All Forum Posts by: Brian Hughes

house hacking a triplex is how I got started too.   As Michael stated,  the loan process is not much different than for a regular house.   The rate might be slightly higher (an eight to a quarter point) and there will be some wording in the loan saying in the event of defaults the lender has the option of directly collecting rents.   On the plus side,   you can figure a fraction of the rent income towards qualifying for the loan.   I think its typically around 70% of expected gross rent.

I hope that you are looking /near/ Seattle, as operating rentals /in/ seattle is subject to a lot of regulatory risk right now, with more looming.   We are also likely to see 'just cause' eviction rules statewide this legislative session.

Good Luck.

at bare minimum,  start by providing a written receipt each month stating the amount paid,  any balances owed and their category  ('rent" or "non rent" - it makes a different now)  -  both yourself and the tenant should sign the receipt.  This means you can't accept the rent just slid under the door,  it has to be in person so the amount can be verified by both parties.

Note that due to new WA laws, you can only evict for late / missed "rent".  No matter how many late fees or other penalties/etc pile up you can't evict for that.   You need to verify your rental agreement states how you will apply received payments -  it should specify that any received funds are applied in priority order to balance owed fees/penalties, current fees/penalties, back rent, and current rent,  in that order.   Otherwise,  the tenant can claim they paid rent but not the late fee, and you cannot penalize them for it. 

Provide the tenant a copy of the receipt,  keep your own copy,  and forward a copy electronically to the tenant (email, etc) if possible, and store it yourself in such a manner that you have proof of date it was created. 

Note your only option to enforce collection of late fees, repair bills for tenant caused issues, etc.  is a separate legal action, like small claims.   Of course,  this is likely to be not worth it,  which of course was the intent of the law  (sorry, editorializing...)

congratulations on receiving that windfall.   If managed right it will set you up for life.

First thing - make sure the insurance you have on the properties is landlords' insurance. Regular homeowner insurance will NOT cover non owner occupied, non SFR rentals.

You are fortunate to be in the pacific northwest - but NOT within city of seattle boundaries.  Nonetheless,  many laws are changing regionally and statewide.   Make sure you are up to date with things like fair housing standards statewide and in snoCo, notification periods for rent increases, rental agreement terminations, and (likely coming soon) legal reasons for eviction statewide.

Join a rental housing association.  RHA (rental housing association, https://www.rhawa.org) is most active in seattle and urban areas,   but there are other groups such as washington landlords association (https://www.walandlord.org) statewide.  Figure out which has the best presence/most active in your area and join.   These groups provide education, support, advocacy, forms, services,  etc. for a very reasonable cost of membership.

Review your tenant's rental agreements and make sure they are written, match best practices,  don't have any out of date or illegal clauses,  etc.   If they are month to month you can correct problems with proper notice.   I had to do this when I acquired a 4-plex where the one-page rental agreements had been written up by the prior owners 20 years earlier for example.   In that case while they were initially apprehensive all the tenants agreed to sign new MtM rental agreements (I told them I was not re-screening anybody, they would remain MtM,  and I laid out clearly what rent increases were coming the next 2 years)

It sounds like you have been at least tangentially aware/involved in operating rentals for a while,  but if you are at all uncomfortable with the prospect of managing tenants and the occasional need to be firm or make hard decisions,  hire a property management firm.   Your properties are paid off,  so you can afford the cost.

Assuming you haven't already,   arrange to meet every tenant/occupant and inspect every unit.   You can explain there was an ownership change and take pictures/etc to document current condition.

Once your current properties are stable, THEN consider BRRR or other strategies to grow your portfolio. One obvious one would be sell the SFR, and use those proceeds for a down payment on a larger MF. Depending on its value and where it is, it should provide a solid down payment for a 4-plex at minimum.

Good luck.

Nit:  Improper use of the "E" word (Eviction).   An eviction is what occurs after a landlord provides a tenant with legal notice to terminate the tenancy,  AND the tenant does not comply, AND the landlord brings suit in court.   For example,  If you have served notices properly and sufficient number of times to cure a waste or nuisance problem,  AND the tenant complies by vacating the unit,  that was NOT an eviction.   It would be an eviction if the tenant does not cure the problem/behavior, AND stays in the unit, AND you take it to court and the judge rules in your favor.

That said,  definitely do what you have already started - contact an attorney as this sounds complicated,   with what sounds like a problematic tenant (even before the flood) and some management missteps.

