Trying to house hack, but zoning says NO!

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Trying to house hack, but zoning says NO!

Rob Roy
Agent Sales Representative at BiggerPockets · Fort Collins, CO · Member since 2017 · 51 posts · 38 votes

Hello!

I'll be stationed in Annapolis, MD soon and have been looking for any property where I could cash flow, while still finding a place that my wife and I will enjoy living in. In this area, there are virtually ZERO multiplexes that are affordable (found a duplex for $650,000 once...). What this area does have though, are a lot of split level houses where the lower level is considered an in-law suite and many have separate outside entrances, a full bath/bedroom and we would put in a kitchenette and permanent door to create a separate unit. Long story short, I've looked at countless houses online, met with a realtor twice and saw over 25 houses in person and finally put an offer on one the other day. The seller chose a higher offer; so I rolled right into putting an offer on house #2, when I thought about the zoning a little more. We had a conversation with the realtor weeks ago and she assured us that the area we are looking in would be "totally fine" to have a basement rental - only historic Annapolis is where you need to have a permit. Well I finally took it upon myself to do my own due diligence and called the zoning office directly for Anne Arundel County. The agent told me that the neighborhood that we are looking at is zoned as R5 and multi-units and such are only allowed in R10/R15 zoned areas (which is essentially the town center and a few other small pockets). According to the zoning agent, the only way to legally split a SFH and rent out one unit is if the lot is >14,000 sq.ft. AND if you live in one of the units (my original plan was to move out after a year and then BRRRR the two units and go do it again two more times while I would be there and in total leave with 6 units in my portfolio). All the properties we have looked at are <10,000 sq.ft. and now I'm not sure what to do. It appears to be near impossible to find a SFH that would rent even close to 1% RTV when we move out and we both don't want to commute 45 minutes to work in order to find a multi-family that would work. A huge reason we took orders to Annapolis in the first place was to live close to that area. Any other suggestions you have would be much appreciated. @Scott Trench I'm trying to practice what you preach, but the man is keeping me down!

Also, I know of a few other people that are renting out their basements full time in the same type of zoned areas in Annapolis.  Are they doing this under the radar or is there something I'm missing?

Thanks!

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Elizabeth Wilson
Real Estate Investor · Memphis, TN · Member since 2016 · 940 posts · 695 votes
9y

@Rob Roy  - I learned this little trick that might be helpful to you as you look for properties: find out the official definition of a duplex or guest quarters or whatever they are calling it.  I always assumed that two living spaces with separate entrances are duplexes but that is not so (at least in Memphis).  The technical zoning definition is two stove tops (gotta have permits pulled for those...).  So you will find "in-laws" spaces or airbnb sides to houses that simple don't have a stove top and thereby not a duplex. I lived a similar split level and had a double hotplate and it was just fine for me. :)

So the legal box is check-marked but the homeowner can still use the property as he/she wishes.

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  • Alex Deacon
    Investor · Pittsburgh, PA · Member since 2015 · 1k+ posts · 1k+ votes
    9y

    @Rob Roy In my market its mainly done under the radar. I am in PA. There may be ways around it to protect you from zoning and liability so I would discuss with an attorney well versed in RE. You can buy RE here. A nice duplex completely rehabbed in a B area would sell for 200k. Not far from VA.

    0Reply
  • Rob Roy
    OP
    Agent Sales Representative at BiggerPockets · Fort Collins, CO · Member since 2017 · 51 posts · 38 votes
    9y

    For some reason, the last part of my post got cut off..

    ------------

    All the properties we have looked at are less than 10,000 sq.ft. and now I'm not sure what to do. It appears to be near impossible to find a SFH that would rent even close to 1% RTV when we move out and we both don't want to commute 45 minutes to work in order to find a multi-family that would work. A huge reason we took orders to Annapolis in the first place was to live close to that area. Any other suggestions you have would be much appreciated. @Scott Trench I'm trying to practice what you preach, but the man is keeping me down!

    Also, I know of a few other people that are renting out their basements full time in the same type of zoned areas in Annapolis. Are they doing this under the radar or is there something I'm missing?

    Thanks!

    0Reply
  • Scott TrenchPro Member
    Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
    9y

    Rob - It sounds to me like you have the right idea in what you are looking for. Unfortunately, Annapolis can be pretty expensive (I grew up about an hour away in Howard County, MD). 

    You have a couple of options:

    1) Go a little farther abroad outside of the comfort zone. If you are only stationed there for a while, you may find that you can just drive downtown to enjoy the part of town you love and still come out way ahead if you live a little farther out.

    2) If you are intent on being in that location, go make some friends. Who is successfully renting properties in Annapolis of the type that you are trying to buy? The hard way to go about succeeding is to figure every last bit out on your own. The easy way is to meet the guy that is doing what you are trying to do and then following his or her advice. 

