When it comes to buying a home, Americans can be creative in getting what they want.
Consider the case of income-generating homes, which are flourishing in older neighborhoods and planned two-flat communities throughout Chicago and its suburbs, according to real estate experts.
People who buy such homes, which include a rental unit, are able to use the extra income they receive from a tenant each month to help them afford a bigger and better house than they would be able to buy otherwise.
”They`re all over the city,” says Ken Best, district director in the Conservation Bureau of the Chicago Department of Buildings. ”Financial is the main benefit (of homes with income since) it`s never fun to have a tenant around. You have to baby them a little.”
The financial benefits of homes that generate income are often substantial. Chicagoan Beth Wheeler covers 75 percent of the mortgage from the $1,000 generated each month by the two smaller rental units in her frame home in the St. Benedict`s neighborhood on the North Side.
”That`s why people do it,” says Wheeler, a real estate agent with Palormo Realty in Chicago. ”It really brings down your cost of living and you have a nice place.”
Fewer compromises
The beauty of income-generating homes is that you don`t have to compromise your dream of living in a spacious place in a safe neighborhood, Wheeler adds. She originally shopped around for homes in the Lincoln Park and De Paul areas, close to where she works, but would have had to have settled for a tiny home that she could barely afford. She now lives in a large, two-story unit that previous owners duplexed up, or expanded, by finishing off the attic, in a community she loves.
Jackie Edens of Chicago didn`t want to compromise either. She loves Victorian homes, yet couldn`t come close to paying for a Victorian single-family in a neighborhood she liked. Instead of considering small, average-looking single-family homes, Edens fulfilled her wish and bought a
Victorian two-flat in the Logan Square community.
”When I saw this I said, `This is it, this is it. What do I have to do?
Where do I sign?` ” Edens says.
She lives in a duplexed-down unit consisting of the first floor and a basement finished off into a den with a fireplace. She rents the second-floor unit for $800 a month, which covers about 40 percent of her monthly mortgage payment.
A two-flat with an expanded owners unit is a fairly common style of income-generating home in the city, Wheeler says. It can range in price from $150,000 to $600,000 and pull in anywhere from $500 to $1,000 a month, depending on its condition and location.
The rent money is usually just applied toward the mortgage-often covering a third or more of the monthly payment-though it can also be used to pay property taxes, utility bills or any repair costs.
The 75 percent rule
Typically, lenders will include 75 percent of the possible rent as income when determining the amount of mortgage you can afford, says mortgage consultant Phil Lukan of Fleet Mortgage in Palos Heights.
That`s provided the rental unit is legal, in that it meets the municipality`s building and zoning laws, says Hank Saikin, owner of Affiliated Lenders` Group in Skokie. ”If it`s up to code and the city accepts it`s up to code … they`ll say, `Doable.”`
Before buying a home, you should ask the owner for a written certificate of inspection, the Conservation Bureau`s Best says. The certificate is proof that a municipality inspector has examined the property and determined the rental unit to be either legal or illegal. If an apartment is illegal, the municipality could make the owner get rid of the unit or bring it up to code. The same advice applies to people who buy homes with coach houses that are used as rental units.
Ed Stapleton bought into that type of housing in De Kalb about three years ago. ”If you`re going to be a landlord, this is the way to do it,”
says Stapleton, an appraiser with Allstate Appraisal in Chicago Heights.
The coach house rents for $450 a month and is in the side yard next to Stapleton`s 100-year-old home.
Stapleton wasn`t originally looking for a home with a coach house, but he learned during his home-buying search that the rental unit was a good deal not only because of the income, but also because it is aesthetically pleasing.
”It kind of adds to the character of the home.”
Stapleton estimates that a coach house closer to the city, such as in Wheaton, could rent for $700, while Graham Grady, zoning administrator for Chicago`s zoning department, says a coach house in Lincoln Park might bring in $1,000 or more.
A money-making attic
Another way to obtain some rental income is to buy a traditional single-family frame home or bungalow that has a small rental unit in the basement, attic or back of the house. Often such homes are 80 to 100 years old, cost between $60,000 and $200,000 and are in middle to lower-middle-class neighborhoods, real estate experts say.
”It`s mainly in the middle- and lower-middle-class areas that used to be very stable neighborhoods of Chicago, but now are becoming worn,” Grady says. Most of these home rental units were created during World War II when there was a severe housing shortage, says David Lynn, a real estate agent at Re/Max South in Orland Park. He lived in such a rental unit in Chicago with his mother and grandmother during the war era.
