Buying 5BR house-renting out rooms to 5 unrelated tenants

[Jim Smith]

Thinking of buying a 5BR house in the city of Philadelphia and renting by room to 5 unrelated young professionals

The house would be 3,000 Sq ft new construction and meet all forms of habitability

Now here's my question - assuming more than 3 unrelated persons in a house is a code violation and worse case scenario that neighbors call or tenants for some reason call L&I

1 - what is my potential exposure with the city.  I'm assuming a small fine (in relation to what I'm collecting in rent).  Could they possibly make me kick people out?  Or since the house Is so big and fully up to code let it slide.

2 - on a legal front, could tenants get sly and say that the lease (everyone on separate room agreements) is actually not valid and try to sue me for any back rents  that were paid to me 

[Ethan Giller]

@Jim Smith, people definitely do this all the time in Philly.  The question you have to ask yourself, is whether it's a good idea to invest in something that you already KNOW is illegal, and may turn into a problem.  For myself and many investors, the answer is no, there are enough above-board deals to be had, but your risk tolerance might be different as might your ability to deal with headaches.

It's very hard to give you a certain answer.  The way I would personally look at it is that over the long-term, you are probably 70% likely to have it work out well with no issues (other than the property management stress of having to deal with 5 unrelated parties in one property).  You are 20% likely to have it turn into an issue at some point, such as receiving an L&I violation and having to make tenants leave over the short-term until they re-inspect, or having trouble getting a mortgage, or one or two tenants not paying rent.  You are 5% likely to have it turn into a major issue, such as losing a year of back rent due to problematic tenants and an unsympathetic judge, or L&I flagging the building such that you get in trouble any time you have more than 3 unrelated tenants.  The remaining 5% is the likelihood that it turns into a catastrophic problem, such as a fire that is not covered by your insurance since the building was being occupied illegally.