Paid off 3 Family Home, Now What?

Question

So in the near future, I will be inheriting a 3 Family home which is great considering that the mortgage is already paid in full and there is nothing wrong with the home since all major repairs have been done fairly recently. The current owner lives on the first floor and rents out the second and third floors and does an ok job with maintaining the property on the inside.

I have a few questions:

• How can I make sure that once the home is passed over to me that all applicable laws are being followed to both of the renters? Where can I find this information or contact someone to assist me in assessing the property?
• Since the house is fully paid for, I would like to do a HELOC and take out what is necessary to purchase another rental property and fix it to code and have that as another stream of income. Is this the best course of action or is there another way that makes sense.
• Since I am becoming a landlord, I would like to read up on any good literature that can help me with this, especially anything that can shed some light to being a landlord in Massachusetts.

Some details about me. I live in Massachusetts and already own a home. Have construction experience and have several friends that work in the trades that can help with any major issues with the home if needed. I'm really new to this so any sort of information is greatly appreciated.

Thanks in advance!

Sue Bovio · Answer

There is a book out there called :

The Successful Landlord - A Comprehensive Guide to the Rights and Responsibilities of Owning and Managing Rental Property in Massachusetts.  By MariBeth Perry, ESQ.  Central Massachusetts Housing Alliance, INC.

We own a multifamily in Massachusetts and this book has a lot of good relevant information specific to Massachusetts.

Ed Matson · Answer

Here's another option to consider: You can sell the MA property and invest in a more LL friendly state.  You will inherit the property at its current value, so when you sell it you won't have a substantial Cap Gain to pay taxes on. Not a recommendation, just trying to give you another option so you can make the best decision.

Ann Bellamy · Answer

I can better give you specific resources if I know what part of MA you are in.  Even a county will help.  In the meantime,  mass.gov has a whole section applying to landlord/tenant law.  It is no joke in MA to comply with the laws, so read them carefully.  Charlie is right about the testers at MCAD.    I also recommend you start attending groups in your area.  Specifically landlord assns, which I can't recommend without knowing your area.  There are several of them.

Your first an most important task, IMHO, is to read and understand the MA laws.  Do not assume that because something sounds ridiculous, like triple damages, that it is not enforced.  Do not underestimate professional tenants.  Do not skimp on screening.  Read up on BP about screening tenants in MA.

Charlie MacPherson · Answer

@Nick Fernandez Congrats on the 3-plex - and welcome to BP!

You might already know this, but the landlord/tenant laws in MA are wildly biased in favor of tenants.  I'd recommend taking a landlord workshop like  https://www.wayfindersma.org/events/massachusetts-...  or http://nwsoma.org/homebuyer-education/landlord-tra...  These might be a good place to start.

Be very careful when it comes to fair housing.  The state of MA actually hires "testers" who will pretend to be renters and try to trick you into saying something they can call discriminatory.  The fines will be crippling.

The workshop will probably cover this, but here's a link to the state law: https://www.mass.gov/service-details/overview-of-f...

Also, be sure to get an estoppel certificate from the tenants prior to closing.  This is a document that the tenants sign, stating how much of their funds are being held by the landlord, i.e., security deposits and last month's rent.  Those funds should be transferred to you at closing.

Be sure to set up reserve funds to cover capital expenses, vacancies, marketing, etc.

Good luck!

Nick Fernandez · Answer

@Thomas S. Sorry if this is a dumb question, but how would you analyze that? I'm still very new to this and still researching and reading everything I can, but I haven't come across this or even thought about it. I just thought that having a fully paid off property was great and to use that equity to leverage for the next property. Never thought about selling it.

Thomas S. · Answer

Interesting that not a single person, to my knowledge, suggested that the start point is to first determine if the property is even worth keeping as a investment. Is the rent to value in line, will it produce positive cash flow etc.

Having a tri plex fully paid off is a terrible waste of money but the fct is that the property may not be a worthwhile investment and may need to be sold.

Nick Fernandez · Answer

@Sue Bovio Thanks for the recommendation and I'll give it a look. Do you think that the information is still relevant considering that the book was published in 1998?

Jerry Padilla · Answer

@Nick Fernandez

If you are planning to take the money out long term, On the property I would suggest doing a cash out refinance. You can pull out a 70% LTV on an investment property 3 unit. This will give you a fixed Interest rate versus the adjustable that goes along with a HELOC. Make the renovations and use the remaining cash to purchase more properties using the BRRR method - Buy Renovate Rent Repeat to keep the process going with as little out of pocket. Using the cash to purchase undervalued property that you can fix up and increase the value, allows you to then cash out, so you can recoup most or all of your costs. Then repeat the process.

Jamie Adames · Answer

@Nick Fernandez

Hi Nick, Welcome to BP.

As a few others mentioned beware of professional tenants, there are classes you can take that are for landlords. I recommend starting with those immediately, try doing it for 6 months or so, if you really don’t like the hastle, hire a PM and have them make decisions under a certain dollar amount.

As for investing, I would cash out refinance, and make your money work. You can probably take out around 85%, the Lynn, MA area is actually still pretty warm depending on where you are in Lynn. Feel free to reach out to me if you have any questions, i’m glad to help and be a resource.

Nick Fernandez · Answer

First of all, thanks to everyone for the advice and insight into my situation, I really appreciate it. I know I have a lot to learn and have been slowly getting my feet wet so sorry if this seems like a very beginner question.

@Ann Bellamy The property is located in the downtown Lynn, MA area and I live in Hamilton, MA. I will start reading up on the landlord/tenant laws soon. Thanks again for the help and any direction or groups that you would recommend would be greatly helpful. Also I've been listening to the bigger pockets podcast and for someone that's new to all of this you and the other guests, along with Josh and Brandon, make things a lot easier to understand and are extremely helpful so thank you for that.

Paid off 3 Family Home, Now What?

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