Legal 2-fam used as 3 rental units

I actually found a link to the interview I reference above…it’s quite informative. http://www.today.com/id/29642902/ns/today-money/t/how-score-your-first-investment-property/#.UfP_PuvAAmI

bedstuytownhouse

in General Discussion 11 years and 10 months ago

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jay | 11 years and 10 months ago

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Just wanted to throw a question out there just to hear some thoughts. A 2-family for sale is being used as 3 rentals and all three are being included to calculate the cap rate. If there were to be a renovation post-sale (for example, need some walls taken down and new kitchen in one of the units), would the building require inspection by the DOB and would one of the rentals likely be asked to vacate? Should that be taken into consideration for the ask price?

so_architecture | 11 years and 10 months ago

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This is considered an illegal conversion. If you purchase the property, you are responsible for all illegal work performed by the previous owner(s). The DOB will make you correct it at your expense. The DOB will figure it out when you apply for a new permit, or if a neighbor complains. Something else to consider. A renter could stop paying rent, and because it is illegal, it would be difficult to evict or collect past due money. so-architecture.com

bedstuytownhouse | 11 years and 10 months ago

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And unless you are buying all-cash, the bank won’t close the loan without removal of one of the kitchens. Happened with the house we bought.

jay | 11 years and 10 months ago

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@bedstuytownhouse – what constitutes a kitchen for purposes of a bank loan? I am told it is simply the removal of the stove. Would a refrigerator and cabinets be part of that as well? I think this situation may be even more complicated since there are tenants in place on month-to-month leases and removing a kitchen in that case could be problematic I would assume.

jay | 11 years and 10 months ago

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By the way, thanks for you replies everyone!

bedstuytownhouse | 11 years and 10 months ago

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We had seller remove the whole thing since it was falling apart anyways but you should check with your lender on what their requirements are. I think everyone would agree with me in saying to avoid buying a building with tenants unless you have a large amount of money held in escrow to deal with any headaches like so-architecture mentions above. If you were to consider buying with tenants in place, I would demand proof of rental payment from said tenants for the past year, at a minimum. Just because there is a lease, doesn’t mean that the seller is collecting any rent. I saw an interview with Barbara Corcoran, of the Corcoran Group, and she said that she bought her first investment/rental property after only seeing the leases from the seller not knowing that she was inheriting deadbeat tenants who hadn’t paid in months hence my point above.