My partner and I just purchased an investment property in Chicago, IL and I figured I would come here to walk through the deal.
The property is in the Logan Square neighborhood of Chicago which is a hip, up and coming neighborhood that has lots of great restaurants/bars yet still has a long runway of growth. I expect this growth to be driven by its proximity to transportation and the historic nature of the area which will always be desirable to renters.
My partner and I first saw this property in May 2020. While we loved the building, the price of $649k felt far too much for a 3-unit building on the outer cusp of Logan Square. However, we loved the fact that it was on a 30-foot wide lot that allowed for larger than average bedroom size, it was set back from the street by a sizeable front yard, and it is a brick building with large south facing windows. These brick buildings have proven to appreciate far faster and have a lot more upside in Chicago that balloon, frame buildings.
We have learned to step outside of the spreadsheet and look at old Chicago buildings (this particular building was built in 1961) with an eye towards their quality, character, and factors that will make renters say "I want to live there" in perpetuity. Even with this in mind, at $649k, this building did not satisfy the returns we desire from our investments. It also sat too far outside of the FHA Loan Limit (~$579k for 3-units at the time in 2020) for us to feel like we were truly optimizing this very valuable loan product.
So we kept looking elsewhere. Then we saw the price go down to $639k. Then to $629k. Then $599k in November 2020. At that point we felt like it was closer to where we needed it. We toured it and loved it but still felt we needed it be a LITTLE lower to satisfy the returns we were searching for. We offered $570k as we knew there was not much interest coming from other parties and our offer was declined. We walked away and forgot about the property for a few months.
Then in February 2021, when the listing had been taken off the market, we reached back out to the agent to inquire further. We offered $575k, the seller countered at $580k, and we accepted as long as they removed the "AS IS" condition. One unit had been vacant for awhile and there was a clear sense of urgency by the seller to finally get rid of the property. Then following the inspection we requested a $6k repair credit related to a few small items which brought our total purchase price down to ~$574k (and decreased our cash at closing by $6k).
Current rents at the time of purchase were $1600 for the top 3-bedroom unit, the middle 3-bedroom unit was vacant, and the 2-bedroom garden unit was renting for $1,000. At a purchase price of $574k with PITI of $3,300 and me and my 2 roommates living in the middle unit this acts as a very effective house hack in a city that is difficult to make the numbers work. The two 3-bedroom units market rent is closer to $1,900 in reality and the garden should be $1,100. The property was appraised at $591k.
Getting over the blinding effect of the current, in-place rents was a huge hurdle for us. The numbers are tight at current rents (although we will always feel like we're winning since we are owner occupying the property and instead of paying rent to a landlord we will be paying very low monthly rent (to ourselves), if any, as well as benefitting from ~$1,000 per month in loan amortization and potential for appreciation). However, what we realized is that rents in years 2-10 are far more important than in year 1. We plan on renovating all 3 units over the next 2 years (starting with the garden unit right now). Logan Square has very high rent disparity which gives us the opportunity to make high quality improvements to the property which will garner higher rents. We will then refinance our property and use our FHA loan again to repeat the process (while building our portfolio through other assets simultaneously).
This investment was a huge learning experience. We stepped out of the spreadsheet for a moment and looked at the potential. We like the deal now, we'll love the deal in years 2 and beyond. We gained instant equity at purchase based on the appraisal of $591k. And lastly we feel confident that we bought a very high quality asset that will be desirable to renters for many many years. Being persistent and continuing to reach out despite not liking the price or it even being taken off the market finally won us the deal.
