Posted by: union03g | July 1, 2009

Two-Flats Investments Are Hot In Chicago, But They Come With Risks

Buying a two-flat in Chicago that you are going to occupy has strategic significance but comes with major risks. The idea is generally to get the renters to cover RE taxes and hopefully part of the mortgage while you pay for the rest. The two-flat purchase used to be widely sought after in the early 90’s as places like Wicker Park, Bucktown and West Town were still reserved for urban pioneers and had a lot of growth potential. $175,000 two flats quickly turned into $500k – $700k two flats 15 years later and rents haven’t increased in lockstep.

Two-Flat Upside:

  • More leverage = more ROI
  • No condo association restriction or dues that eat into ROI
  • Management control over improvement/tenants
  • Ability to rent both units out or borrow against cashflow for larger place later

Two-Flat Downside/Risks:

  • Vacancies can crush ROI
  • Home improvement projects gone wrong
  • Being responsible for maintaining two units
  • More leverage creates a larger variance of returns, this can magnify losses
  • Bad tenants and strict Illinois tenant/landlord laws
  • Less ability to diversify into other asset classes from a portfolio perspective
  • Urban pioneering issues, neighborhood selections can be narrow

The Chicago Tribune seems to think Two-Flats are in Vogue:

“It’s a much more flexible investment than a condo or single-family home,” Northey says. “You live there and collect rent, and even if you outgrow it, you can rent out both floors and still borrow against it to buy a single-family or something bigger.”

Back in 1994, Steve Hobbs bought a Wicker Park two-flat for $150,000, fixed up the first floor and quickly found a renter.”I rented out the first floor for $900 a month and my mortgage was $1,300,” Hobbs says. “My wife and I were living in the top floor for $400 a month.”They’ve since moved to Sauganash, but he and his wife held onto the Wicker Park two-flat as a rental property. “Now it generates about $3,200 a month, so it’s sort of been a little ATM for me,” he says.

Check out Rubloff. They also think Two-Flats are hot commodities with the decrease of home values over the past two years. It’s a big investment and the numbers need to be vetted thoroughly, but if you can make it work there are big rewards to be had. A really good inspection needs to be done by a professional because when the black mold shows up under the carpet and in the walls of  the basement, your returns gets hammered. Remember, this isn’t just about a home, this is about MONEY. Two-Flats need to be compared to other asset classes constantly. Good luck.

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