If someone told you that you could live in Chicago rent-free, would you believe them? Or laugh at the seemingly absurd idea?
A few years ago, I would have laughed. Now, I not only know several people who achieved this feat but am hoping to attain it myself this summer. How is this possible in such a competitive market? The secret lies in “house hacking”.
House hacking entails simultaneously purchasing a multi-unit apartment building, living in one of the units, and renting out the others. If you purchase correctly, the rents from the other units should cover all or most of your mortgage, utilities, etc. While it is possible to find a house hack with nearly no expenses, in most cases, your expenses will simply be minimal or much less than an average city rent. Score.
Wondering how to finance a multi-unit in Chicago? Living in one of the units opens up options. As your primary residence, you can use an FHA loan with as low as 3.5% down or a 203k Loan, an FHA loan used to tie in rehab costs if the building needs pre-move in work. Alternatively, if using conventional financing, which generally requires a 20-25% downpayment, the city offers grant programs that can alleviate your down payment, depending on where you buy. One of the current grants provides 5% down up to $40,782 on a 4 unit, $32,817 on a 3 unit and so on if the purchase is your primary residence and falls within the permitted areas.
To demonstrate how house hacking works, let’s analyze a real life example. While searching for myself, I came across a renovated 3-unit in Ravenswood, near the Brown Line and listed for $347,000. This may seem low for a Chicago 3-unit, but a more inexpensive case will help depict the feasibility. If you go with an FHA loan and put 3.5% down ($12,145), then your monthly payment should equate to around $2400 (includes mortgage, estimated tax, homeowner’s insurance, and FHA mortgage insurance). Currently, the units are rented out for $1000, $1150, and $900 which is actually under market, but let’s implement these numbers in our calculations since you’ll earn at least this much in rent. If you moved into the unit that is currently rented for $900/mo, you lose that income but will still receive $2150/mo from the other units. That would mean you only pay $250/mo to live in a renovated unit and cover the costs above. While you technically wouldn’t be living rent free, $250/mo is considerably less than what your fellow Chicagoans pay.*
To further demonstrate the power of house hacking, you could possibly refinance to generate better monthly numbers. As you pay down the mortgage, the building potentially appreciates which affords you more equity. For example, if you refinance and have 20% equity, you could potentially reduce your monthly payment to around $1947. Essentially, you will be living “for free” and actually generating income with the $2150/mo in rent from the other units. You should even be able to increase your rents each year.
One of the main criticisms the house hacking strategy raises is rooted in location. Most don’t want to live in the neighborhoods where the numbers for house hacking are optimal. With FHA financing, the initial purchase needs to be your primary residence for at least 12 months. However, you aren’t bound to the house hack forever. Once you have lived there for a year you could start looking to purchase another property in the location of your choosing. If you move out and rent the unit in which you resided, you gain $3050/mo in income, and your mortgage, tax, and insurance still amounts to only $1947/mo. The remaining $1100 in monthly cash flow enables you to cover part of your living costs, should you decide to move elsewhere.
If this innovative concept interests you, find a realtor with extensive knowledge of the multi-family market and who is familiar with the rental market in your area. Look for future blog posts cataloging my journey through the financing, renovating, and renting of my house hack with actual numbers. Lastly, if you’re looking to attempt your own house hack or buy/sell/rent in Chicago, don’t hesitate to connect!
Matthew Engle
Real Estate Broker
717.658.0899
matthew@fultongrace.com
Mortgage input by:
Zlatan Hodzic
Senior Mortgage Banker
NMLS# 1033862
773-544-7762
zhodzic@uhloans.com
*estimated payment assumes FHA financing on a single-family, detached, owner-occupied primary residence in Illinois; a loan-to-value ratio of 96.5%; a minimum FICO score of 740; rates are subject to change without notice; subject to underwriter approval; not all applicants will be approved; fees, charges, and restrictions may apply.