Starting a Subletting Business?

Question

Recently I applied for pre-approval in order to start looking for small multi-family units to do an owner occupied house hack, I was, unfortunately, denied pre-approval due to my low income.

So I had an idea and I was wondering if this is 1) Legal/Feasible 2) Effective/Smart or Not.

So because I am unable to get approved for a loan I was thinking that I can search for houses that are renting below market value, sign a lease making sure that I am able to sublet, and then sublease that same property out for a few hundred dollars more each month depending on how far below market it is. I could even potentially get a lease option on the property and then use the tenants rents to pay into that and essentially buy me that property.

I was thinking I'd probably be wise to use an LLC to do this in order to avoid personal liability, but other than that what do you think of this idea?

I can't wait to hear your thoughts!

Sam L. · Answer

I've heard of people doing this to STR's but I don't see how this would be feasible on a large scale. How would you handle maintenance request? Who pays for what if something breaks? What happens if they stop paying rent? You'd still be on the hook to pay putting you in a tight spot.

Account Closed · Answer

@Sam L. Thanks for the reply, those are definitely important questions I'd need to think about, thank you!

Adam Martin · Answer

I like where your heads at on this one but I think it may be a difficult prospect in my market at least.  Few properties are rented under value and the ones that do rent quickly and have hundreds of contacts in the first couple days.  You mention you couldn't qualify for a loan due to dti, it may also be difficult to qualify for a rental with that issue as well in a highly competitive market.  If you do get in though this could generate a few hundred each month but keep in mind these rentals don't always rent and get occupied same day so a month of holding costs may eat up a large part of your profits.  Also ensure you have the cash reserves because if your tenant doesn't pay you are still expected to.  A LLC would protect you to an extent but also show as a red flag to landlords that they would not be able to collect as easily which could scare many off.  Best chance for you would be to offer slightly above asking for the rental which may sway some landlords in your favor.  For a few hundred dollars a month though I don't really feel like the risk is worth the reward.  Ultimately the landlord is going to come after you for any damages and rent and that is not a responsibility I would feel comfortable taking.  This is a form of rental arbitrage and is talked about here from time to time but it is usually where the renter is putting it on air b&b where the spread will be larger than with long term but there is also more work involved.