All Forum Posts by: Danny Duran

@Joey Nakayama  while I will owner occupy, I am evaluating the properties as if I amnotgoing to live there. If it cash flows without me occupying one of the units, it's worth a closer analysis. Properties that don't meet the minimum 1% ratio don't have the likelihood of cash flowing. I'm okay with paying for some of the mortgage/expenses each month when I amoccupying a unit; just need to make sure it will cash flow positive the instant I insert a tenant in my place.

When (if) I find a City of Chicago property that meets the 1% rule and I can feel comfortable living in, I will proceed in applying the 50% rule of expenses, etc. I just don't want to analyze tons of listed properties that don't even meet the first screening test: monthly rent to acquisition price ratio ? 1%.

@John Weidner  in the N and NW side where prices have risen and properties are below the 1% threshold, how will the multifamily units on the market attract buyers? I'm trying to understand the psychology of an investor under these conditions. Given that the buyer of a 3 or 4-flat is most likely a small pool of investors conducting sophisticated analysis with rigorous requirements, it seems highly likely that these less than 1% properties will sit on the market for long periods of time. Or, would an investor knowingly purchase an income property with a ratio of 0.7% and stomach the negative monthly cash flow for future appreciation in a Logan Square type area? For this to work, an investor must have significant cash reserves, a high level of confidence that the property will appreciate and that they can exit with a profit after months or years of negative cash flow. Risky.

@Ray Browne part of the allure of owner occupying a 3-flat for me is that my tenants would pay the majority of the interest, tax, property insurance, and FHA mortgage insurance which are all tax deductible. I'm in need of deductions such as this to reduce my taxable income each year. A studio or 1-bedroom place I buy in your suggestion would provide the same benefit, however, the lower amount would make less of a tax impact (smaller loan), and, I would be paying PITI out of myownpocket versus having the tenants cover most of it in an owner occupied situation. In your suggestion, the 3-flat in a rough neighborhood could provide cash flow, but, I would only be able to deduct depreciation, not interest/tax/Ins. on an income property I don't occupy (non-primary residence). Furthermore, I must put 25% down for a conventional loan on a non-owner occupied, income property; whereas, I can put as little as 3.5% down on an FHA loan if I owner-occupy, leaving more capital available to deploy in other investments.

Those of you with tax expertise, please keep me honest on these tax benefits outlined above.

Thanks for everyone's commentary and suggestions. It really helps think through my strategy for this milestone investment. @Wendell De Guzman  do you have any advice for this scenario? Would love to get @Brie Schmidt's input, too.

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!

@Asha Holly, try getting mortgage numbers from direct lenders (start with your own bank). I found that the rates were lower and the fees were less expensive than the brokers. I can give you the name of the loan officer at BofA that I'm using if you'd like. @Albert Bui, great points. I have been looking into the same FHA idea. @Asha Holly, in Illinois, the maximum FHA loan for a 4-flat is 703,250; 3-flat is $565,900; 2-flat is: $468,150. You're well under the 3-flat maximum loan amount with your $329K MFR. Here's a great crash course on FHA: http://www.bankrate.com/finance/mortgages/7-crucia...

I'm in the same boat as you. Just beginning to look for a 3-flat or 2-flat to owner occupy in Chicago. What neighborhoods have you honed in on? First and foremost on my list is positive cash flow (not heavily reliant on an appreciation play). Need a safe neighborhood (where the dog can be walked late at night, early in the morning) that will attract stable tenants. I presume many of these things were important to you and your husband as well.

Can you share what is most important to you in this process and what you've learned along the way? I'd love to learn from a couple who have just made this journey to maximize this quest. Thank you!

@Wendell De Guzman, I just read through this entire thread and am inspired. I'm preparing to purchase my first multi-family unit to owner occupy and begin my portfolio. 

I just listened to BP Podcast episode 001 with @MartyBoardman where he reviewed the pitfalls of Guru seeking and endorsed RE Investor mentorship in one's local market instead by adding value to the Investor (bringing them $ or deals). How can an investing beginner, who holds down a full time job, help bring you deals and learn the business? I'm Chicago based and would love to help your business and learn along the way!