Hello all. I have been on the sidelines of the real estate investing community for quite some time. Over the last two years I have progressively invested more and more time learning, watching markets, modeling out deals & back testing previously sold properties vs rental listings, etc. Over the last six to eight months, I've moved into the phase where I am not only actively monitoring properties but actively searching for one. I have a few different paths I am considering going down, some of which are the traditional paths that are discussed on this forum at length.

One topic I am interested in some general feedback, which is of particular interest to me, is the idea of adding a third unit to a multi-family home. I live in New England where there are a lot of very large late 1800s to early 1900s colonials. I have experience in this type of home – my first house was a 1924 colonial which I took down to the studs, repaired major structural issues, and replaced all the mechanicals while putting it back together. My primary interest is to find a large two-family home with a high peak / high pitch attic (12/12 is ideal) with a roof design that could support a large one-bedroom apartment.

In certain towns that I’ve searched, converting / expanding multi-family homes is explicitly encouraged by the local P&Z. In others, there are explicit prohibitions from doing so. In the later case its usually a densely populated area, the former usually an old manufacturing town with tons of large homes in need of attention. If I end up in a town that encourages this practice, I will certainly get an architect and go for it. For purposes of this question lets assume that the old attic is large enough and structurally sound to support a third unit – all done the right way (ingress / egress, etc)

My question to you all: If I added a properly built third unit apartment to a large two-family house, and rented out both units but lived in the third as an owner occupant – is that a frowned upon idea? From my perspective you can’t really lease that unit to somebody since its not a legal unit. But I don’t see why an owner couldn’t live there and manage the property. It would allow me to live without a mortgage and be able to fund future deals very quickly, particularly as my income climbs from my W2 job. Is there anything else I should be thinking about? Risks? Horror stories? I figured when I move out I could just convert it back to extra living space for the lower two units or offer it out as a single rental unit with separate living spaces for college kids and/or larger families.

Interested to hear everyone’s perspective on this.