Personal Investment/House Hacking Process

Can't speak on Chicago at all but I would certainly DD on potential tax implications others have mentioned.

TLDR: The challenge with house hacking is the buy. You are often competing with more seasoned investors with better financing and it is difficult to find a property and location that 1) you are willing to live in 2) can be financed through FHA 3) performs. Properties that meet these criteria often go quick. Once you buy it mostly a matter of having the reserves to weather any expenditures, vacancies, or changes to the market and then successfully managing the tenants. This can be challenging for someone with little experience as a landlord and is further complicated by the dynamic of living next door to said tenants. Strong lease agreements are mandatory and a good balance of firm but friendly people skills are very helpful.

MACRO: Your thoughts are valid and worth researching. An FHA loan can only finance max 4 units. This means that for appraisal purposes valuation is conducted via comparable property sale analysis rather than the income approach typical of commercial or multifamily assets of 5 units or more. Analyze the market via online platforms and research comparable sales. Get a broker to help you. Make sure it is someone with relevant experience as it is a niche market with somewhat blurry lines between an investor's desired cap rate and an appraised value that can be supported by comparable sales. This requires a broker well versed in investment analysis who still has highly local market knowledge of smaller assets. Your average residential broker may not have the skill set (most don't but a few will) while an established multifamily broker may not have time or interest for a smaller deal though one will likely will be very willing to help if you are persistent in your search and target the right brokers. A good broker with a network may be able to source a property off market. Whether on or off market, it is vital to demonstrate that you are competent and capable by being well-versed on both the market and the asset and by having your financing lined up and ready to go. The right broker will be glad to help but (on a smaller deals especially) will have little patience for someone wasting their time. If the right broker likes and respects you, then you have an advantage and a resource that can prove extremely valuable in both the short and long-term.

MICRO: Thorough physical DD and simple cash flow analysis. Whatever your projected expenses are, add a bit. On the flip side, take a little off your projected income. Ideally, the income producing units can cash flow or come close to covering total expenses while you occupy one of the units for 2 years per FHA requirements (may only be 1 year but I'm certain its not more than 2). After required period you can move out and begin collecting rent on that unit for additional income. FHA imposes higher requirements on the condition of the property which can make your offer less attractive than a competing offer. People get caught up on the required mortgage insurance on FHA loans but if you don't have the down payment it is simply a cost of doing business and it is still a great opportunity for a less capitalized investor to purchase income producing property where they otherwise wouldn't be able.

BOTTOM LINE: Reserves are paramount. Substantial capital should be available to address acquisition financing requirements on your own dollar (FHA especially) as well as throughout ownership as there will almost certainly be unexpected expenses that will come up. Be mindful of timing. We are late in the cycle. If you find the right deal, buy it. It is impossible to time the market....that said, reserves will be even more important if your valuation takes a hit and you are forced to weather the storm. Risk should be minimized through thorough DD, but even bad acquisitions (while painful) can prove profitable in the long run if you have the reserves to correct. If you over extend and get caught with your neck out, you can lose it all overnight.