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I am at an age where I am losing lots of friends to suburbia. There are a litany of reasons why people ultimately decide to leave the city, but I think without question the two most common reasons I hear are space and schools. Young couples quickly outgrow their 2 bed / 2 bath, 1,200 square foot condo when they start adding little ones into the mix.

Most, it seems, would ultimately prefer to stay in the city, but become priced out as they look to expand into a larger home (SFH or condos) in a desirable school district (a major consideration for most couples with school-aged children). So what is a family who is hell-bent on staying in the city, but doesn’t have $1,000,000 to spend, to do?

I believe salvation may lie in 2- (and 3-) flat properties.

Let’s look at homes in one of the best elementary school districts in Chicago: Coonley in the North Center neighborhood.

The median list price for a single family home in the Coonley district is an eye-popping $997,500. Condos are almost non-existent in the area; there is only one 3/2 condo currently available (as of 4/3/16). This leaves potential buyers with no options, unless all of the sudden they can afford $1mm (and obviously some people can, but this is aimed at those who cannot), right? This is where I think 2/3-flat buildings can potentially be an option.

If we expand our search parameters to include multifamily buildings, and you are willing to become a landlord – at least for a while, until you can afford to not be – there may be light at the end of the tunnel. Let’s take a look at a couple properties that are currently available and do some math…

First up is a 2-flat located literally across the street from Coonley at 2157 W Cuyler St.  I actually toured this property a while ago.  While it could certainly use some cosmetic updating, the major systems have all been updated in the last 15 years and the location is A+.  Both huge considerations when thinking about renting out an apartment as it will be in-demand and low-maintenance.  The owner’s unit is 3 bed / 2 bath and the second unit, which is currently rented for $1,000 is a 2 bed / 1 bath.  The current ask is $650,000, but it has been on the market for over 45 days at this point.  

This 2-Flat could be an excellent option

If you were to buy this property for, say, $625,000 and put 20% down (more on that later), you would be left with a mortgage payment of $2,387, assuming a 4.00% interest rate and 30 year amortization (I am going to ignore taxes, insurance and other homeowner costs, as a buyer will incur those whether they live in the city or suburbs).  Deduct the $1,000 we collect in rent every month, and our remaining mortgage payment is $1,387, which is the equivalent payment on a $290,000 mortgage.  At 20% down, this is the same as buying the home for $362,500.

In effect, being able to rent out the second unit allows you to afford $237,500 of more house.  You are now living in your own home, with a fenced in yard and detached garage in one of the wealthiest and most desirable areas of the city for the same price (or less) as most homes in nearby suburbs.  You also have the option to stop renting out the second unit and combining the two units into one large, 4 bed / 3 bath home if your financial situation strengthens further and you an afford it in the future.

This next property I think is potentially an incredible value for the right buyer:  4147 N Western Ave.  It is currently setup as a 3-flat with two 2 bed / 1 bath and one 3 bed / 1 bath unit and is asking $415,000.  Without visiting the property, and without much to go on, picture-wise, I think it is a safe assumption the property needs some work.  Let’s assume you purchase this property for $400,000, then spend an additional $150,000 combining/updating two units into one and updating the other.  You would be left with a 5 bed / 2 bath unit (would probably add a 3rd bathroom, in reality) and a 2 bed / 1 bath unit.  

Why not have a tenant pay your mortgage?

Assuming you are able to rent out the 2 bed / 1 bath for $1,000 per month (which is probably low if it is updated, but let’s be conservative), this means your remaining monthly mortgage payment is $1,101…for a 5 bedroom / 2 bathroom home in Coonley. (I will readily admit being on Western Ave. isn’t ideal, but that is partially why a deal can be had here).  Not a bad option…

CAVEAT INCOMING!!!! The one variable that I haven’t really touched on yet is down payment.  This is often the limiting factor for most home buyers.  Sometimes people could afford a $600,000 home based on the monthly payments, but they simply do not have $120,000 to put down.  To be perfectly honest, the plans I outline above only really work if a buyer can either line up attractive financing (i.e. low down payment %), is sitting on a good chunk of cash or knows someone (hi dad, I’m just calling to say ‘hi’…) that can lend them the requisite funds.  Most lenders will require 20% down, regardless if it is a 2-flat, single family home or condominium.  There are certainly lenders out there who will lend on multifamily properties for less than 20% down, but it is not a given and they may not be easy to find.  Given this, the article maybe should have been titled something to the effect of “Two-Flats: The Secret to Home Affordability…if you can get good financing or afford a large down payment”, but my main point is still valid, which is that people should at least consider multifamily properties as an option before they decide they cannot afford to live in their “dream” neighborhood.  It may make sense and work for you, or the lack of a larger downpayment may be a total non-starter.

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