I'm pretty sure the way it works in WA is if you have a lease that does not explicitly require the tenant to vacate at the end of its term,   then it is considered to convert to a month to month tenancy upon end of its original term.  If you have accepted any rent since the expiration that is certainly how courts will likely see it.   There have been changes statewide on this but I think in most cases it is still 20 days notice to terminate the tenancy but some cities the period is longer,  and "Just Cause" ordinances that limit the reason why you can terminate are proliferating across cities.  Seattle has had just cause for years, other cities are starting to adopt.   Statewide there is a 120 day requirement now for "change of use" or major renovation - given the level of damage you describe this might qualify.   But again,  there is the habitability issue - the unit is not habitable.   

If you are in seattle, and increasingly some other cities,  there are additional complications.   In Seattle, you unit should be registered with the RRIO program.   If it is not,   you cannot legally "E"vict, raise rent, and or do pretty much anything else a tenant might not like.  (you can still serve the notices to terminate, hopefully the tenant would comply but sounds like they may not)   As part of RRIO registration,  you have to certify the unit is habitable and it may now require an up front inspection, not sure.   Your unit is not habitable / would not pass in its current condition.  Yes,  this is a catch 22.   You may end up with fines and/or forced to pay the tenant relocation costs.   

Talk to that attorney,  and good luck.

PS,  If you are not already a member,  please consider joining RHA (rental housing association) www.rhawa.org  -  great industry group largely representing small landlords,  great services including up to date forms, screening, education, news,  advocacy, etc.  

One thing to keep in mind with RE  (especially with the appreciation around here,  and hot market around tacoma)  is that time can turn a bad deal into a good one.

Even if you are negative on monthly cash flow now (occupying one unit) you are $1250 a month less negative than if you had an owner occupied SFR with the same monthly costs, and you are getting some tax benefits.

I can totally understand the frustration of a long commute  (I complain about my 35-45m commute all the time,  but I'm a whiner)   so perhaps the thing to do if you don't yet have the funds to purchase a home closer to seattle (check out skyway and north burien for best deals close in to seattle)  maybe find a "cheap" apartment someplace closer that will rent for about the same amount or less than you can rent your other duplex unit for.    Your cash flow won't be much different in the short run,  but maybe you can get back 6 or 7 hours of commute time per week.   

In Seattle this took the form of changing the rules for ADUs in SFR zoned areas to allow 2 of them on all but the smallest lots, and to remove the owner occupancy requirement. The ADU/DADU units still have to be 'junior' to the main house (smaller in terms of sf, I think the size cap is ~1000sf) and there are rules around detached units as to their size and positioning on the lot. They did add some rules (things like square footage bonuses, etc) for preserving the existing house when adding additional units, and they loosened or removed parking requirements. They also passed an "anti mansion" rule limiting the size of new SFR homes to 2500sf, less ADU unit square footage, a small garage, and below grade space. There is also a recently added new intermediate zoning called RSL (residential small lot) which is essentially single family zoning but allows lot sizes down to 2000sf, but the structure still has to be detached and free standing. These can have 1 ADU. I Don't think RSL and SFR can be subdivided into individual smaller lots. The higher density Lowrise zones can. This is how townhouses get built, for example a 50x100 lot is divided into four 25x50 postage stamp lots.

Also, some SFR areas adjacent to 'urban village' designated areas and arterials were upzoned further to 'lowrise' (low to mid density multifamily)

Since the only long term way to handle demand for more housing is to build more housing, and because (left coaster here) I'd prefer more density to more sprawl into what rural areas we have left I generally support a gradual upzoning process. WRT the SFR changes I think that allowing 2 ADUs is a good idea, though I think they should have kept the owner occupancy requirement as it was (It required a SFR zoned property with an ADU to have one unit owner occupied >= 6mos out of the year) or perhaps relaxed it somewhat but not remove it completely. Reason for this is without the requirement, now SFR is really Triplex zoning, and anybody who wants a SFR zoned home potentially has to compete with investors, and as we have seen after the last housing crash and wall street buying up houses, it may not just be small investors looking at buying up these properties now. An owner occ rule of some sort would prevent that. If I had been doing this, I would have said owner or immediate family member has to occupy a unit at the property 2 out of 5 years, with exception that established tenancies may stay indefinitely.

As for how all this might change neighborhoods,   The most desirable neighborhoods in seattle right now tend to have large, older homes on smaller lots.   Many of them already have ADUs.   Those are the homes that already sell for the better part of $1M or more,  and as such I would expect a stampede of investors to come in and convert all those properties to triplex,  though over time additional units may be added, garages may be converted, run down homes rehabbed as triplex, etc.  In Seattle's outer ring neighborhoods (like where I am now) there are somewhat newer homes (mid century-80's typically) on larger lots,  but more commute effort is needed if going downtown.   My home for example is a mid century on a 6000sf mostly level lot,  and is 2300sf on two levels,  including a 400sf garage.   It could certainly have one or two ADUs added, even preserving the garage.  However I'm not sure the demand is there yet for houses in this category to be rapidly converted or redeveloped in large quantity,  but I am sure it will happen at some increased rate.

