HELOC or Renovation Loan - Renovating 3-unit to 6+ units close to a Chicago Univ.

[Quincy Mingo]

Looking for Advice on a renovation.

Hey everyone! I’d love to get your input and perspective on my current real estate situation in Chicago, IL. I’m in the process of purchasing a 3-unit with unfinished basement property for $512,000, significantly below its appraised value of $690,000. This price reflects the equity I already have in the property through a partnership, and I’ve negotiated a deal to keep it affordable. Owner financing is not an option.

The property is located in an area that has been appreciating at around 6% annually, with strong long-term growth potential, I’m considering how to best leverage this opportunity.

My goal is to renovate the property to maximize income by adding more units. The property has 3 above ground units with each unit having 3bedroom 1 bath. Property is zoned RM-5 and has great potential for increasing rental revenue. I'm exploring options for financing the renovations, including potentially taking out a HELOC using the property's existing equity or considering a renovation loan.

Key Details to Consider:

- Purchase Price: $512,000

- Appraised Value as is: $690,000

- Equity Left in Property: $178,000+

- Annual Appreciation: ~6% ($27,000+/year)

- Planned Renovations: Convert and optimize layout to add more units

- Goal: Increase property value and generate additional rental income

Questions I’d Love Input On:

1. Financing the Renovation: Would a HELOC be the best choice, or should I roll into the a Conventional rehab loan, or other loan products? Or buy at full price and take the cash difference?

2. Renovation Strategy: What are the best layouts to ensure I get a strong ROI on the renovations?

3. Commercial loan vs Residential – once I increase to 4+ units the loan request would change. How to work around or best option here.

4. Cost - the basement alone may run me $140K+ to renovate to 2 units with income of roughly $2,300. Should I start renovating the other floors first? Renovation cost for other floors is unknown at this time or if I want to go that route. 

5. Exit Strategy: Should I hold long-term to benefit from appreciation or consider refinancing/selling after increasing the value?

6. Living Situation: I could use as primary residence or strictly buy as investment?

I’d appreciate any insights from experienced investors, lenders, or anyone who’s worked on value-add projects like this. Please share your thoughts, lessons learned, and recommendations!

[Jonathan Klemm]

What's up @Quincy Mingo !!  Given I know a bit more about your situation - I will give you my straight and direct thoughts.

1.   I'd recommend the conventional renovation loan, assuming you get your plans and permits approved before closing.  When you close with a reno loan and then need to get your plans, that is when I see people burn through cash because of the design time and permit time that is not properly factored in.  Chicago often makes this part tricky!

2.  I still vote for 2 units in the basement if those cashflow numbers make sense.

3.  If you have that much equity, you may be able to use that to finance the renovation.  If a 20%-25% down payment (typically required for commercial loan) is going to be an issue you may need use hard money or stick with 4 units.  @Jose Valdovinos or @Landon Hoon any thoughts on 4 vs. 5 with regard to loan options?

4.  Bite off the biggest renovation first if you are able!  Take care of MEP (capex) items in other units while you are renovating the basement

5. & 6.  Completely up to you and what life objectives you have