Buying Your First MultiFamily Home in Chicago

Buying your first multifamily home can be a great option in Chicago. There is a large supply of available properties and these can be a great long-term investment vehicle. Residential multi-family properties were 13% of homes sold in Chicago in the last 12 months.  Similar to the residential housing market overall, inventory of these homes has tightened in the last three years and the median sales price has increased as we move past the foreclosure crisis.

There are two types of multifamily properties.  The first are buildings with 2-4 units.  These are considered residential properties and generally you can use the same residential loans as for a single-family purchase.  The second type are those properties with 5 or more units.  These are considered commercial properties and financing is very different.  You will need a commercial lender. Mixed use properties (a store front or office on the first floor with apartments above) are also considered to be commercial properties.  This article is primarily focused on residential multifamily homes. However. many of the considerations are the same for commerical rental properties.

Buyers decide on a multi-family home for different reasons.  Some buy as strictly an investment property.  Others purchase as a rental property but occupy one of the units as their home.  Finally, some purchase a multi-family property as a family building.  They occupy one of the units and other family members such as an adult child or older parent occupy the other unit(s).  It’s a great choice for multi-generational living — privacy but family still under one roof.

Buying As Strictly An Investment Property

If you are buying your first multifamily home as strictly an investment property – meaning you won’t be living in it, do your homework first before buying.  From a financing standpoint, you’ll need a higher down payment, pay a higher interest rate, and need a higher credit score.  If the building has existing tenants, you’ll be able to find out from the current owner about which tenants pay on time, which tenants cause problems and how long they have lived in the units.

Last thing (but not least) to consider when purchasing an investment property is the fact that you will be a landlord. How will you screen potential tenants?  You’ll need to decide on what information you want to collect on potential tenants and what your criteria is for acceptance. Are you willing to hande the repair calls and tenant issues yourself or would you prefer to have a property management company handle it?  Typically, expect to pay between 8-10% of the monthly rental income for a property management fee.  For a smaller building, you will need to assess whether the benefits of a property manager outweigh the costs.

Also, how will you collect monthly rental payments?  Rents can be submitted online  or collected in person.  Finally, this is a business. You may want to consider hiring an accountant to do your taxes to make sure you are benefitting from available tax deductions.  Also, have a system in place to make sure you are setting up your records correctly to track income and expenses.  This can easily be done with financial software like Quickbooks or even an Excel spreadsheet.

For many potential investors, the goal of investing in rental properties is to supplement savings for retirement.  It is key in this case to ensure that there is adequate cash flow to direct a portion of the net operating income to an IRA or other investment vehicle.  Be intentional about how you will invest or set aside the funds for investment to ensure that you reach your goals. You can discuss this with your financial planner.

Buying as an Owner Occupant

If you plan to live in one of the apartments, there are some benefits. The purchase would be considered an owner-occupied residential purchase.  The down payment and interest rates are often similar to a single-family home loan so you can purchase the building with a down payment as low as 3.5%.  Your lender can be more specific about this based on the loan product you choose.

Another benefit to being an owner occupant is that you’ll be on the premises to handle tenant issues which can save a trip across town for emergencies (actually a disadvantage too).  A possible downside is that it might be harder for some owners to maintain the balance between amiable neighbor and landlord.  You can also choose to live in the home initially and then move out later as life changes. Your former apartment would then increase the amount of rental income received.  Purchasing a multi-unit as an owner occupant can be a great way to start investing in properties.

If you are buying your first multi-family home as a family building, there are different considerations. Family members may be more likely to not be paying rent meaning that there is not the offsetting rental income to your mortgage payment.  You’ll probably not want to evict family so there needs to be an understanding about maintenance of the building and expected financial contribution.

Financing Your Purchase

Speak to your lender to determine what the mortgage terms are. Conventional vs FHA vs VA have different guidelines for multifamily homes, so you want to make sure you know what they are upfront.  You’ll want to talk to a lender before starting your search in earnest, so you have an idea of how much of a mortgage you qualify for in general and whether there are any qualifying issues that you need to address. Rental income is factored in for mortgage qualification for rental properties so you may be able to purchase more than you think.  You’ll want to discuss this with your lender.

Know Your Numbers Upfront

Regardless of what the existing tenants are paying, you should know what the current market rent rate is for the apartments. You can find out this information from websites like  You can also check sites like Zillow Rentals, and others to see what the asking rates are for the number of bedrooms in the apartment. Rents can vary by neighborhood so you’ll want to pull your data for other apartments in the immediate area. Often, long-term tenants pay rental rates lower than the current market rate.  As the new landlord, you will need to decide how to handle that situation.

For any rental property, whether you occupy it or not, know your numbers up front.  The difference between a good investment decision or a bad one lies usually in the numbers. It’s not just the rental income that determines whether a building is a good choice for you, it’s the bottom line.  You should be getting the numbers to calculate net operating income (income after expenses) and cash flow.  Make sure you factor in a vacancy rate, reserves for capital expenditures such as roof or furnace replacement and a line item for repairs.  If you’re not comfortable with how to calculate your numbers, there are some great resources available. There are some great books, websites such as (which is an awesome resource for real estate investors) and local real estate investor networking groups.  Of course, if you have close family or friends who have successfully done this, they can be an invaluable resource.

Lessons from the Foreclosure Crisis

Having been a real estate agent during the foreclosure crisis in the Chicago area, I have some observations to share. First, as mentioned, know your numbers. Make sure you will actually have a profit margin and positive cash flow. Secondly, vacancies can be expected when dealing with rental properties. If a vacant unit for 2-3 months kills your personal finances, you may want to reconsider the purchase. Have a reserve for vacancies but also make sure that this investment works in your overall financial picture.

Become familiar with the tenants’ right in your municipality (especially Chicago where tenants’ rights are strongly protected) and the eviction process.  Next, have a process for tenant selection.  This is important even if the tenant is Section 8.  There is no law against screening Section 8 tenants with the same criteria as market rate tenants. The source of funds to pay the rent is different but you can choose to screen on credit, background and speaking to the previous landlord.  The screening for Section 8 can’t be discriminatory, however.  It must be consistent with screening of non-Section 8 tenants.  Finally, some Chicago suburbs have strict rules for rental properties in terms of drug use, village inspections, etc. so make sure you’re at least familiar with them prior to purchasing.

As first stated, purchasing a multifamily home can be a great option for many buyers. If you are looking to buy as an investment property, these can generate a good long-term return.  If you are buying as a family building, it can be a great solution for different family members wanting the privacy, shared resources and closeness of family.

Click here to start your search for a multifamily building in the Chicago and Chicago suburban area.  If you have any questions, please give me a call, text or email.

Millie C. Lumpkin, Broker