Being the owner or renter of such homes was, and still is, particularly popular among immigrants, Lynn says. ”Everyone lived off of everyone else`s back until they could make it on their own.”
Besides helping you afford a nice place to live, homes with rental units also give you the option of someday absorbing the rental space.
Chicagoan Betsy Lidecker says she and her husband are feeling squeezed for space now that they have a child, and that`s why they`re thinking about expanding into the rental unit of their two-flat in the Lakewood-Balmoral section of the Edgewater community.
Many people keep their rental units, however, because they like both the income and sense of security. ”It`s just the feeling that there`s a friend there if you need one,” says Jean Schulz, owner of Jean Schulz Realty in Chicago.
The in-law
That sense of wanting or needing to be close to people seems to be the reason people buy homes with in-law, or related-living, units.
This arrangement differs from income-generating home situations in several ways, says Ann Sotiros, sales associate at Home Center Realtors in Palos Hills and Chicago. An in-law unit usually consists of a bathroom, kitchen, bedroom and maybe a small living room. The unit also has an interior door to the main home and a door to the outside. Since the home and unit are not totally separated, the home is marketed as a single-family house.
Related-living units are supposed to be lived in by the homeowner`s relatives. While those relatives might help pay for expenses, they`re not supposed to be charged a formal rent, Sotiros adds.
Therefore, lenders won`t include possible rent in determining the amount buyers can borrow, says Randy Larson, office manager at Beneficial Mortgage Co. in Oak Brook.
Another aspect to consider is that relatives are normally covered by the homeowner`s insurance should some kind of an accident happen in the in-law apartment, says Christopher Palanca, a Chicago real estate attorney. The more distance there is in the relationship between the homeowner and the in-law occupant, the more dubious the insurance coverage gets. (Coverage is also questionable when relatives live in coach houses, which are physically removed from the primary residence, Palanca adds. So in that case, relatives should have renter`s insurance.)
Regarding the value of a home with related-living quarters, Warren Albert, president of Allstate Appraisal, says, ”Generally speaking, an in-law apartment will contribute to the value of the property” because such homes have more space.
What`s the risk?
When it comes to homes with rental units, Lidecker, an urban sales manager at Citibank in Chicago, says, ”We don`t view that as any riskier
(investment-wise) than a single-family.”
But Fleet Mortgage`s Lukan contends there is more risk, because you can`t be sure the rental unit will always be rented or that the renters will take care of the place. ”Any place with a second unit is riskier, especially if it`s going to be rented out.”
Larson, of Beneficial Mortgage, adds that homes with income are like homes with swimming pools; not everyone wants the combination. ”If you ever had to sell them, I think it would be a little more difficult to sell.”
What real estate and lending experts do agree on is that income-generating homes are very similar to all types of residential property in that values are based mostly on location.
Larson says the value of a home with an in-law apartment or small rental unit will probably be more in neighborhoods with similar housing, which is the case with Edens, who owns the Victorian two-flat in Logan Square. Most of the homes on her block are owner-occupied two-flats, which she believes will ensure the upkeep of the area. ”I want people who have as much of an investment in their home as I do in mine,” she says.
In a mostly single-family-house area, however, your neighbors might not like the idea of a rental unit.
Then again, one income-generating house on a block of expensive single-family homes may be valued and accepted in a city like Evanston, where space is tight, especially if the rental unit is something like a coach house that meshes with the architectural character of the neighborhood.
Once you`ve determined the condition, location and investment value of an income-generating home, the last point to consider before buying is whether you would mind being a landlord.
Life as a landlord
As a landlord, you would be responsible for making sure the tenant`s space is safe, sanitary and inhabitable, attorney Palanca says.
You also have to take care of any problems reported by or caused by the tenants.
”It`s difficult when you`re not a full-time landlord to keep up with the demands of a demanding renter,” Stapleton says.
What greatly reduces the possibility for problems is the use of a lease, which can clarify the relationship and expectations between you and your tenant, Palanca says. He even advocates using a lease for in-law units.
Another measure of security is to check the credit and character references of possible tenants and interview them carefully, Edens says.
”Hopefully you like them, (because) you get to know each other whether you like it or not.”