    Also, in regards to the fact that you see other people are breaking the law, so you assume it must be ok or not enforced. The goal is passive, stress-free income. I literally had someone tell me that Denver is a great town for Airbnb income, even though that's pretty much illegal unless you meet a very specific set of guidelines. I don't care if the law isn't enforced today very strongly, buying a property that only produces income when I break the law is not a good plan in my book. Pass. I would not be renting out units that were not legally allowed to be rented. Too much uncertainty. 

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  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y

    You don't necessarily need a multi-family property to house hack. You can rent rooms out of a single family home. Some single families may even have a guest house, sparate basement or attic, even though they are not zoned multi-family. You don't necessarily need to move to a less desirable and cheaper market to do it either. I house hacked single family homes all over LA.

    1Reply
  • Malcolm Lawson
    Annapolis, MD · Member since 2015 · 132 posts · 52 votes
    9y

    Hey Rob, 

    Yeah, I don't think you are going to like this answer but probably most of the multi-units in Maryland are not properly zoned. The few that are properly zoned usually say so in their listing description on the MLS because it is so uncommon. If you don't feel comfortable investing in an un-zoned multi-unit and investing in a properly zoned investment unit is not profitable and you are dead set on staying in Annapolis then maybe you will have to shift your goal to walking away from this assignment with 1 big rental unit rather than multiple smaller units.

    You would have to really crunch the numbers but there are homes that will cash flow MORE as a single unit then they would as a multi-unit. I could easily see a nice 3/2 cash flowing more than if it was split into two smaller units like a 2/1 and a 1/1.  Because multi units are so uncommon here in Maryland, I could easily picture people being turned off from the idea of splitting a home with another family.  This may reduce the demand and as a result the rental income.  Just a theory.  Dealing with on tenant vs multiple will probably be less stress as well and you may even get a higher quality tenant renting a hole home vs splitting it up.

    Like @David Faulkner said, you could still rent out rooms in your basement while living there. Only advertise on the Academy so you get some nice military tenants. 

    1Reply
  • Michael Hayworth
    Contractor · Fort Worth, TX · Member since 2015 · 379 posts · 740 votes
    9y
    Originally posted by @David Faulkner:

    You don't necessarily need a multi-family property to house hack. You can rent rooms out of a single family home. Some single families may even have a guest house, sparate basement or attic, even though they are not zoned multi-family. You don't necessarily need to move to a less desirable and cheaper market to do it either. I house hacked single family homes all over LA.

     What David is saying is right. I'm not local to you, so there's always the possibility of some odd law, but generally, those zoning laws apply to actually turning the house into a multi-family unit. You can almost always rent a portion of your own house that you live in.

    The implication generally comes in getting separate utilities for the rental portion. If it's not truly zoned multi, you'd need to do "all bills paid" - you wouldn't be able to get separate electric, water and gas meters.

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  • Joshua Velte
    Real Estate Agent · Ellicott City, MD · Member since 2015 · 31 posts · 11 votes
    9y
    Hey Rob, this is my market so I will confirm that you won't ever see a zoned multi unit. I'd echo what Malcom said about renting a SFH, but would like to add a strategy because of your military background. I know some guys who market and rent ONLY to fellow military members for extended short-term housing and are killing it. They bought smaller townhouses or condos and fully furnish them. The military guys who come into town would much rather rent from them and are given a per-diam, so charging a higher rental rate isn't an issue. The investors started with a fairly cheap rate to draw in business using word of mouth but have slowly increased the price. One word of caution, if you look into a condo check the condo docs for anything related to short-term rentals. I know some associations are prohibiting this. Best of luck with your home purchase!
    0Reply
  • Elizabeth Wilson
    Real Estate Investor · Memphis, TN · Member since 2016 · 940 posts · 695 votes
    9y

    @Rob Roy  - I learned this little trick that might be helpful to you as you look for properties: find out the official definition of a duplex or guest quarters or whatever they are calling it.  I always assumed that two living spaces with separate entrances are duplexes but that is not so (at least in Memphis).  The technical zoning definition is two stove tops (gotta have permits pulled for those...).  So you will find "in-laws" spaces or airbnb sides to houses that simple don't have a stove top and thereby not a duplex. I lived a similar split level and had a double hotplate and it was just fine for me. :)

    So the legal box is check-marked but the homeowner can still use the property as he/she wishes.

    2Reply
  • Rob Roy
    OP
    Agent Sales Representative at BiggerPockets · Fort Collins, CO · Member since 2017 · 51 posts · 38 votes
    9y

    Thanks everyone for all the responses!

