Is the 2% Rule (Or even the 1% Rule) Possible in Chicago?

Question

Hi, first time RE investor here. I currently rent in downtown Chicago with my fiance, and come this June we plan to buy a multi-family property (living in one unit and renting out the others) within the Chicago city limits using my VA loan benefits.

The issue that I consistently run into is that I cannot find an investment property that meets the 2% or even the 1% rule. Which leads me to my question: how can I do a better job identifying and finding deals in this type of RE market?

Thanks

Alex

Kenneth Cowan · Answer

@Alexander Small - My wife and I purchased a 3 flat in Aug 2017 in Portage Park. We used the 5% down loan that I don’t think is available any longer. We’ve had a blast at our home, lots of ups and downs, but we recently refinanced and we are now at $300 POSITIVE cash flow per month with reserves while owner occupying. We legit get paid $300/mo to live in our 2/1 unit that we kind of like. This has changed our financial lives, and we have almost $100K in equity to boot. When we move out we are looking at $1800-$2000/month in positive cash flow. I cannot recommend this process more highly.

We worked with @Brie Schmidt to purchase our home and also strongly recommend her. I don’t think you’ll find anyone that knows this particular niche better.

Please reach out if you have questions on house hacking. Happy to help if we can.

-Kenny

Jonathan Klemm · Answer

@Alexander Small - In my opinion, the key to your first deal is just finding something that is saying you some money compared to what you would be spending when you are renting.   Too many newer investors spend so much time analyzing and worrying, that they forget about the most important step, taking action.

There are no 1-2% deals in Chicago unless you are looking in class C & D neighborhoods.  If you find any, make an offer the same day and lock it up.

If you have any of the above (@Brie Schmidt, @Tony Angelos, or @John Warren)  real estate agents on your team, you are going to be led on the right path to get started.

Looking back 5 years from now you will laugh about your first property.  I am still laughing at mine.

David Pere · Answer

@Alexander Small I'm not intimately familiar with the Chicago market, but you may not be able to. In some more expensive markets like San Diego, where I'm at now, the 1% rule is basically a fairytale. That being said, if you use the VA loan to house hack, and can slash your living expenses, and pay down a decent amount of principle every month, it might still be a good investment!

Tony Angelos · Answer

@Alexander Small I'm a broker here in the city. It technically can be achieved if you find a diamond in the rough, but the 2% rule is more of a guideline than a rule.

I worked with a client who wanted to get an investment property that could beat a REIT that he was invested in. It was yielding about 8% but had terrible performance, yet he was ruling out so many properties because it didn't meet the 2% rule. From a total return perspective, he was definitely losing. Once we started to break down what the investments actually would look like in real life, his attitude changed as he understood there are a number of ways to evaluate what a successful investment would be.

Don't let that stop you. There are several roads to a successful house hack. Feel free to PM me if you'd like to talk more.

Paul De Luca · Answer

Like @Tony Angelos I'm sure it's possible but I imagine the property would have to be highly distressed.

John Warren · Answer

@Alexander Small you can find cash flow all day long in the Chicago market. Now can you find it with a VA or FHA loan in the most desirable neighborhoods in the city? No. You can find 3 and even 4% deals on the south side. I still am seeing deals in the 1.2-1.5% range in the western burbs if there is some value add. Chicago is a huge market, and you just have to find a neighborhood that makes sense for your investing and quality of life goals.

Brie Schmidt · Answer

@Alexander Small- I cover Pilsen to Jefferson Park to Evanston.  No, you cannot find the 1% rule, but it isn't a real metric that anyone should use to determine the profitability of a property.  It is just a quick look metric to determine if a property is worth looking into

Crystal Smith · Answer

To do a better job of identifying and finding deals in Chicago throw out the 1% and 2% rule. Make a decision on what type of Return on Investment you want from your assets, 10%, 15%,....  Analyze properties based on that number. When you analyze properties consider how much of your own cash you must invest based on the loan you're approved for, then the numbers to determine how much rent you'll need to make your target. The 1% and 2% rules are great in regards to getting you to think about what to look for, but at the end of the day you have to establish your own investment goal/target numbers.

Russell Brazil · Answer

Yield is a function of risk.   To locate properties that meet a specific yield, keep increasing the risk premium until you find the yields you are looking for.

Andrew Syrios · Answer

Probably not, but the 2% rule is garbage. For more of my thoughts on this, see "Why the 2% Rule Should Die a Horrible Death" https://www.biggerpockets.com/...

Is the 2% Rule (Or even the 1% Rule) Possible in Chicago?

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