Just because ALL of SFR now allows this, it will tend to spread out the activity more, as opposed to upzoning smaller areas, concentrating redevelopment in those areas and rapidly changing them. I think Seattle's own analysis on these changes said that they expected a few hundred to a thousand additional units per year to be developed as a result of these changes, so if seattle has about ~150K single family homes, thats not a dramatic rate of change.

Also,   Seattle's anti-landlord renter protection ordinances are going to diminish interest in this,  especially if our more aggressively / unapologetically socialist council members get their way and achieve some sort of rent control.   At that point, the only ADUs likely to be built would be to house a family member.



   

I suspect one (of many) of the fundamental issues here I think is extreme risk aversion borne out by many of the people pushing for laws like this.   In September I attended a seattle city council meeting where our avowed socialist city council member proposed her rent control ordinance.    I would say 80% of the crowd of of supporters there was somewhere in their late teens through mid 20's.   Most of the rest looked to be elderly/retirees.    

Theorizing here,  but for the younger crowd they would have been in childhood formative years 10-12 years ago during the height of the last housing bubble / great recesssion.   I suppose many of them saw their own family or somebody they knew go through a period of instability.   (Of course,  several complaints voiced by speakers at that meeting was (paraphrased/aggregated)  "I'm an engineering student and I'm too poor to rent a wallingford house without having 4 roommates" - er... boo hoo?  Wait a few years mr. ms. newly-minted UW engineer and that salary will catch up fast.)

Fast forward now,  and many probably think the easiest/safest route to their own security is - yes - to force somebody else to buffer them from financial and other risks.   One angle of that is rent control and all these ordinances making it harder to screen for qualified/acceptable risk tenants and harder to remove bad tenants.

I wonder if it will make news if and when the first landlord in seattle is foreclosed on during the annual 5 month eviction moratarium now proposed by same city council member (because its inhumane to evict when you need to wear a coat outside)

if its a SFR that is probably a good move. the rental regulations snowball in seattle is still picking up steam as it rolls downhill it seems - the latest proposal by certain council members is a full eviction moratorium during the coldest 5 months of the year, regardless of tenant behavior, and of course zero mitigation to the owner.

There isn't a glut of small MF in seattle for sale by any means, but there are a fair amount of those on right now so anybody who is interested in buying that type of property in seattle has some options. in SFR market though you can market both to other investors and potential owner occupants and while maybe a bit off peak its still a very strong sellers market.

Be sure to check current rules around giving notice to tenants if you are planning on terminating their tenancy for the sale.    The rules have changed around on that.   do not quote me on it but I think you have to give 120 days notice for a detached house.   If its a condo,   you cannot terminate the tenancy to sell the property;  it would need to be sold with tenant in place and the new owner if wishing to occupy the unit would have to give notice to the tenant for that reason and follow that process.

You can hold longer and ultimately do a 1031 exchange as well.   I'm no expert on them but thats a mechanism for trading up and deferring capital gains taxes.   

Good Luck

Short notice but anybody in or around Seattle on this forum who's looking for something to do tomorrow Tuesday Dec 10 should consider attending this trade show:

https://www.trendstradeshow.com

It runs from 730am - 5pm on Tuesday Dec 10.   Downtown convention center.

Its basically everything landlording at any scale - relevant for everybody with single unit ADUs to large commercial developments and everybody in the industry.   Seminars cover all aspects of running rentals,  changes in local and state regulations (grr),  strategies for investing, investigating where the market and industry is headed, and everything in between.    The trade show has vendors from everywhere - maintenance providers and contractors, property managers, brokers,  bankers, lenders,  government liasons,  etc.    You also get lunch  :) 

I try to go every year.    I'm not affiliated with the event :)  but raising it here since it is very useful way to spend one day a year and I would encourage anybody else with a rental or who is seriously considering it to attend.  Especially for a first timer or new(ish) investor,  it will be eye opening - thrilling and terrifying at the same time...

BH

Do the rental agreements specifiy the deposit amounts?   are they fully refundable?   If not that probably means the party who collected them keeps them.  (should not be referred to as a "deposit" then either) If they are refundable,   in my experience so far escrow has handled transferring the deposit money from seller to buyer.   But I'm in WA,   I suppose LA may be vastly different around legal process for transferring real estate. 

Note even if you are legally entitled to receive the deposit funds,  if it doesn't happen you still need to return those funds to tenants (less allowable withholdings based on circumstances) at move out from your own pocket.