Unusual BRRRR situation, need help

4 Replies

Hey ya’ll

-Bought an REO foreclosure (cash) as an Owner occupant last April.

-House was a 3/1, converted it into a 3/2 then I had the idea of enclosing the carport and terrace.

-The carport is a 1/1 “in law space” with its own entrance and the terrace is a smaller 1/1 (Still with its own entrance but is still connected to the main house) It’s effectively a 5/4 Triplex now.

-it’s my first deal, wasn’t sure how having two attached but disconnected rooms would effect the appraisal, so I left the smaller one like a room and plan on closing it after the appraisal

-I know I could increase the value by adding them but I also understand the diminishing returns of adding square footage/rooms/bathrooms. Ultimately, I did this to combat the cash flow compression after the refi.

-In the process of doing the appraisal, but my bank is offering me a 2.95 HELOC instead of a cashout refi, which works out because I get more cash flow and still be able to leverage the forced equity with the HELOC and service the debt when I use it.

-The situation - i’m currently living at my parents home but the house is still my primary home(which is why the bank is offering me a heloc)

-I plan on renting it out, but I want to do it the best way possible in terms of asset liability, insurance and taxes. Im thinking I could rent out the two bigger units and “live” in the smallest one.

-Not sure if that’s necessary? Should I just rent out all units?

- what kind of insurance should I get?

- should I do a quit claim deed to an LLC, not sure I could do that to a primary home?

Thanks for your time, look forward to hearing from you guys!

@Mike Rios  
-The carport is a 1/1 “in law space” with its own entrance and the terrace is a smaller 1/1 (Still with its own entrance but is still connected to the main house) It’s effectively a 5/4 Triplex now.  even though you might consider it a 5/4 triplex, what's the zoning?  an appraiser will check the zoning (at least they should) so if there's an issue in that regard you'll run into lending issues

-I plan on renting it out, but I want to do it the best way possible in terms of asset liability, insurance and taxes. Im thinking I could rent out the two bigger units and “live” in the smallest one.  if you tell your lender you intend on living there but turn around and rent it out, you might run into some issues with mortgage fraud.  but insurance is a little cheaper for rentals vs. owner occupant.  as for property taxes, only owner occupants are able to get discounts, and often that requires evidence of low income, etc.  

-Not sure if that’s necessary? Should I just rent out all units?  to a bank, lender, appraiser, etc., a unit requires a kitchen.  so if the property has 1 kitchen, it's considered single family.  even if it has 16 rooms, 20 bathrooms and 15,000 SF...only if the zoning is appropriate and there are 3 kitchens could a lender qualify the property as being multi-family.  how many kitchens does this property have right now?  

- what kind of insurance should I get?  your lender will require "any" home/hazard insurance so perhaps ask yourself to what degree and extent you NEED coverage.  Frankly, i think most home insurance is a scam and benefits no one but the lender, but without it you'll have a hard time getting loan approval.  so might as well go super cheap?  that's really your call...  

- should I do a quit claim deed to an LLC, not sure I could do that to a primary home?  i dont know of any lender who will allow both owner occupancy with title held in LLC.  

@Patrick Britton

Thanks for getting back to me Pat! This is my first deal/appraisal and HELOC so any advice is much appreciated.

"-The carport is a 1/1 “in law space” with its own entrance and the terrace is a smaller 1/1 (Still with its own entrance but is still connected to the main house) It’s effectively a 5/4 Triplex now. even though you might consider it a 5/4 triplex, what's the zoning? an appraiser will check the zoning (at least they should) so if there's an issue in that regard you'll run into lending issues"

The house is zoned as R1, but the property will be vacant during the appraisal. The Strategy was to househack a BRRRR,
make the house look like a SFH during the appraisal, live and rent out the other units, leverage the forced appreciation and repeat the process.

"-I plan on renting it out, but I want to do it the best way possible in terms of asset liability, insurance and taxes. Im thinking I could rent out the two bigger units and “live” in the smallest one. if you tell your lender you intend on living there but turn around and rent it out, you might run into some issues with mortgage fraud. but insurance is a little cheaper for rentals vs. owner occupant. as for property taxes, only owner occupants are able to get discounts, and often that requires evidence of low income, etc. "

I know some people rent out there primary after living in it for awhile. I wouldnt mind living in the property during the "seasoning" period, but if i do live in it and house hack, would i be able to keep the exemption? Not a big deal though, I could pay the extra property taxes 

-Not sure if that’s necessary? Should I just rent out all units? to a bank, lender, appraiser, etc., a unit requires a kitchen. so if the property has 1 kitchen, it's considered single family. even if it has 16 rooms, 20 bathrooms and 15,000 SF...only if the zoning is appropriate and there are 3 kitchens could a lender qualify the property as being multi-family. how many kitchens does this property have right now?

3 kitchens: The main 3/2 has a standard kitchen with an island, the In-law has a 10 foot kitchen running against the wall with a frig, sink, microwave and burner top. The smaller efficiency has a compact kitchen (attaching picture below) Not sure if that will constitute as a kitchen.

Compact Kitchen

Would this effect my appraisal in an adverse way? Multi familys here are extremely overvalued so it could work out but i dont know if it'll stop the bank from giving me a HELOC.

- what kind of insurance should I get? your lender will require "any" home/hazard insurance so perhaps ask yourself to what degree and extent you NEED coverage. Frankly, i think most home insurance is a scam and benefits no one but the lender, but without it you'll have a hard time getting loan approval. so might as well go super cheap? that's really your call...

Interesting perspective, i own the property free and clear and will be getting attempting to get a HELOC instead of a mortgage, will the bank force me to have insurance before they approve it?

- should I do a quit claim de ed to an LLC, not sure I could do that to a primary home? i dont know of any lender who will allow both owner occupancy with title held in LLC.

Sounds good, thanks again - Mike

@Mike Rios The bank will require insurance.  Talk to an insurance agent about what coverage you will need for living in the house and renting part of it.  Most likely homeowners insurance with a rider for tenants will probably do.  


I usually recommend making sure that you get replacement coverage on your insurance.  It will cost more.  However, if the house burns down the insurance company will replace it.  Otherwise, you will be overpaying for cheap insurance just to keep your bank happy.