Chicago 2-Flat: Hold or Sell?

Question

Hello all, would appreciate some feedback on my situation:

My wife and I purchased a 2 flat in the Lakeview neighborhood about 2 years ago, It is a 3 story, 2 unit building near right off the Southport Corridor (Very popular area).

Our initial plans were to deconvert the building into a single family home, we had plans drawn up and everything. Our circumstances changed, and we will now be moving out of state (Minneapolis) and based on the numbers below, would love to hear from some experienced members what they would do:

-Purchase Price: $800,000

-Current Amount Owed: $700,000 (bought building for 10% down, paid down about $20K in principle)

-Total Rental Income: $4,700/month (there is some room for increase, could get $5,000 with rent increases)

Monthly P&I + Taxes: $5,700/month (I took a pretty serious property tax increase this year which increased my monthly payment $500/month.

We didn’t plan on purchasing this building as a long term hold (obvious since it doesn’t cash flow) but we were going to take what, at the time, was a $500/month hit while we renovated the building. That isn’t happening now, and we now have a building that costs us $1,000 / month to carry.

I see the options as:

• -Sell the property, probably for what I paid - I eat the 5% realtor commission
• -Refinance with a 75% LTV, which would require me to put quite a bit more cash into the place, which ideally I don’t want to do
• -Do nothing, and hold as is.

Building is in good shape, and in a very popular area, so should hold it’s value, and will rent very easily.

Would love any opinions. Thanks!

John Warren · Answer

@Steve Miglieri I would personally sell the home and cut your losses. There are a variety of strategies that have been proposed on here that MIGHT help you bridge the 1k per month gap, but the reality is that you will be living in a different state many hours away. Unless your time is worth running a long distance Air BnB business or managing a construction project from afar, I see a lot more risk in holding onto the property. In addition, Chicago has seen fantastic appreciation for the past ten years but it may not continue to appreciate. That is the speculation part. What you know from running your numbers is that you will lose money, and I can tell you that you will HATE losing the money from afar.

Some other things to think about would be what would you do if you have an eviction? I know nicer neighborhoods generally help you attract the right tenants, but it could still happen. What if you have a plumbing issue that causes damage? These types of things happen, and being out of state makes it hard to respond.

Frank S. · Answer

What do I know? I am assuming a teardown. In my area, North Center, $600K -$700K is teardown price for a 1.6M SFH new construction. I assumed at $800K, the rehab must be a little nicer to get more money out.  There are many flippers and rehabbers in the area. I've been quoted $350K to $450K for a full gut job of a typical two-flat, 8 months process. However, this is for my own home, so you big shots probably get better prices.

Mike B. · Answer

@Frank S. Since when does buying an $800k property automatically translate to a $2 mil rehab?

Jonathan Klemm · Answer

@Steve Miglieri -  I feel like this is a no brainer unless maybe to @Lumi Ispas point #1 you could still deconvert to a single-family and make a good profit.  However to @John Warren point, are you going to be able to handle or even want to do a Chicago 2-unit deconversion from over 500 miles away?  I have dealt with a handful of Chicago zoning issues and its not fun at all.

My suggestion is to cut your losses, learn from the experience, and find some new profitable deals up Minneapolis.  Good luck!

If you end up wanting to manage it from Miieapolis PM me and I can definitely help with that, although don't recommend it.

Frank S. · Answer

Curiously, I thought about the following exist strategies before buying in North Center.

If you need the cash, sell.  If so, I would sell it by owner or use a low cost brokerage like Redfin. We bought our house from a sign on the front lawn without agents.

Recall you paid 50% of the original commission, the fee is an intrinsic part of the purchase value and not paid by the seller, as they say. I would try to lower the overall transaction costs somehow.

If you don't need the cash, buy yourself time to figure it out. You are also making money in amortization and tax shelter to soften the negative cash flow.  You could look into hiring an AirBnB management company or set up a corporate rental for a few years.   You will make more money than renting the unit.

You could also partner with a developer and flip it.  Although, at $800K purchase you will need a +- 2M rehab. Talk to a developer in the area, look at the high flips in the area or deconversions, call the agent and get the developer's name.  They may give you a cash offer.

Good luck,

Frank

Update: I just notice you didn't put 20% down, so you will always have to pay out of pocket.  I would be more inclined to keep it as a corporate rental or Airbnb for a while in that case.

Crystal Smith · Answer

Sell it. Include the plans/drawings for deconversion as part of the sale

Erika Carter · Answer

Sell it!

Lumi Ispas · Answer

@Steve Horvath, I am seeing at least a couple of possibilities here, depending on your exact credit, long-term goals and income situation:

1. What if you were to deconvert as originally planned and then sale the new home? How will that work out for you? Will you be able to get a construction loan and will you make a profit?

2. Sell & carry the loss - you might save some in income tax. Placing 120K into refi vs loosing about $35,000, depending on how you file your taxes, I suspect you'll fare better if you carry a loss than getting 200K stuck in the property with a very low return. (you'll have to take in consideration vacancies, rental fees & maintenance)

3. Keep the property with the same loan, increase the rents, hope the value goes up so you can get rid of the PMI and your $700/month loss will probably get equaled by your depreciation gained, while you'll continue paying about $10,000/year in principal. If you can still take loans with this property in your credit, use the additional 120K you wanted to use to refi the property to buy an additional property with high positive cash flow.

Good luck to you!

Jake Hartnett · Answer

I have a friend making a killing doing Airbnb in Chicago. Is that an option? Or is there a rule that you have to occupy the property to do short term rentals in Chicago?

Tim Swierczek · Answer

@Steve Miglieri Welcome to Minneapolis!  I would recommend you sell.  There are better places for your equity to get a return of $600/month before operating expenses.  Hit me up when you make it to MN if you feel like talking investing here.

Chicago 2-Flat: Hold or Sell?

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