How to Avoid Purchasing or Rehabbing an Illegal Rental Duplex
The rental duplex is often sought after. It is an attractive option for investors because you get two tenants under one roof. What you don’t want is the illegal rental duplex.There are many advantages to a duplex. They reduce some of your management and logistical efforts because everything is under one roof.
Duplexes come in many shapes and sizes. Some duplexes are almost like complete units and are sectioned off by a firewall. Many new newer condo duplexes have that sort of structure. Other duplexes are houses that have been converted to a rental duplex. In this case, owners split off one of the bedrooms and one of the bathrooms, add a kitchen, and call that an efficiency that is able to house another tenant. Sometimes this split of the structure is not done entirely correctly and essentially an illegal rental duplex has been created. The individual that buys the property may not entirely understand all the implications. Let’s walk through a scenario.
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An Investor Finds a Duplex
An investor, who we’ll call Tom, picks up a 3 bedroom/2 bathroom (later referred to as a 3/2) apartment in Miami and is able to rent it for $1,700 per month. This investor has a great understanding of his market and knows that 1 bedroom studio efficiency apartments in the area can rent from $1,000-1,200 a month. He decides to add another kitchen, put a wall in, and carve off a separate 1 bedroom/1 bathroom (or 1/1) unit for a second tenant. Now, he essentially just created a new unit out of “thin air” that rents for $1,150. Of course, his original 3/2 apartment is now a 2/1 apartment after the conversion.
What is the net effect? Well, in a larger city like Miami, you often pay a premium just to live there. In Tom’s case, the $1,700 per month 3/2 has been converted to a $1,550 per month 2/1 apartment, creating a second unit within that property.
Put it all together and you have a 2/1 for $1,550 and a 1/1 for $1,150, which adds up to the original 3 bedroom/2 bathroom house that Tom purchased. The total rent for this house, which was originally just one 3 bedroom/2 bathroom house (at $1,700), is now $2,700 per month of rent. If Tom bought this rental unit for positive cash flow, he just kicked this puppy into overdrive. It just sounds perfect, doesn’t it?
Until you realize that Tom’s unit is now an illegal rental duplex…
What are the Implications?
Why is that? Well, Tom did the conversion without notifying the proper authorities. He also didn’t ensure his improvements were fully up to code by having them inspected. You might argue that Tom was a little negligent here, but it could’ve just been an accident.
Let’s look at another investor, Jessica. She is looking for a rental duplex and Tom just so happens to be ready to sell his. Jessica thinks it’s a great deal, even after Tom’s inflated the price to account for the new income the duplex offers. It is a really nice looking property and the numbers look great. Nothing to worry about, right?
Watch out for illegal rental duplexes that have been incorrectly converted, especially in large cities. Click To Tweet Jessica works with her Realtor and buys the property. The Realtor ended up pushing the appraisal through with the seller anyway, despite the fact that it was illegally converted. This situation is real and this story, is in fact, based off of a true story. Beware of the possibility and make sure to have your property appropriately checked out.
After the Fact, Dealing with the Illegal Rental Duplex
After purchasing the property, Jessica did notice one problem. As a result, she now has to pay utilities of that unit because there was only one meter in the building and they couldn’t be separated out by the tenant. Furthermore, someone could report her to the city. Other questions such as “what happens when I have to sell it?” crossed her mind. She’d either have to hope that the appraisal was approved again (which is taking a huge risk) or find a cash buyer that wouldn’t try to get an appraisal.
So what happens if the city found out? The bad side is that the units would have to be converted back to original drawing specs. This means tearing down the added kitchen and opening up the walls that connect the illegal unit to the main residence. Often this would also mean evicting the tenants from the illegal unit while all of this is going on.
So what’s someone like Jessica supposed to do to avoid this situation from happening?
Ways to Ensure Your Duplex is Legal
Four things to research to ensure your duplex is legal:
1. How many units does the property have?
2. How many bedrooms and bathrooms does each unit have?
3. Are any of those units illegal units?
4. Does each unit have their own water and electricity meter?
Asking these questions will make sure you don’t run into problems in the future. Having an illegal rental duplex may seem profitable at first, but they really aren’t worth the risk. Due diligence, as always, is important. But when you buy a rental duplex, you definitely want to make sure you take extra steps to ensure you aren’t stuck with a huge mess on your hands.
Find out any changes, repairs, and taxes from your local assessor’s site.
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