The True Cost of Buying a Multifamily Building in Chicago

Investing in multifamily real estate in Chicago can be a lucrative opportunity, but understanding the true cost of acquisition is crucial for long-term success. Beyond the listed purchase price, investors must account for a variety of upfront and ongoing expenses that impact profitability. Here’s a comprehensive breakdown of what it truly costs to buy and operate a multifamily building in Chicago.

1. Purchase Price and Financing Costs

The most obvious expense is the purchase price, but financing plays a significant role in determining overall costs. Investors must consider:

• Down Payment: Typically 20-30% of the purchase price for conventional loans, though FHA or commercial loans may have different requirements. For house hackers, many creative financing options exist and we’d be happy to consult on some of your options depending on your goals.

• Loan Fees and Interest Rates: Origination fees, closing costs, and current interest rates significantly impact monthly payments and overall affordability.

• Private Mortgage Insurance (PMI): If putting down less than 20%, PMI may apply, increasing monthly costs.

2. Closing Costs and Legal Fees

Purchasing a multifamily property involves various closing costs, including:

• Title Insurance: Protects against ownership disputes and liens.

• Attorney Fees: Essential for navigating Chicago’s real estate laws.

• Appraisal and Inspection Fees: Lenders often require professional assessments of the property's value and condition.

• Transfer Taxes and Recording Fees: Chicago and Cook County impose taxes on real estate transactions that can add thousands to the closing price.

3. Renovation and Maintenance Costs

Many multifamily buildings require updates to attract quality tenants and maximize rental income. Expenses may include:

• Cosmetic Updates: Painting, flooring, and appliance upgrades.

• Structural Repairs: Roof, plumbing, and HVAC system updates.

• Code Compliance: Ensuring the property meets Chicago’s strict building codes.

• Ongoing Maintenance: Budgeting for routine repairs, landscaping, and snow removal.

4. Property Taxes and Insurance

• Chicago’s Property Taxes: Can be a significant annual expense, often increasing over time. It’s crucial to research projected tax assessments.

• Landlord Insurance: Covers property damage, liability, and potential loss of rental income.

5. Property Management and Operational Expenses

Managing a multifamily building effectively requires time and expertise. Costs to consider:

• Property Management Fees: Typically 8-12% of collected rent if hiring a professional management company. Teton Property Management charges just 5%! This results in substantial cost savings over time.

• Tenant Turnover and Vacancy Costs: Lost rent and marketing expenses during tenant transitions.

• Utilities and Common Area Maintenance: Owners may cover water, trash, and electricity in shared spaces.

6. Unexpected Costs and Reserves

Smart investors set aside a reserve fund for unforeseen expenses such as major repairs, economic downturns, or prolonged vacancies. Many experts recommend saving at least 3-6 months’ worth of operating expenses.

Is Multifamily Investment Still Profitable in Chicago?

Despite these costs, investing in multifamily properties in Chicago can still be highly profitable. Key strategies to ensure success include:

• Minimizing Operating Expenses: Efficient property management and proactive maintenance reduce costs over time.

• Optimizing Rent Prices: Conducting market research ensures competitive yet profitable rental rates.

• Leverage Tax Benefits: Taking advantage of depreciation, deductions, and tax incentives for real estate investors.

• Minimizing Tenant Turnover: Keeping tenants happy by responding to maintenance requests in a timely manner, ensuring timely and effective communication, and ensuring the property is in pristine condition contribute to improved tenant retention and reduce turnover/vacancy costs. Working with an experienced property manager can be an asset if you are not able or if you would like to focus your time elsewhere in growing your business.

Final Thoughts

The true cost of buying a multifamily building in Chicago extends far beyond the listing price. Investors must budget for financing, closing costs, renovations, taxes, and operational expenses to maximize profitability. By carefully evaluating these factors, investors can make informed decisions and build a successful multifamily portfolio in Chicago’s dynamic real estate market. Working with an experienced broker to understand which upgrades, renovations, or repairs are critical/translate to highest ROI is important. Our in-house brokerage services focus on multifamily investing in Chicago and we’d love to help you find your next deal. Once the building is ready to go, if you’d like a trusted property management partner to ensure that you are maximizing its potential, we would be honored to partner with you!