Last week, we opened up a big can of worms and gave a video tour of our newly-purchased two flat. Thank you all for your enthusiasm as we shared our news! We’ve received some great questions about the project between the vlog and Stories, and today we’re here with an official Q + A to answer all of your thoughtful questions about financing, construction, and how we knew this building was The One! We’re digging deep and opening up about everything that led us to this decision.
Tip: You can access the full before tour of The Two Flat through the House Tour tab on the menu bar and blog footer. We’ve also begun the Room Makeover evolution so that you can follow along from the beginning at any time!
I’ve divided your questions into three easy-to-follow categories:
- The Building
- The Money
- The Renovation
Q. Okay, guys. What exactly is a Two Flat?
A. According to the Chicago Architecture Center, a Two Flat is ‘…two stories—with an apartment unit on each floor—usually with bay windows greeting the street through of a facade of brick or greystone. Most were built between 1900 and 1920.’ Our unit does buck a few of these conventions. Like, it was built in 1890 and is constructed of timber. But like most two flats, our building features a single entry into a small common entryway with a door to the first floor unit and a staircase up to the second floor unit. Fun fact: more than 30% of Chicago’s housing stock is made up of two flats!
Fun fact: more than 30% of Chicago’s housing stock is made up of two flats!
Q. How did you determine what neighborhood to buy in?
This is an easy one! We focused our search almost exclusively on properties within a 1-ish mile radius of our primary residence. It’s no secret that we love Chicago, but we love our neighborhood, Logan Square, most of all. We’ve lived within 4 blocks of our current home the entire time we’ve been in Chicago (it’ll be 13 years this fall!), and we have no intention of moving. In an attempt to keep travel time to a minimum, we searched for properties that we could drive to in less than 10 minutes during rush hour. We scored big time The Two Flat, clocking in at a 6 minute drive or 30 minute walk from our front door. It’s half a mile from the train an surrounded by some of the best restaurants our city has to offer!
Q. What’s the most important factor you consider when choosing a property?
On our hunt for this property, these three things all tied for first place:
- The location. We wanted a building that was in need of some TLC, but on a well-maintained block near a train station. Bonus points were awarded for properties with walkable restaurants, bars, coffee shops and grocery stores. This property checks all of those boxes! It’s a dreamboat, really.
- The bones. We considered the the floor plan as well as the condition of the foundation, roof, windows, siding, and doors – which luckily, checked out, with only a few very minor exceptions. These are all budget line items that can quickly increase costs. We also ensured that the basement stayed completely dry after a few days of heavy rain.
- The original details + features. Finding a home in Chicago with original trim and details still intact can be an exercise in futility. 100+ year old homes have had lots of opportunity to be stripped of character. We were thrilled to find that this home still has all of its original solid wood doors in place. The original built-in hutch still lives in the dining room and most rooms still have all of their original trim and door hardware as well!
Q. What caught your eye?
A. In addition to the original details mentioned above, the staircase leading up to the second floor unit stopped us in our tracks. It certainly needs to be stripped and refinished after the rubber runner is removed, but the condition of the treads is near-perfect. We know that a staircase is already a large expense, so we were relieved to see this. It squeaks in all the right places, ha!
In addition to the staircase, the floorplan of the second floor was also a pleasant surprise. With the exception of cosmetic repairs (okay, a lot of them!) and adding a functional kitchen, the only major changes to the floorplan will be widening the arch between the kitchen and living room (seen below on the left) and turning the walk-in pantry into a laundry closet. This will bring in a better flow and allow for more natural light between the rooms.
Q. What type of loan did you use? 203k? FHA?
This one turned out to be a little trickier than we initially imagined! Since this is an investment property for us, we weren’t eligible for the FHA 203k loan. This fact led us down the path of securing a construction loan, which seemed scarier to us at first than it actually is. We reached out to the same lender that helped us buy our Chicago home in 2013, and he informed us that large banks do not generally offer construction loans for multi-unit properties. Umm! A brief moment of panic ensued, but he was able to calm our nerves and connect us with a VP at a smaller local bank that was willing to take a chance on us. Whew.
Q. How do you run the numbers to decide if you can afford an investment property?
A. This one is a little bit unique to us since we already own a few other properties. For starters, the rent that the condo generates covers the cost of its mortgage, and the garden unit in our primary residence also generates enough in rent to cover a large portion of our mortgage. Our Michigan Tree House will eventually be rented out as a short term rental in hopes of covering that mortgage as well.
All that said, we crunched the numbers backwards and forwards to ensure that the additional carrying costs of holding the property for 12-18 months without generating revenue would still leave us in a position we were comfortable with. We started with our average monthly income, subtracted our average monthly expenses plus the carrying costs of mortgage, taxes, and insurance on top of that. The numbers all made sense. Of course, banks also run their own numbers through the underwriting process to ensure that they’re confident they’ll get their money back! There are always multiple sets of eyes on the financial portion of a transaction like this.
Q. Do you have six separate mortgages for the six different properties?
A. Not quite, but close? We currently own four properties with six different addresses. The condo and our Tree House are each one property with one address and their own mortgage. Our primary residence and the new Two Flat are each one property with two addresses. All told, we own four properties with four mortgages, but a total of six addresses. And yup, they’re all set up on auto-pay!
Q. How do you estimate the costs of renovation? And how do those budgets account for partners/sponsors?
A. Great question! We’ve worked with our favorite contractor on quite a few projects over the last four years or so. This has allowed us to develop a fairly strong understanding of his pricing structure. Over the last decade, we’ve also purchased materials for countless DIY projects large and small, and we’ve had a lot of one-off work done with other contractors, so we have a decent understanding of what things should cost. This renovation also requires the help of an architect, and he has already proven to be an invaluable resource, since he oversees large-scale work like this frequently.
Regarding budgeting for partners and sponsors, we treat them as ‘icing on the cake’. When taking on a new project, we always ensure that we have funds allocated to cover all of the costs completely out of pocket. Once the project is scheduled, we partner only with companies that align with our brand and can bring added value to you, us and the brand. It’s a balance, and it’s a position that we don’t take lightly.
Q. When is the renovation too big for an investment property?
A. There are two ways to look at this question. For us, the short-term view is simple. If the estimated completed value of the home does not exceed the cost of the property plus the cost of renovation, we likely won’t consider the transaction. Lenders will also utilize a similar formula to ensure they’ll get their money back.
The longer-term view is also fairly simple. If the total fair-market rent we believe we’ll be able to collect doesn’t completely cover the costs of the mortgage, taxes, insurance, and maintenance while also leaving additional profit to build an emergency fund for unexpected expenses, we wouldn’t consider the transaction.
Q. How do you prioritize your to-do list?
A. Since this will be the largest project we’ve ever undertaken at one time, (our home and our Tree House have been completed on a room-by-room basis), we’ll be leaving the order of our tasks up to our contractor and his team of subcontractors. We’ll still be handling a portion of DIY and detail work, but the timing of most of our work will be determined by their schedule. All that said, we are hoping to complete the Two Flat within a year and a half!
We truly appreciate the overwhelming positivity and support you’ve given us since we spilled the beans about this next adventure. Thank you! We absolutely cannot wait to show you what we have in store for this century old beauty. We’ll be maintaining as much of her character as possible while introducing all of the modern conveniences, and we invite you to come along for the ride. This is going to be so fun!
PS! You can access the full before tour of The Two Flat through the House Tour tab on the menu bar and blog footer. We’ve also begun the Room Makeover evolution so that you can follow along from the beginning at any time!