Advice: Buy to rent

General Real Estate Investing
1

Looking for some advice. I am an investor (and a newbie to the forum). I’ve spent 5 hours doing my own research on this specific topic already so I hope I’m not wasting anyone’s time. I’ve got a potential opportunity to purchase a “waldo” property.

It is a 6 bed 3 full bath single family residential home with two separate “units” (3 bd 2 bath up & 3 bd 1 bth down). The zoning is single family residential (R 1-9 in Utah terms). The neighborhood is all single family residential. Through reading the forums it appears the pros to a SFR “conversion” to duplex is cash flow (and it appears to cash flow great). Cons are zoning and difficult resale.

My questions are these: Should I be worried about the potential for me buying this and zoning enforcement coming after me if I rented it out to two households? Is this common for investors to do? If it’s been done for years, does that sort of tell me neighbors are okay with it? Am I missing any pros or cons?

Your help is super appreciated.

More supporting information about the property: The home was built in 1999. The tenants have done surprisingly well to keep it clean. There is only one gas meter, one water heater, 2 furnaces, 2 separate laundrys and kitchens. The seller has rented it out as a duplex for 6 years. The upstairs is even on section 8 housing for $1050 per month. Downstairs is month to month at $800. The lot actually has a huge 1100 sq ft insulated garage in the back yard which is in addition to the attached two car garage in the front yard. Ideally I could rent that garage out separately as it also is right off the street (perfect for a hobby mechanic shop scenario).

2

Call zoning and ask them if it’s legal.

Better yet, email them so you don’t stay on hold for an hour.

3

A non-permitted, illegal duplex is just that; non-permitted and illegal.

If you buy this, you buy what the permit allows; one single-family dwelling. Whatever the other houses of the same size, location, and age sell for, is the value of this property, and no more.

Issue: The seller wants to base the sale price on the income. How do we spell, “Forget it.” You don’t buy anything under 4 units based on income. You buy only based on comps.

Issue: The seller is lucky the city/county hasn’t filed a cease and desist order against renting the bootleg unit and fining the owner in the meantime (Section 8, or not).

Issue: You only buy under the assumption that you will have to end up renting both units as one, or only the top, or bottom half… and call it a day.

Issue: This is a risky cash-flow play, and potentially a standard appreciation play. Whatever equity you capture at the the time of the purchase is your immediate profit margin. Anything more will come over time.

Issue: You will not be able to sell this as a duplex. No bank will finance you, or a buyer, as such, nor consider the income, in making a loan against this ‘mashup’ of a duplex.

Issue: Again, the subject property is worth the same as any standard single family home of the same size, age, and location. Anything more, is a value-added benefit, that you should not be paying for.

Issue: One disgruntled tenant can upset your non-permitted, duplex, apple-cart with a call to the zoning department, and then what? You become the owner of an overly large, illegal, over-valued, un-saleable, upside down, violation-loaded alligator.

Issue: Mostly likely you could buy a similar house, for way less money, in the same neighborhood, and bootleg in another unit the same way. I’m guessing.

Issue: Don’t pay for what you’re not getting. You’re not getting a duplex. You’re getting a house with an illegal, non-permitted, bootleg quarters, that is subject to violations, fines, and cease and desist orders.

Issue: Any conventional lender will discover this house is zoned R (1-9), and base it’s lending decision on the comps first, then your credit and your down payment. The bank could actually keep you from overpaying on this bootlegged situation just because they’re protecting themselves.

4


DO NOT CALL ZONING AND ASK THEM ANYTHING! DO NOT EMAIL THEM, BECAUSE IT’S FASTER!

That’s exactly the same same as calling the zoning department and saying, “Hi, Mr. Zoning Official, I’m looking to buy a house with an illegally occupied second floor apartment, and I was just wondering when you could come and condemn this unit, so that I can buy the house cheaper.”

The seller screams, “What!!!” :banghead

5

I was just trying to say he shouldn’t do anything illegal.

I could put a cot in my storage shed, but I don’t because it’s against zoning.

Are you saying he should break the law?

6

Hi,

No Redstar, what Jay is saying is the house is a single family home and needs to be valued as a single family home. If Petergrant buys this it needs to be converted back to a single family home and rented as one unit!

The value is as a comparable single family of the same size and beds / baths minus the cost to convert back to a single family home.

Keep in mind buying as an investor needs to be a good deal if you have to buy with hard money (Conventional, FHA, VA won’t qualify) and you have to start under construction to convert back before refinancing and renting.

              GR
7

Are you planning on continuing the illegal activity to make more money?

8

[quote=“Redstar1324
[/quote”]
I was just trying to say he shouldn’t do anything illegal.

I could put a cot in my storage shed, but I don’t because it’s against zoning.

Are you saying he should break the law?
[/quote]
No, I’m saying it’s none of your business what the current seller is doing with the property. Otherwise, what’s the point of confirming the obvious with the zoning department?

At the same time, I’m saying that you would be buying this bootleg deal “as is,” with the full knowledge that this bootleg apartment could end up being condemned by the city, and so you would need to be prepared for the worst case. Never mind you cannot get conventional financing on the purchase, or a sale, with a bootleg unit in place.

Meantime, I’m not making an ethical judgment on the operation, just weighing the pros and cons of buying a bootlegged duplex.

***GR makes a great point of considering the costs to return the house to its original configuration, and negotiating that into the purchase price.

9

Be Smart and walk away from this property; it sounds like this property is going to cause you a lot of problems down the road. If you have any questions about this property, then you should call the city hall of the property and ask them the same questions that you asked on this forum. They are the only people that can give you the answers that you need.