SFR with possible separate basement unit...?

Question

Ran across a listing recently which was a 3br/2ba.  2/1 on main level and 1/1 in the basement.  Kicker is that the basement has a fully equipped kitchen as well.  I am a wannabe househacker so this is pretty intriguing to me.

There is no true separate entrance, but the entry to the basement is the same breezeway as the back door to the main level.  Seems like adding a legitimate (fire?) door would do the trick nicely to make it feel like a separate unit.

Has anyone gone through something similar? Wondering how to legitimatize it into a true second unit?  Zoning concerns, legal/permit costs?

Located in a urban residential neighborhood of Denver.

Bill S. · Answer

@Mitch H. and @Dan Mackin be careful about calling Denver. I called on a property someone offered me. They are now paying an attorney $5K to get the property grandfathered in as a 4 unit despite it being taxed as a 4 unit. The property records only had it listed as a 3 unit.

So many things to look for in these situations.

This is my flow chart if you will.

1) What do the property records show? 1 or 2 units? If only 1 unit then raise red flag but not a white flag (yet).

2) Zoning. Does zoning allow for two units? If not, raise the white flag unless you can prove the unit was there prior to the zoning change that made it non-conforming (If you got a red flag on item 1 and here then probably not worth further investigation). First zoning was adopted in the mid 1950s and the latest in 2010. If it was legal before the change and in use then the second unit might be grandfathered in (see above regarding cost of proving so). Usually this is not worth the hassle IMO unless it's a slam dunk. If there is any question about it's continuous use as a duplex for the last 50 years, it's probably not worth your time.

3) Building code. Unless it was built this year, it will not likely conform to building code. If it was and is in use as a duplex then nothing is required to be done at this time. The kicker comes if you do any work that you pull a building permit for. They can then make you do upgrades to meet their requirements just to pass a something as simple as a drywall inspection. Things like egress windows and hardwired smoke alarms. I have not had them make any noise about fire separation on existing construction but that's not to say they won't.

Incidentally, up/down duplexes are the worst investment property to manage. They often share utilities, furnaces and ducts, and circuit breakers. Tenants are always complaining about each other and they can be a real pain.

Mitch H. · Answer

About what I expected.  Top floor is livable as-is but the kitchen, bath and wood floors need major overhauls.

The basement, unfortunately, was not livable in its current condition.  The only good part was the fresh coat of white paint to make the 4"x4" windows make the room seem brighter.  Who knows what the walls looked like without the paint.  The kitchen probably wasn't functional and maybe hadn't been in 30-40 years. Utilities were off in the whole house.  The "bathroom" actually had a new toilet but the shower was literally a concrete enclosure painted grey.  No surround, tile work, nothing. Also, the basement floors sloped a lot. I could live in a basement for a year if it meant payoff in the end.  Unfortunately I wouldn't live in this basement as-is, and didn't really see a good option for maximizing Cash Flow as a Buy and Hold.

Additionally, someone else looking at the same time had their agent call and put in a cash offer.  Sheesh.  Its definitely decent as a 2/1 with tons of flex space in the basement, but anyone who wants it as a true 3/2 has some work to do.

Moving on.

Mitch H. · Answer

Plan A is Buy and Hold.  Yes, it would "sell" better as a 2/1 with some flex space in the basement.  I would say it is currently priced as low end 3/2, though.

Rentability as a 3/2 is good, especially in its location, though on the lower end of urban rentals.  Going to check it out tonight.  I anticipate it wont show very well...especially the basement.

Main variable would be if I wanted to do any moderate work on it (which it will need either immediately or at some point to maximize its potential), either as an exit strategy or for longer term rent benefit. Then we would get into the building code/conforming/accessory dwelling can of worms.

Bill S. · Answer

@Mitch H. yes that would work. What is the exit strategy? Remember, begin with the end in mind. When you move out, you would have to rent it as one unit or the neighbors might complain and get you in hot water. It will be hard to rent to one party. You might get by with doing a rooming house. It would be management intensive. If you sell on exit, then your buyer would need to be someone like you. No offense but that's a pretty small market.

Families looking for a 3/2 will pass it by so it will be hard to sell and sell for less than homes with similar specs in the neighborhood. Keep that in mind with your purchase price.

Mitch H. · Answer

1.  Single family detached.

U-SU-B1.  Urban - Single Unit - 4500sf lot.  The basement kitchen looks to me like its 1950's.  Metal cabinets.

Up/Down is not ideal, but something I would be willing to accept.

So what if I buy it as a SFR and happen to live in the basement while my 'roommates' live upstairs?!  Guess I should stop putting this in writing ;).

Mitch H. · Answer

It does have a stove, though it looks like it needs to be trashed.  Maybe trash it out before the appraiser gets there!

Travis Sperr · Answer

It really depends on how the appraiser sees it, some wouldn't think twice - others may note the nonconforming, which would the loan underwriter could have an issue with. I wouldn't allow it to kill the deal for you right away, I would just be sure to keep it in the back of your mind in case it comes up. Is there a stove, dishwasher, etc? a fridge and sink could be a wet bar!

Mitch H. · Answer

Good to know.  On this particular property I would be doing conventional financing.  Might I still run into issues?  Taking the kitchen out to add it back in sounds expensive and time consuming, not to mention still against the loan terms??

Travis Sperr · Answer

Financing can get you on something like this, with two kitchens it can be considered nonconforming for FHA, Fannie/Freddie. Years ago an investor I know doing something very similar had to take out the basement kitchen for financing - only to add it back later.

Dan Mackin · Answer

Depending on who you find for the window replacement I would generally figure at least 2k minimum to have a window that is to code.  That would be for them to cut the concrete, put in a header if it is needed and install the window.  Again the price could vary greatly on a job like that.

SFR with possible separate basement unit...?

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