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