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If you can't afford a mortgage, have someone else pay it

For young Chicagoans, the idea of renting in a two-flat may be more familiar than the prospect of buying one. But as the housing market bounces back, a wave of first-time homebuyers are scrambling to snap up homes with two to four units.

It’s not just a local phenomenon. Nationally, the number of owner-occupied investment sales jumped 17 percent last year, even as overall investment sales declined, according to the National Realtors Association.

The allure is clear: more house for your money. Financial modeling from Access Chicago Realty shows that rental income in a three-flat could reduce the typical homebuyer’s out-of-pocket payments by around 60 percent, even after factoring in repairs and vacancies.

But being a landlord isn’t for everyone. “The biggest challenges are picking the right tenant, really knowing the laws, and understanding that you’re running a small business,” says Taft West, the director of property management training at Community Investment Corp., a nonprofit Chicago lender that finances multifamily rehabs.

West believes interest in investment property is on the rise, with enrollment in CIC’s course for new landlords up 126 percent since 2009.

“You’d be surprised how many inquiries I get,” says Kevin Rocio, a Chicago real estate adviser who specializes in multiunit properties. “People don’t want to feel that they’re missing out on this real estate run that we’re in, especially the tech-savvy kids with an entrepreneurial side.”

The recession temporarily sidelined many folks who would have been first-time buyers, says Mike McElroy, a Chicago buyers’ agent who specializes in investment property. Now that the economy’s picking up, they’re back in the market, looking for something bigger.

“They skipped that condo step when they were 25, but now these people are coming back ready to make their first purchase,” McElroy says. “They want to consider raising a family in the city and having some room to grow, but it’s crazy expensive to buy a single-family [home] and pay off that mortgage yourself.”

Norm and Emily Pacyga are just such a couple. With two young kids, they’d reconciled themselves to a move to the suburbs, where space wouldn’t cost so much.

But in February, they closed on an early 20th-century brick four-flat in a desirable North Center school district. Even after rehabbing the main house to a single-family, the couple predicts rental income from the coach house’s two units will cover at least half of their monthly payments. “We’re going to have a home in the city with a yard and great schools, and normally we wouldn’t be able to afford that,” says Norm, 34, a commercial banker.

But getting an offer accepted wasn’t easy, a common refrain among multiunit hunters.

“At the first-day showing, there was a line out the door,” says Emily, 30, a self-employed product designer. The property listed at $525,000, and after a hasty post-showing debrief at Starbucks, the couple made an offer the very same day — $13,000 above the asking price. Their final offer hit $587,500.

In September, newlyweds Grant and Valerie Craig returned from their honeymoon to a surprising business proposition from their downstairs neighbors, Dan and Rose Miller: go in together on a three-flat, and rent out the third unit.

“Our life could’ve just continued to be this migration of rentals on the Blue Line — Wicker Park, Bucktown, Logan Square,” says Rose, 34 and a therapist. “Our rent kept getting raised, and we just saw this future of getting priced out and moving further out every year.”

In April, the four closed on a stately brick three-flat in West Humboldt Park, paying the $399,000 asking price. They say schools in the developing neighborhood aren’t a concern for now, since neither couple has children. If their families do grow, the couples point to the building’s versatility. They could duplex two units for more space, or move elsewhere and rent out the building as an investment property.

“There is no way we could have afforded a single-family,” Valerie says. “So it’s a little ironic that being tied to a mortgage has made us more flexible than renting.”

Landlording 101:

Buy low

“Jefferson Park is still a great area for deals,” says Kevin Rocio, who also touts Rogers Park and Belmont Cragin. Mike McElroy sees affordable options in Pilsen, Humboldt Park, Uptown and Avondale.

Move fast

Investors with deep pockets are making cash offers within days of listing. Get pre-approved for a mortgage, acquire a feel for the market, and be ready to make an offer quickly.

Know Your Loans

Lenders don’t assume that 100 percent of rental income will go toward your mortgage payment. Work with a lender who specializes in multiunits and can walk you through the math.

Current Tenants

If the building has tenants, get full disclosure on their lease agreements. If a seller says occupants will be gone by a certain date, confirm it with the tenants before signing anything.

Be a Serious Landlord

Learn the local rental laws. CIC offers property-management courses that cover the basics for $50. Above all, screen your renters thoroughly by soliciting recommendations and credit checks. “Even if it’s your cousin, put them through the same ringer,” Rocio says.