Two homes on one lot?

Sugaluv40January 26, 2011

Long time lurker, first time poster. Thanks in advance for any input!

My wife and I are this close to putting in an offer on a property in California. The property is interesting in that it has two single family homes on one 10,000 sq ft lot. Both homes need a little TLC, but nothing I'm too worried about at this point. The property is zoned R3-2, which allows up to two residences but no more, and cannot be subdivided and sold separately.

Given there aren't many comps of this nature, I was hoping to get the forum's input. Does the pro of rental income from unit B outweigh the con of having a tenant? Would our potential buyer pool be so limited we'd have no chance of reselling after doing some improvements? Should we run the opposite direction as fast as we possibly can?

Please don't hold back, we need to act quickly. Looking for any suggestions or similar experiences. Thanks again for any help!

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"Given there aren't many comps of this nature, I was hoping to get the forum's input. Does the pro of rental income from unit B outweigh the con of having a tenant?"

That depends on if you mind living beside a tenant.
It has good and bad points, depending on the tenant.

"Would our potential buyer pool be so limited we'd have no chance of reselling after doing some improvements?"

That would depend on how the land is divided, and what the other houses in the neighborhood are like.
If there are other houses on smaller lots it might be fine, if even the single houses are on large lots it might be a problem.
It would also hinge on how the lot is/can be divided.

"Should we run the opposite direction as fast as we possibly can?"

Depends on what you want.
It could be a problem being next door to a house you are renting, or an ongoing problem with being beside the house you sold to someone.

    Bookmark   January 26, 2011 at 9:09AM
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it really depends on a lot.

in my area at my income level, a lot of people see a plus of having the rental income. People subdivide their homes (illegally) to rent out basements or 2nd stories. I personally would not do that. and a lot of times the house price factors in some rental income into the pricing.

having a seperate house is a much better situation, but does have some drawbacks to go along with the income each month.

if your house is in an exlcusive 1M area, a rental house is probably not a plus. in a more middle, to upper middle area, probably could be a plus.

comes down to whether you like the set up or not, and how much your being charged for the second house. if the charge is minimal, not a bad thing, if its adding $1500 to the mortgage and bringing in $1500, its not helping you.

    Bookmark   January 26, 2011 at 10:19AM
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Thank you for the replies, good insight.

To be perfectly honest we are leaning towards putting in the offer. The houses are in an expensive neighborhood (but in the CA Bay Area, where isn't?), so I certainly see the validity that people with that kind of cash may not be interested in the rental house savings. But as was also mentioned, rentals are very strong in this area and there are many young families and working professionals as prospective tenants. I actually have a little experience renting in this area previously, with some work I don't see much difficulty finding a respectful and easy tenant. The rental income does (barely) more than make up for the additional mortgage cost.

Please continue to share other thoughts and/or questions, as I still want to hear other people's experiences, we're not fully committed yet!

Thank you...

    Bookmark   January 26, 2011 at 6:27PM
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Several years ago a friend of mine was looking for a new house; something small that she could handle herself. Another friend of hers suggested that she buy a property that had income potential. She ended up buying a 2 bdrm home that had a very large studio apartment attached at the back. The studio has it's own entrance. She says that is the best thing she has ever done. The rent from the studio pays her entire mortgage. She also gets a great tax deduction. She has never had a problem renting it and has had several long term renters over the years. Another plus is that when she is out of town, the tenant watches out for her house for her. I think purchasing such a property is a great idea as long as you don't mind being someone's landlord.

    Bookmark   January 27, 2011 at 1:39PM
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If you're in the Bay Area---keep hunting for comps! There are lots of homes like that in the East Bay, for instance. May not be your area, but can give you a sense of how that type of property compares to a single-family home in the same neighborhood. (Two of our neighbors have them, as does a good friend, though on smaller lots---one set of neighbors co-owns the property as a TIC, which was super common when it was easier to get TIC loans; the other neighbor and our friend both live in one house and rent the other out. Both of them have been extremely fortunate to have wonderful tenants, but they were choosy.) They're particularly common in the older cities where a detached garage or other building may have been converted to a living unit at some point. I've also seen several where a family bought a single lot back in the 1910s and built two identical houses on it, one in front and one in back.

Just check that the units are legal (so that you won't run into problems renting one out) and brush up on local landlord/tenant laws so you have a good understanding of what your rights and responsibilities are. You could also check Craigslist to see what the going rental rates for your area are, too. Good luck!

    Bookmark   January 27, 2011 at 4:39PM
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Not sure how you plan on financing this purchase ... but a lender will look at this as a two-unit purchase, and will require two-unit properties of the same type as comparables to establish a value.

    Bookmark   January 28, 2011 at 12:41PM
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Check to see if rental on the 2nd home is legal. In my area(not CA), two homes are allowed but county zoning rules clearly say the 2nd home is considered a guest house and cannot be rented out.

Most lots with this zoning don't have the 2nd home, and of those that do have the 2nd home, some folks rent them out but do so illegally. If the renter ever decides to put up a fight (over getting evicted, etc) and decides to bring up the issue to the county, then the landlord will be caught for having an illegal rental.Not sure what the consequences are for this with the county. Also not sure about the home insurance in this case when they are renting it out against zoning rules.

    Bookmark   January 28, 2011 at 5:31PM
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I wanted to give a quick wife and I went ahead with the purchase. Thank you for the comments and input, definitely helped out and I made sure to check up on a few things. I can confirm that both homes are legal and allowed as rentals, and we were able to arrange financing and insurance (although not without a few hoops to jump through).

The front house is already rented (professional tenants), so no worries there. Now comes the fun part, getting my hands dirty -- we plan to do some renovations on the back house before renting/moving in. I'm sure you'll all be seeing plenty more questions from me in the immediate future!

Thanks again...

    Bookmark   February 9, 2011 at 1:56PM
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