House Hacking in Chicago - Can a MF cashflow with no downpayment?

Question

Hi Everyone, just as a caveat I'm brand new to BP.

I currently live in Chicago and qualify for a VA loan. Overall, I want to know if its possible to house hack in Chicago with no down payment? I'm currently looking for properties under 400K but, with no downpayment, the mortgage for properties seems to be higher/or barely cover the mortgage payment. A couple more questions:

1. Should I find a real estate agent that has experience w/ VA loans?

2. From my understanding, the VA requires properties to be almost "move-in ready" i.e. no structural damage, crazy repairs. Do good MF deals typically require a lot of repairs (if so, it would be harder to qualify for many "fixer uppers" with a VA loan).

3. Does any know any good articles/networks that have experience with veterans/using the VA loans?

John Warren · Answer

@Sandra Pinzon you can definitely find good properties that will qualify for the VA loan. It is pretty similar to the FHA loan, and actually shares a disclosure when we write up offers using one of these loans. When you think of cash flow, you probably will have to consider the apartment you are living in as part of the equation. It is pretty hard to find a 2-4 unit that shows positive cash flow beyond giving you a free apartment to rent!

I often times encourage clients to run the numbers as though they had already moved out of the property so that they are including their own unit as part of the income/expenses equation.

Another thing to think through is all the other ways to build wealth you miss when you rent. You will definitely get debt pay down with a property as well as depreciation. You may get some nice appreciation as well (Chicago is an appreciation market) which often times can turn a so so deal into a stellar one.

Crystal Smith · Answer

For your first question- Is it possible to house hack in Chicago w/ no downpayment- The answer is yes. You have to target 3 to 4 unit multifamilies with units that are large enough to accommodate a minimum of 2 bedrooms (3 bedrooms would be even better). You'd then be able to cash flow the property as an owner occupant.

Should you find a real estate agent that has experience w/ VA loans?- What you need is a loan officer that's familiar with the VA Renovation loan. The VA renovation loan covers 100% financing which includes $ to acquire & renovate the home. The VA will lend up to the After Repair Value (ARV) of the home. What you need is an agent familiar with determining the potential ARV.

The VA requires properties to be almost move-in ready.  Here's a link to a BP article on VA Renovation Loan for Veterans. It describes what's included & excluded from the VA renovation loan. VA Renovation Loan Article

Do multifamilies typically require a lot of repairs? - For us, the most challenging thing about multifamilies in Chicago is not necessarily the number of repairs. For older housing stock it's dealing with functional obsolescence. Example: Room sizes that may have been adequate in the early 1920's but for today's market just won't work, so you end up tearing down a wall to expand a room or the entire property being heated by a boiler.  Many may not consider boilers to be obsolete, but we do & replace boilers the first chance we get with Force/Air cooling for each unit.

Chace Fraser · Answer

@Sandra Pinzon welcome to BP and thank you for your service!

@Alejandro Calixto made some great points. If you are using a low down payment option, it's not really realistic to expect to be cash flow positive while you’re house hacking and living in the property. However, the property must cashflow after you move out for the deal to make sense (in most scenarios).  When an investor is looking at being cash flow positive, they are typically putting down 20 percent or more. If you are in a high demand metro area, it's simply not realistic to expect to be cash flow positive if you are putting down 0-10%.

Now if that is all the capital you have, that is what it is. Is it better to keep renting than to buy? Typically it is better to buy. Better to build your own equity through the debt pay down, enjoy the tax benefits of ownership, and garner the equity of an appreciating asset. You just can't expect to cash flow on an initial purchase with a low down payment.  Now with time and rent growth, what could be a negative cash flow property might very well become a cash flow king, but that takes patience.

Another way to increase cash flow would be renting out rooms in the unit you live in, either Airbnb or longer term.

When I’m analyzing the numbers on a house hack I go through this progression. Keep in mind I’m in a high cost of living area so some of this may not be relevant to you. These “hurdles” typically go from easy to clear to harder and harder to clear. Better “deals” will clear more of the hurdles.

• Will the buyers portion of the mortgage payment be LOWER than the market rent for the unit the plan on living in. If you are renting a 2/1 and the market rent for that type of rental in the area is $1,000, then the amount of the mortgage payment you will be responsible for must be lower than $1,000. Otherwise, why would you pay more to live there? Remember, the goal of house hacking is to reduce your housing costs
• The buyers housing cost must be lower than it was before. This one doesn’t always apply. What if you were living with your parents rent free? What if you were living with a friend and they were charging you way under market rent?
• The property must be cash flow neutral or cash flow positive at the current rents if you were to never move in. If a unit is vacant I use current market rent.

This is where I start. If a property clears these hurdles, I’ll then start to dig a little deeper

Alejandro Calixto · Answer

@Sandra Pinzon congrats on what seems like an awesome mindset. Student debts can be a painful anchor. So being mindful of that is a good thing. When it comes to your house hacking in Chicago, it might depend on where you're willing to buy.

I am house hacking a 2-unit in a Chicago suburb (La Grange) with a VA Loan. If I were to move out I would definitely be cashflowing. While living in it, although I'm not cashflowing, I have lowered my out of pocket expense for housing by about $500. Might not seem like a lot to some, but that helps a great deal in my lifestyle. And that expense will only keep going down as long as rents go up. I'm also able to afford a much more expensive property by paying less out of pocket.

Prices are at a point where it would make it hard (not impossible) to find a property that cash flows with a VA loan (no money down). And it is true that the regular VA Loan requires the property to be in good condition. But house hacking is definitely the way to go. And the beautiful thing with the VA loans is NO PMI. When you buy with other loans and put minimal down payment, you end up having to pay PMI which usually destroys any cashflow. So in our case, we pick up a decent property that should require less maintenance, don't have to pay PMI which means we keep some more of that rent in our accounts, and no money down.

Having a great lender and a great realtor helped with my situation. Coincidentally, I used VU when I purchased my first SFH years ago before I knew anything about REI. I would suggest you deal with a lender that can understand your long term goals. Let me know if there is anything I can help with.

Sandra Pinzon · Answer

Thanks @John Warren and @John Clark!

That makes sense. I wasn't sure if I was suppose to run the numbers as if I wasn't living in the unit.

I was pre-approved for a mortgage through Veteran's United about two years ago. I decided to hold off while I was paying off some student debt but, now that I'm close to paying that off, I'm hoping to buy my first property.

House Hacking in Chicago - Can a MF cashflow with no downpayment?

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