you drive down the street, look for the recently rehabed or new construction properties and you can always see the replaced strip of asphalt going out from the property line at the street to wherever the city water main is. That's the city saying "Yup. Upgrade the water service line." There must be a dozen on Foster between Broadway and Lincoln. = $15-21k
• Electrical system needed to be upgraded from 100 amp to 400 amp service even though no one managed to notice. While we were not called on our wiring (I pleaded with the electrical inspector stating his plumbing colleagues have already bled me dry), we were called on the entire wiring for 1 unit as there were electrical boxes hidden behind drywall for each and every fixture. =$5k for upgrade and $4k for wiring in one unit. Imagine getting called on wiring for all units and common areas!
• City of Chicago inspection delays will cost you *months* of holding costs you are not planning on at the moment, regardless of what your GC says. The initial permit took 35 days to attain with the city. I had made my first mortgage payment before work could start. Then your GC will want to be careful about how they are scheduling inspections. God forbid your electrical inspector wants you to open walls and the next day the ventilation inspector sees bad venting behind those opened walls. So things might need to be done in a certain order to minimize this damage. However at some point you might be stealing from Peter to pay Paul. That is to say potentially saving money because the city inspector isn't seeing things that they want corrected but, at the same time, you now end up paying 3 months of mortgage payments you wouldn't have had to pay if you just plowed through the project.

The big unknown is what is behind the walls. You just never know! And Brie can attest: I did a crazy ton of due diligence... everything short of opening walls up myself.

Hope this helps!