I have been unable to find any threads on this so I thought I would start one.
A relative of mine owns a couple single family homes in the Phoenix area that he has divided into their own units with their own kitchens and bathrooms. They also each have their own entrances. He has 3-4 low income families living in the same building. Is it legal to do what he is doing?
Without re-zoning, probably not. There is a difference between Single Family zoning and Multifamily zoning. Even though banks may consider up to Four units a "residential" property, the city has certain regulations pertaining to multifamily (aka "high density") properties. Even if it were considered a "rooming house", certain regulations must be met.
I can't be any more specific because I'm not a lawyer. Unless I occupied part of the property in order to consider myself simply renting out a room, I wouldn't want to get caught in the situation you've described.
Have to agree with Andy, unless it's located in a multifamily zoning, which I doubt. I'm also guessing it was done without proper permits, assuming it doesn't meet zoning.
@Marcus Nielson what about utilities. Here you can't get a second electric meter from the power company without City zoning approval. If they are all on one meter then that is a huge headache (think AC on in July with the windows open). If it's out in an unincorporated area they often have much more lax requirements but also have fewer services like firefighting water. Does the insurance company know about the multiple units?