4 family which is truly only a 3: first deal

3 Replies

Hey everybody.

I recently made an offer (my first ever) on an investment property.  it's technically a 4 family (4 one bedrooms) but it's only zoned for 3 families. So the current owner has all 4 units occupied but every time the C of O is due he has to vacate the one unit so that it can be inspected as a 3 family. He's had the place 10 years so he's already done it a handful of times. At first I didn't think it was a big deal but as the deal progresses I'm a little nervous about it. What do you think?

Also, here are the stats on the house:

Rental Income = 2300/mo

Gas/Elec (included in rent) = -200/mo

taxes = -150/mo

loan = -200/mo

insurance = -70/mo

capex = -230/mo

vacancy = -230/mo

maintenance = - 220/mo

cash flow = $1000/mo (with no prop management, at least initially)

However,  if I lose that 4th OR I have to keep that 4th unit unoccupied in order to wait for the next C of O the numbers will not be good.
So again, what do you think?

Martin, I put a lot of cash into the deal (cash + HELOC). If all goes well I'll refinance in a year and get a chunk of that cash back. Yes, previous owner has tried unsuccessfully to get an exception/variance.

@Paul Reynolds

If I were you, I would underwrite the property as a 3 unit because that’s what it is. The fourth unit is probably not permitted, hence why the owner has to vacate the unit for the inspections. You have to think about what fines you could receive from the city. Just because the previous owner hasn’t had a problem, doesn’t mean that you won’t.

If the numbers don’t work out as a 3 units, move on to the next. Especially, if the owner has tried to have the property rezoned. Don’t speculate or try to make the situation work.

Just my 2 cents.