Chicago is one of the most dynamic real estate markets in the US. The Chicago market may be the perfect place to begin your investing career because of the massive range of price points, a plethora of properties needing renovation, and a large inventory of 2-4 unit multi-family properties. 

But let's be real—most aspiring investors hesitate, thinking they need tons of cash, insider information, or years of experience. What if we told you there’s an easier way? 

In this article, we’ll talk about the easiest way to become a Chicago investor. Reading about it is not enough. We will also discuss some tips to help you avoid potential pitfalls. 

What is House Hacking in Real Estate? 

Have you heard of Airbnb? Well! House-hacking is a closely related story. While the elements of the story are different, the plot is the same. You earn money by generating passive-ish income from your current residence. 

Basically, you rent out a portion of your property. You can rent out bedroom(s) for single-family homes or a complete unit in a multifamily property. House hacking is not for everyone since you have a bit less privacy, but if you are willing to make a short-term sacrifice, you can have great long-term financial gain.

Benefits of House Hacking

House hacking is ideal if you want to start your investment journey and don’t have much cash sitting around. You gain real-life investment and management experience, which you can apply to your next investment venture. 

You can also use the additional income to pay off your debt faster if you have a mortgage on the house. You will decide what you want to do with the rental income. 

Fact: House hacking allows you to create wealth in 4 ways. 

• Property Appreciation
• Rental income
• Pay down the mortgage to gain equity in the house
• Tax Benefits

When done right, house hacking is the easiest way to become a real estate investor in Chicago. However, you must learn to screen tenants and have proper management in place. 

How Can I House Hack My First Deal in Chicago? 

You need a property—for house hacking to work. You need to find a rentable place. Ideally, you can start with a 2-4 unit multifamily property. You can rent out the other units while enjoying privacy and a comfortable life. 

Real estate investing is a cash-intensive game. You can’t househack for free, but you can get creative with financing. You can consider a HELOC loan to pull out a down payment if you have enough equity in another property. 

Another way is to qualify for a government-backed mortgage loan.

Conventional Mortgage for House Hacking

You can qualify for a traditional mortgage depending on your credit score, down payment, and the property’s condition. 

Wealth-minded first-time investors choose an undervalued house that can be rehabbed for a better profit margin. Do you have experience doing repair work around the house? If you’re a handyman, you can qualify for a conventional loan and rehab the house. After rehabbing, your equity in the house will go up, and then you can rent out the units for additional income. 

Apart from the down payment, you need to set aside cash to cover property expenses, which can range between 5-10% of gross monthly rent. 

QB Investor Quick Tips:

• Learn to analyze deals. 
• Read a good book about property management. The house hacking book from Biggerpockets can be a good start. 
• Choose a quality contractor for professional rehab work.
• Find a team (lender and agent) that has completed renovation loans.
• Vet several HUD consultants because they have a lot of control once the project starts.

Renovation Loans for House Hacking

Are you investing in a fixer-upper? You have two options that let you quality with a minimum down payment.

• FHA 203k 
• Fannie Mae Homestyle Loan

We have done an extensive comparison of both loan programs. In this article, we will explore both options to help you get started in the investment world. 

How to Invest in RE Using FHA 203k? 

FHA 203k is a classic government-backed renovation loan. You can finance both the purchase and renovation. The down payment requirement starts from 3.5%. So if you want to invest minimum cash and would like to secure a 1-4 unit property, then FHA 203k is a good option. 

There is a rule, though. The property has to be self-sufficient. 

Self-Sufficiency Test for FHA 203k Loan Approval

The self-sufficiency test only applies to 3 or 4 unit properties. The test formula works like this:

So, you want to purchase a 3 or 4-unit multifamily property…now you cannot qualify for FHA 203k unless the expected rental income exceeds your mortgage payment. There is a catch though. Your mortgage lender will also consider the vacancy factor. 

Vacancy factor is the higher of:

• Appraisers’s vacancy rate
• 25%

A professional appraiser will report the typical vacancy rate for properties in your area. Let’s say the vacancy rate for your multifamily property in Chicago is 20%. In that case, 25% vacancy factor will be applied to your monthly payment. The monthly payment considers all expenses related to owning the property including taxes and HOA fees.  

Let’s say your expected rental income is $4,000. Reduce $4,000 by 25%. You will get $3,000. You can only qualify for FHA 203k if your mortgage payment is less than $3,000. Invest in an undervalued house. You can add value through renovations. Then if you’d rent the house, it will be a good starting point. 

Cons of Investing with FHA 203k Mortgage

• The problem is that FHA 203k requires hands-on management from an HUD approved consultant. All the repair work needs to be approved before the actual work begins. You don’t have complete control over the renovation process. Like General Contractors, all HUD consultants are not created equal.
• Another drawback is that you cannot pay yourself for doing the repair work. That’s why FHA 203k is not a good choice if you’re a DIY person. 
• FHA 203k is suitable only for renovating your primary residence, which includes 2-4 unit multi-family properties. That requirement is fulfilled as long as you live in the house for 1 year. That's what house hacking is all about. You will live in the house while the other tenants help build equity in the house.

How to Invest in RE Using Homestyle Loan? 

The homestyle loan gives you more control over the renovation type. The loan structure is similar to FHA 203k. You can upgrade the house as you want. It’s a Fannie Mae-backed conventional renovation loan which has a few issues, like a strict credit requirement and a higher down payment than the 203k loan. 

• The down payment starts at 5%. 
• Minimum credit score should be 620.

The best part about the homestyle renovation loan is that there is no self sufficiency test. You have more control over the repairs, and you enjoy some flexibility, which is absent in a 203k loan. 

Problems with Renovation Loans

Both FHA 203k and Homestyle Loan can be problematic unless you work with an experienced general contractor willing to work under the payment schedule of the lender. The payment is released gradually as the work is approved and done. That can hinder your schedule if your general contractor is not familiar with the loan process. 

More paperwork is involved for both the buyer and the general contractor. Your offer might not appeal to the seller if you’re competing with other buyers. You also need a HUD consultant which creates additional expenses.

Renovation loans have high interest rates compared to the traditional mortgages. You can renovate the house to increase it’s value and see a gain in equity. It’s a good deal if you spend $20,000 on repairs and the value of your home goes up by $35,000. That means you have earned back $15,000 in equity. 

Conclusion:

House hacking looks complex on the paper, but it’s actually not. It’s a tradeoff between some inconvenience and long-term wealth generation. New investors can experience stress from property management, privacy issues, tenant screening, and maintenance issues. However, that’s part of the process. You can streamline those steps. You will get real-life investing experience, which allows you to save cash for your next deal. 

Ready? Partner with a trusted general contractor in Chicago who is familiar with the renovation process and also the financing. At Quality Builders, we offer you support throughout the project and help you accomplish your goals in a timely manner. You can join us for a free consultation to discuss your options.

Schedule your free consultation with our expert team at Quality Builders.

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