For the seasoned rental investors out there, especially in the baltimore area - I'm thinking of picking up a fourplex that's fully occupied. However, I really want to get is under an owner occupied FHA loan with 3.5% down. The house has an extra room that's separate from the other units and is unused. Do you think it's doable for me to get an FHA loan stating that i'll be staying in that room, while I try to get one of the tenants out (they're on month to month leases)? My other question is has anyone ever even tried to "get a tenant out" for the sake of you occupying the property? It seems like a total a-hole thing to do. Also, the current landlord is paying all the utilities in that property, which comes close to a grand a month. How would you guys go about telling the tenants that they're now responsible for utilities once you take ownership of the property?
I would like to hear some "experts" answers on this as well. Though from what I have read, it's probably not a good buy if you're going to have to pay the utilities. I'm not sure how you would go about telling the tenants they now have to pay an extra X amount of dollars for utilities that they have never paid.
I think I might have some answers for you. First, you'll have to be able to tell the bank that you have a reason to live there.... they will believe that you are moving into one of the units, so you might have to show them an eviction notice for one of the units before they will believe that you will be moving into it. I'm pretty sure that if you give the bank 4 leases, and tell them you are going to owner occupy, they are going to have a fit. kicking out a tenant shouldn't be a big deal. If they are on month-to-month, they shouldn't be upset... they will, of course, but they shouldn't. Tenants leave all the time with 30 day notice... it works the same other way. Your offer should include the fact that you intend to owner occupy, and you should make it part of the offer that the seller needs to give notice and provide you with a vacant unit upon closing. It's going to take at least a couple months to close the deal any way. The trick is figuring out which tenant you don't want and getting them out. So, when you go through the units, make sure you get a feel for which tenants are treating the place well... find out if any one of them is paying under market and/or missing payments.
Utilities? It all comes down to numbers weather or not it's a good deal. I bought a 4plex with owner paid utilities... and it makes the money that I need. One thing you need to be careful about is splitting up the cost if you have only one meter. Frankly, I would never do this for heat or electricity because you will end up with your tenants being bitter towards each other for leaving lights on... keeping their heat turned up, or something like that. Also, you might run into legal issues, billing tenants for something that isn't metered.
I hope these thoughts help.
If the utilities are metered separately, it shouldn't be an issue to tell the tenants they're going to pay for them now. Either have them sign a new lease saying they're responsible for such and such utilities or make an addendum to the current leases. A brand new lease is probably preferable, although you could keep them month to month to avoid rocking the boat too much.
As was already mentioned, if the utilities aren't separately metered, you should probably steer clear of directly charging the tenants for utility usage. I think if this is the case, raising the rents for each unit to reflect your cost of paying utilities would be the best solution, however, you should sit down and try to get a pretty good idea of what each unit is going to cost you monthly for utilities so that yyu ddot sssrt oor charging them. Obviously different sized units and units with more or less tenants will have different consumption amounts.
Hope that helps!
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All very helpful responses, thanks a bunch for your input. As for the separate utilities, I have heard of a system called RUBS - Ratio utility billing systems. I think these are more so used on larger scale multi families, but perhaps could come into play here? Anyone with experience using RUBS, especially on residential size multis?
The way the FHA Loan works you HAVE to owner occupy for at least one year. Period.
As for the current tenants...regarding utilities....even if you don't have seperate meters you should have them pay for utilities. Let them know that from now on they will pay for utilities. Whatever the utilities are,,,,they will be split equally four ways between you and the other three units. WHICHEVER of your tenants gives you the most pushback on this, needs to be the tenant that you select to be given the 30 day notice.
Also.....don't be so quick and happy to keep all tenants....You may like the safety and security of the cashflow they are providing but there are a LOT of people here on BP that would advise that you "get your own tenants". There seems to be a strange dynamic when you inherit tenants and keep them,,,,,and that dynamic will only be "more interesting" when they start having to pay utilities....also as the new owner you should be able to raise rents by at least 5%.
Between 5% raise and them having to pay utilities they may tell you they want to move out themselves....which may not be a bad thing my friend
@Mike Goikhberg In Baltimore city it takes 60 days notice to change a lease. Keep in mind that is 60 days before the lease renews on a month to moth basis. that means it can be up to 90 days. If you give notice in the middle of the month (or lease period) then the 60 counter does not start until the following month.
You must honor any existing leases. If the leases are for longer than month to month you have to wait until the lease expires.
Yes you have to move into the property but ask your lender if it needs to be immediately at settlement or if is can wait until a tenant is removed.
Ah so it may not have to be immediate move in, that's good to know I will definitely ask, thanks!
in our area i've seen listings that say rent is x, and there's a 'sub charge' for utilities and they do a generic 100 or 150 for utilities on top of rent.
@Mike Goikhberg I have no problem buying properties that are already rented, however this makes your due diligence more complicated as you need to go over the existing leases as they stay with the property for the lease terms. Giving someone the boot in order to occupy isn't always the easiest/nisest thing to do, but as being renters they understand their living situation revovles around the owners choices.
You can also make a condition to close on the property, that the seller give a tenant notice to terminate lease to get the 60 day counter going for you to move into a unit.
For you to qualify for an FHA loan your living area has to be habitable. That means there has to be a kitchen and bathroom at the minimum. It also has to comply with the local codes, meaning proper egress and such. This means that you won't be able to qualify if it is just a room that you are planning on staying in.
As for utilities, you are going to want to see what other properties like this one are doing. You don't want to be the only property charging for utilities if none of the others do as you will find it harder to rent or get good tenants. You will want to check into RUBS as part of your due diligence as this can make or break a good deal. Seperating utilities can be a huge value add but can also be a disaster.
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