Sue Fox, @Properties. Direct 773.816.1788
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Archive for the 'Two-flats' Category
Chicago two-flats are back… as a good investment option, that is. For much of the last decade, their price had climbed so high as to no longer make sense for many owners. As I had warned in previous posts, it is ludicrous to pay $500,000 or $600,000 (or more) for a two-flat when each unit will only rent for $1,200 or $1,300 a month.
And once the recession hit, this obvious math finally caught up with many two-flat owners. Suddenly people were scrambling to unload these properties, and the price of multi-unit buildings plunged. Now that they are priced more realistically — meaning that if an owner were to rent out both units, it would come close to covering the mortgage and other expenses — Chicago two-flats are suddenly in demand once more.
In Edgewater, for instance, a classic red brick two-flat located at 1300 W Norwood Street recently sold for $370,500. The math here makes sense: Assuming the buyer put down 10% and got a 30-year loan at a 4.5% interest rate, the monthly payment (including property taxes and insurance) would be about $2,525. Each unit has 3 bedrooms and a bath, which in Edgewater would rent for around $1,400 per month, giving the owner $2,800 in income. That’s enough to cover the expenses… which indicates that this purchase is a sound investment. (And in my example, the buyer didn’t even put down 20 percent! The numbers would work even better if he/she had.)
What wouldn’t make any sense at all is paying $600,000 for the same property, which is where it was originally priced in January 2010. The seller had to reduce the price seven times over the next year, finally settling at $429,000. Still, this two-flat closed for nearly $60,000 less when it sold in April 2011.
In Chicago, people sometimes buy two-flats with the intention of converting them into a single-family house. But even then, the property must be obtained for a reasonable price to make financial sense. These days, dozens of affordable two-flats can be found in appealing neighborhoods. I just searched the MLS in four North side neighborhoods relatively close to the lake — Edgewater, Uptown, Lincoln Square and North Center — and found 29 two-flats for sale from $149,000 (a foreclosure in Lincoln Square) to $400,000.
Is it time to jump back into the two-flat market? If the numbers make sense, I say yes.
In what has become a seller’s nightmare — and a buyer’s dream — the median price of a Chicago two-flat has continued to plummet. And more buyers are taking notice, picking up these stalwart Chicago homes for a fraction of what they were worth a few years back.
I’ve written about this phenomenon before (see my Sept. 30, 2009 post, “The collapse of the Chicago two-flat”), but I keep seeing more sales data showing major price declines. Of the 47 multi-unit properties (mostly two-flats and three-flats) that closed last week in Chicago, the median price was just $80,100, according to Midwest Real Estate Data LLC. Two years ago that same week, 25 of these multi-unit buildings closed at a median price of $310,000.
That is a 75% price drop over just two years!!! Of course, the number of Chicago two-flats changing hands appears to have roughly doubled during that time, but that’s to be expected when prices have fallen so dramatically. What sane buyer wouldn’t want to own two units for $80,000?
Unfortunately for owners who bought their two-flats two to six years ago, they are now in very deep trouble. I’m seeing more and more of these buildings offered as short sales as they slide towards foreclosure, with owners who paid upwards of $500,000 now so far underwater that defaulting on their mortgage may be the only way out.
In Edgewater, 1672 W Edgewater Avenue is a fairly typical example. The owners bought it for $550,000 in June 2006. It looks like they intended to convert it to a single-family home (according to the MLS description) and they gutted the first floor and upgraded the heating and electric systems. A year ago, they put it on the market for $415,000 but it didn’t sell. It’s now listed as a short sale — which requires the lender’s approval — for $240,000.
This sad story has a flip side: It is now an excellent time to buy a Chicago two-flat. In Edgewater alone, I just counted 13 two-flats that are either foreclosures or short sales for $400,000 or less. In Andersonville, there are at least four that fit this description. Even in pricey Lakeview there are three, including a graystone two-flat in foreclosure, now priced at $284,000.
Why do so many people like two-flats? If you live in one, it’s usually not much different from living in one of Chicago’s multitude of narrow, vintage rental apartments… but somehow many buyers have this fantasy that a two-flat is a great investment because it provides rental income.
What they don’t realize is that, in many cases, you can’t charge anywhere near enough rent to cover your mortgage. And that, in a nutshell, is why prices for two-flats in Chicago have completely nose-dived in the last two years. There are now hundreds of two-flat owners, particularly on the North Side, who have almost no hope of selling for the price — often $500,000 to $800,000 — that they paid for their homes.
In late September 2007, the median price paid for a 2 to 4-unit building in the city of Chicago was $315,000. During that same week in September of 2009, the median price COMPLETELY PLUMMETED to $49,000, according to figures collected by Midwest Real Estate Data LLC.
Of course, this is citywide data, which includes all sorts of distressed, boarded-up buildings in ravaged neighborhoods. Many areas like Edgewater, Lincoln Square, Andersonville, Lakeview and Lincoln Park still have plenty of two-flats for sale for half a million and up. The problem is, virtually nobody is buying them.
It’s a matter of math: If you take out a mortgage for $500,000, you’re going to be on the hook for at least $4,000 a month, including taxes and insurance. And since you’re probably only collecting $1,200 or $1,300 in rent on your second unit, you’re stuck with a big, cash-swallowing alligator.
Two-flats are only a good investment when they can be had for far less money. Which is why their prices are now falling and falling.
A few months ago, the Chicago Tribune ran a story heralding a “Two-flat comeback.” That’s because two-flats are now getting so cheap that the numbers actually make sense again… in some neighborhoods. One of the buyers mentioned in the story, for example, paid $265,000 for a Logan Square two-flat that he is rehabbing himself (read the full story here.)
It’s relatively easy to figure out whether buying a two-flat makes sense. Just do the math, calculating how much the mortgage, taxes and insurance will cost each month and how much you can likely charge in rent. If you can’t cover the total costs by renting out both units, don’t buy it.
Please check out my other blog posts at www.hometochicago.com!
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- How to Buy a Chicago Foreclosure (as Supply Steadily Shrinks)
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- Lincoln Square on a Tear as Average House Price Tops $600,000
- More choices ahead for Chicago buyers as rally cools