    @David Faulkner That is what I was going for- rent out the in-law suite/basement of a SFH, but my fear is once I leave the area I'll have this SFH and could rent it 'illegally' as two units and won't be there to keep an eye on things. Or I'll rent it out as a single family house, but then the cash flow wouldn't be anywhere close to being positive. And this one is on me, but renting out individual rooms in a SFH as a married man with two dogs is not really practical for my wife and I :-/

    @Alex Deacon I'm from PA and would love to have those kind of duplex options available to me in Annapolis!  I know you are probably a Sheetz fan... but I'm all about that Wawa!

    @Malcolm Lawson Yea the place we put an offer on was nicely flipped and the bottom "unit" really did feel like an apartment all on its own.  It would have been a 2/2 upstairs and 2/1 downstairs.  But now we are looking at "cheaper" townhouse options between $210K-$260K that would get us a lot closer to the 1% rule with a renter in there.  If we go this route, we would buy the townhouse as a primary residence, move out after year and get tenants in and then go buy another one to rinse and repeat.   The idea being to have three townhouse rentals by the time we leave there in 3 years. 

    @Michael Hayworth My fear is that after I leave the area in 3 years, even if I did rent out the basement while I was there, once I leave it would make terrible financial sense to rent it out as a single family house- the listing prices are too high and the rental prices are too low for the SFHs in this area to cash flow (most SFHs between $360K-$420K seem to rent around $2,000-$2,600 a month). So unless I go to sell it, there really wouldn't be any sense in buying a SFH as a future SFR down the road in this market.

    @Joshua Velte This is great advice and would seem to jive with what we are leaning towards currently.  I just really wanted to find a way to house hack while I was there.  I'll keep an eye out for a townhouse with a basement and separate entrance - this way I could have the best of both worlds.  And that's good to know about the condos. 

    @Elizabeth Wilson Fantastic tip!  I will call the zoning office again, but to my recollection they said non-family dwelling in your house and paying rent constitutes as a multi-family property.  They didn't have a problem with renting out your whole house once you're gone, but if you rent out a room or unit the property has to be greater than 14,000 sqft AND you have to be living there.   But I will certainly look into it again..

    1Reply
  • Malcolm Lawson
    Annapolis, MD · Member since 2015 · 132 posts · 52 votes
    9y

    Rob, that is a fantastic idea! Similar to what I did. Bought a townhome for $210,000 in Annapolis and moved out and started renting it for $1,900 then went on to purchase a second home with the VA loan. Your maximum VA entitlement for Anne Arundel County is $517,500. So if you want to pay $0 for all of them using the VA loan you would really only be able to buy two over the next few years. And remember your VA funding fee goes from 2.15% for the first use to 3.3% for the second. Let me know if you want me to show you any more homes.

    1Reply
  • Rob Roy
    OP
    Agent Sales Representative at BiggerPockets · Fort Collins, CO · Member since 2017 · 51 posts · 38 votes
    9y

    So I had an epiphany just the other day...  I have a strong feeling that Annapolis would work (and work well) for Airbnb.  Based on everything I've learned about the zoning laws and with houses in Anne Arundel county renting no where near 1% RTV, I think Airbnb could be the answer I'm looking for.  Case in point- we found a split level townhouse 15 minutes from downtown Annapolis and it would be perfect to rent out the lower living area as a full-time Airbnb unit (living room, full bath, bedroom and separate entrance).  This could be our ticket to 'house hacking,' although not conventionally, and we would be able to seriously cut a big portion of our mortgage off while we live there. And after I move out of the place, I think I could rent the whole townhouse out on Airbnb and do well - almost certainly cash flow better than a traditional lease in that area, especially because I'll be putting either 0%, 3.5% or 5% money down to buy the house and not 20%. I need to do some due diligence on Everbooked and Beyond Pricing to really dig in to the sustainability of Airbnb in that market, but I was inspired by BP's recent podcast with Zeona McIntyre on the subject and had an 'aha' moment while we were driving to Annapolis to go look at houses recently.

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  • Perry Farella
    Lender · Chicago, IL · Member since 2016 · 189 posts · 153 votes
    9y

    Just add something here although not from the area on my experience in Chicago. I always advise clients to go down the Planing Dept. to see what Permits would be issued for a property in order to split it into two units. Often here a basement is turned into a separate full apartment, with two entrances, yet it is illegal. We have many 2 story two apartment dwellings that have a third basement apartment added years ago illegally. So to buy and rehab the Planing Dept. will not issue a Permit to have the 3rd basement unit anymore. If you go to the local zoning or planning dept ( Planning usually issues Permits and Zoning does not), ask them if they will issue a permit to subdivide the house or not. That way you  know before you own if what you planning is legal or not. The Realtors or sellers would not be the ones to ask.

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