2 To 4 Units Property Purchase
Any properties under 4 units are considered residential properties. First time home buyers can qualify to purchase 2 to 4 unit residential properties with 3.5% down payment with a FHA loan. Buying a to 4 units is an excellent investment as long as the homeowner is ready to tackle the job of being a landlord. If you play your cards right, you can live with very little mortgage payments or no mortgage payments due to the rental income offsetting your monthly housing expense.
2 To 4 Units: Are You Ready To Be A Landlord?
Before we discuss 2 to 4 untis mortgage qualificaton requirements, lets discuss the idea of you being a landlord. Home buyers need to realize the responsibility that comes along with being a landlord. The risks versus reward factor applies here. Having a tenant is great because of the rental income but there are risk factors associated with being a landlord. Whenever there is a problem such as furnace problems, plumbing and electrical issues, the tenant will contact you and you need to either fix it or hire a janitor to correct the problem.
Duties Of Being A Landlord
Some issues might be minor such as a clogged sink or toilet but there are major issues that arise such as a furnace breakdown during the middle of winter where it needs to get corrected immediately. Furnace and air conditioning repairs can be high ticket repair issues. It may be as simple as a thermostat replacement or can be as major as the replacement of motors, fans, or even the whole furnace. These repairs can cost as little as a few hundred dollars to several thousand dollars. You need to realize that a service call visit from an electrician, plumber, or HVAC repairman can cost a minimum of $100, and that is just a repair call service call charge. Then you have parts and labor that is on charge of the service charge. This is where reserves are very important.
Reserves Required On 3 To 4 Unit Properties
Mortgage lenders may require you to have reserves but even if mortgage lenders do not require you for reserves, having reserves is strongly recommended for a rainy day if you are planning on owning 2 to 4 units and being a landlord. For example, we had a winter artic blast that lasted several months here in the Chicagoland area and many parts of the Midwest where many homeowners had furnace problems. I had furnace issues also when the weather was 30 below zero and the repairs cost $1,400. Actually, it was a combination of furnace and plumbing. $1,400 dollars is a lot of money for many homeowners especially to landlords where the winter season has more housing expenses due to paying for gas. If your renter had a situation like mine where their funance broke down and you needed furnace repair for your tenant, do you have the money at hand? Vendors want cash payment at the time of service and many will not entertain payment plans. Unless you have ample room on your credit cards or reserves, this can present a big problem for those homeowners who have tenants.
Problem Tenants And Non-Paying Tenants
A nightmare for all landlords is having problem tenants and non-paying tenants. If you own a 2 to 4 unit building, you take on the role and job of being a landlord. Screening a tenant is the most important factor in avoiding future tenant problems. Just because they come up with a wad of cash for the security deposit and first months rent does not mean you have a good tenant. If you rent your unit to the wrong people, you will have a nightmare on your hands. There are federal and state laws when it comes to evicting tenants. You cannot just throw their furniture and belongs out and change the locks.
Know Evictions Laws
There is an eviction process that you need to go through and if you are a part time landlord, the chances are that you will need to hire an eviction attorney which can cost you hundreds, and sometimes thousands of dollars. There are professional scumbags who rent apartments and know the tenant’s laws and guidelines better than any eviction attorneys. The eviction process is another big issue. Evictions are not done overnight. There is a process. You need to serve your tenant with notice initially before you can proceed with the eviction process. You need to file proper eviction paperwork in court and a deputy sheriff in you county needs to serve your tenant. Your tenant then needs to appear in court, however, if your tenant does not appear in court the first go around, there will be other delays. More than likely, your attorney will be handling all this unless you can educate yourself in the eviction process and want to do it yourself. Another drawback in the eviction process is that many counties have moratoriums on evictions certain times of the year when the weather is cold. The eviction process comes to a halt and your tenant is allowed to live rent free until the eviction program in your county re-opens. There are cases where eviction process takes six or more months. You cannot shut off the tenant’s water or cut off their electric or gas. You cannot harass the tenant for not paying. Remember there are many rights a tenant has even though they are non-paying tenants. Even though you own the building and the unit the tenant is living, your tenant has rights that is protected by law and you need to abide by those laws. The best thing you can do to avoid major problems is to reason with the tenant and have them move out and offer them that you will not pursue the back rent. Many apartment management companies even offer cash for the deadbeat tenants to move out to avoid court costs and to have the tenant move out so they can rent out the subject rental unit.
Screening The Right Tenant
If you are thinking of a 2 to 4 units property purchase, you really need to think about whether you want to be a landlord. There are many advantages of a 2 to 4 units property purchase. 2 to 4 units property purchase is a great way to take off the ground if you are planning on being a property investor. You can go for a 2 to 4 units property purchase as an owner occupied unit and qualify for a single family home owner occupied unit in a year and rent out the owner occupied unit on your 2 to 4 unit building and keep it as an investment property. If you can charge a premium on your rental units, you can probably offset the rental income where your housing expenses will be minimal. Many 2 to 4 units property purchase owners live rent/mortgage free because the rental unit revenue pays for the mortgage and expenses of the building. The key to owning a 2 to 4 unit building is to have the right tenant. Another case scenario with tenants is that you can have a tenant that pays their rent on time but the tenants can be pigs. They can be pack rats and leave garbage by the door steps where it attracts critters like raccoons, cockroaches, mice, rats, and other scavengers. This can be a major problem. If your tenant listens to you and abides by the rules you place on cleanliness, then you have no problem. But there are many cases where old habits are hard to break and they might just yes you but do not take action to correct the problem. Other nightmare tenant case scenarios are when tenants hold loud parties and not only disrupt you but your neighbors also. You do not want to be popular with the local police force where you get visits from them every other day or every weekend.
Having Good Tenants Is A Major Asset
The key to having good tenants is to screen them before accepting their rental application. There are third party services where they run credit checks and criminal background checks. Make sure to check on references and previous landlords. Make sure that they have jobs or have a source of income where the rent you are asking is not too much of a strain. I strongly recommend that you do not give them a one year lease
The Ultimate Eviction Nightmare
The worst thing that can happen to you as a landlord is when you evict a tenant, the tenant trashes everything in sight. I have owned and operated just under 3,000 residential units as a real estate investor and evictions was part of business. There are a large percentage of evicted tenants that really trashed the unit where they damaged the carperting and/or floors beyond repairs. People can be mean. Some left meat in the refrigerator and unplugged the refrigerator so the meat can rot. Others broke fixtures and left garbage everywhere where I had to order a dumpster to clean the mess out. Still others have broke everything in sight including drywall, millwork, doors, and anything possible. Be prepared to run into bad tenants during the course of being a landlord. If you can screen your tenants and make sure you are aware of laws concerning evictions and have reserves, 2 to 4 units property purchase should be extremely rewarding and a great way to start being a real estate investor.
By Gustan Cho