Second Home - Occupy Upstairs

8 Replies

Hello, I want to ask those of you smart people if you think I have a good plan and help me find the pitfalls.

I live in Utah County. We have a home in Highland and it's worth about $700k (owe $200k). I run a t-shirt business and also rent out a warehouse in PG for $1200k per month. 

I'm getting tired of my PG warehouse. There's a lot of creepy humans that hang around there and I work in it alone as a female and don't feel safe. Also, that $1,200k makes up a good chunk of my expenses and I'm not getting equity from it.

So here's my plan. I will buy a second home that has some sort of rental area, either an outbuilding or a basement that I can rent out to help cover expenses and run the business out of the remainder of the home. I'll need at least 1500 square feet to keep inventory. I've been looking on the market and see a bunch that pop up that will fit my needs. 

I've done the math and if I buy under $300k, and am able to rent out a basement at $1000k plus utilities, I will still be paying a little of the mortgage, but at least it will go toward an investment instead of my warehouse owner.

I guess I wonder if it's legal to not occupy the home, but rent out part of it and run a business out of another part. No customers will visit the premises. I won't be sleeping in the house either. I also won't be selling my house. 

I was thinking of opening up a separate LLC and rent that floor space to my business' LLC so I can claim it on taxes. BUT--I think I heard you can't do that because it would be an illegal duplex because TWO entities would occupy the house.

Anyone know? Does the plan sound ok? As long as I am smart about my renters, locking up inventory, etc? Any pitfalls you can think of?

Petra

I think it's a great plan. As for the legalities, I cannot answer those questions. I would suggest calling the local city's zoning departments around here and asking them. I live in Cedar Hills, and I know the city was just passing a new ordinance about home based businesses. I didn't look into a lot, but those are the things you want to look at. I would guess PG and AF will be your best bet. 

I would suggest doing your business in the basement, and renting out the top half of the house. You'll get a lot more for rent that way, especially if they get to use the yard and what not. Also, it would be cheaper for you to get a family up and going in the upstairs then trying to convert a basement into an apartment. For under 300K you can't find a place that already has a basement apartment, but you might be able to find one with a walk out basement. If not, it's approximately 8-10k to have an entry way created. The less stairs that need poured, the less expense.

If you're not planning to occupy the home, you might need to have 20% down. But, I'm not a mortgage expert šŸ˜

Good luck. Hopefully someone with more knowledge will chime in.

Hey @Petra S Jordan

As for the question of legality, I can tell you that in order to rent out out a mother in-law apartment or accessory apartment you are required to owner occupy the home. That leads me to think that if you are renting a level out to your business's LLC and renting out the other level to tenants you could run into an issue since technically you aren't living there. At the same time I think the likelihood that you will actually run into any trouble is very low. I know that there are multiple homes rented throughout Utah Valley that are zoned to have accessory apartments where both units are occupied by tenants. I don't think it's a bad option but you may want to consider running a worst case scenario analysis to see how it would effect you if you weren't able to use it for your business. Another thing to consider could be to purchase a multi unit commercial property and "business hack".

I agree with @Kaydn Jensen .  You technically shouldn't do it, but it is done all the time and usually the cities don't enforce it (except Provo).  To be legal, you could find a house that meets that criteria that is located in a commercial zone and convert it to commercial use if it hasn't been done already. There are also properties built for mixed use.  There are some available in Pleasant Grove, but they are significantly more than you are looking at.  Essentially, they are a 4 plex with 1900 sq ft of commercial space as well.  The numbers probably work out about the same, but you would have a larger down payment and more units to rent out.  Hope that helps, good luck!

@Petra S Jordan Your real estate agent could set up for daily emails on properties like this. They are listed under commercial real estate. The property I was referring to is in American Fork. The MLS number is 1562214. You could search it by that and look at it. Let me know if I can be on any help.

Thank you. I think that bigger building is far above what I can afford!

Another question. Should I wait to find a below-market property that needs work or just buy at market because I will be saving money on my warehouse rent? What might be the pitfall besides the inability to find renters?

 I ran the numbers on an at-market property that I could just move into easily. AS long as I have a renter at $1600+200 utilities for the top of the house (1,300 square feet), I would still have to pay $600.

But that's half the warehouse rent and I'd be paying down my mortgage rather than someone else's.

I can afford worse case scenario, but of course I'd rather not! The cost to run that house would be around $2300 without renters, which is way more than I pay to the warehouse.

The house I'm looking at is in the 400's.

OR...I can somehow find a below-market house. I just don't really like the ones I've seen because they are in bad areas. I think this case is slightly different than those buying simply to rent out. Because I would be there every day, area is more important.

There are so many variables and I don't want to end up in a bad situation. 

@Petra S Jordan Have you thought about doing a detached garage at your home? You could do a home equity line of credit to pay for the garage and then pay rent to yourself to pay it off? 

In Highland, Accessory buildings shall not cover more than five percent (5%) of the total gross lot area.

Or you could do what I'm doing. I'm doing addition with an attached apartment with a four-car garage above it. However, I'm not sure on if you could run your commercial business out of your garage. I'm sure you could call the city and find out.