1% Rule Multi-family Properties – Where are you hiding them, Chicago!?

[Danny Duran]

BP Community—equipped with many hours of Bigger Pockets podcast listening and forum trolling, the fiancé and I are actively searching for a multi-family property to owner occupy in the City of Chicago. Goal: leverage a 3.5% FHA down payment to acquire and owner occupy a 3-plex (that's a "3-flat" in Chicago, folks!) which cash flows positive in an up and coming area that's close enough to the rough zones to offer bargains but far enough away to feel safe walking our mini schnauzer late at night. For us, cash flow is king; we'll sacrifice appreciation for cash flow in a heartbeat. In good Bigger Pockets faith, we are strictly adhering to one of @Brandon Turner's most sacred commandments: thou shall not purchase an income property with a monthly rental income to acquisition price ratio of less than 1%.

Loved @Brie Schmidt in podcast show 78! Her story resonated with our goals, big time! @Brie Schmidt mentioned her owner occupied Chicago 3-flat property has a monthly rental income to acquisition price ratio of ~1.25%. I was inspired. After scouring over 100 MLS listings with abysmal ratios, @Brie Schmidt's 1.25% simply blows me away! Where are all the 1% properties hiding?!

For your viewing pleasure, I’ve included a snap shot of my “5-minute analysis” process on properties in our Logan Square farm area. Yes, this is a small sample of properties, but, the ratios are representative of a more exhaustive list:

Column “S,” the 1% Rule, reflects values well below the acceptable 1% ratio. Column “T” reflects the acquisition price required to achieve a ratio of 1.05% (my self-imposed minimum). Column “V” is the acquisition price to achieve 1.1% and column “X” achieves my ideal 1.25% (for Chicago anyway).

We realize there are three ways of arriving at 1%: decrease the acquisition price, increase rents, or both. As owner/landlords inheriting lease terms, we will have to wait for expiration for the opportunity to increase rents, hurting cash flow upfront. I have more control over the acquisition price and want to heed the advice of BP contributors everywhere who assert that “investors make their money when they buy the property and realize it when they sell.” With our BP knowledge, we know it’s unacceptable to invest in anything south of 1%; however, the required purchase prices in columns T, V, and X are so dramatically low that that we’re discouraged we’ll find a seller who’ll accept or even take us seriously.

In this mega city, we presume there are thousands of buy and hold investors with properties ? 1% and we want to be one of them. Has the Chicago market appreciated to a place that makes 1% properties scarce? I have a feeling we’re “missing” something here. We’re looking for the Chicago BP community to help us understand this market and point us in the direction of the 1% motherland.

Your comments and guidance would be greatly appreciated!