One way to add income to a duplex or a multi-family property is to add another unit.
And one way to not qualify for a loan to purchase an investment property is for the previous owner to have added a unit.
Sometimes those additional units were done without permits or proper zoning.
Which could cause trouble on a couple of levels. First, if a unit is non-conforming (added without proper permits and zoning), a lender won’t count the income it generates toward qualifying for the loan.
As a buyer can use up to 75 percent of the rental income to qualify, on a unit that rents for $1000/month, this would represent a reduction of $9000 in annual income. If the buyer is just barely able to qualify, this can almost immediately render the duplex unaffordable.
Even if an investor doesn’t need the income to be able to buy the property, non-conforming units can raise red flags with city inspectors. For example, one property owner I know had an extremely nice unit the city required him to completely dismantle, and leave dismantled, because the owner hadn’t gone through all of the proper channels pulling permits and conforming to zoning requirements.
How can you protect yourself? Many non-conforming units are found in places that were clearly not originally intended to be inhabited. For example, rental units in places like garages, basements and attics are usually good candidates for further investigation.
Buyers and their Realtors can easily protect themselves by checking with city planning and zoning departments that all the proper permitshave been pulled and zoning restrictions followed.
Of course, learning a unit is non-conforming is not necessarily a bad thing. In fact, it may even help you get a substantial price reduction; as the property was likely listed at a price substantially influenced by the amount of rent it generated. And that’s rent from conforming units.
Just imagine the money you’d save if that triplex you love suddenly became a duplex!