What stops you from living in the basement/attic/garage of an FHA Multi-Family Hack

Question

Hello, this question doesn't behave well with the search algorithms so I was struggling to find the answer.

I believe this would not be allowed but I figured I'd ask.  If you are doing an FHA multi-family (duplex) purchase, and you are going to house hack for a year, what stops you from renting BOTH units and then living in the basement?  FHA requires you to live there for 1 year, but what qualifies as "living there"?

I ask because I am currently in the closing process of a 2900 square foot duplex in Grosse Pointe, MI (very close to Detroit).  Two large units.  But during closing I've been noticing more and more that I think someone might have been living down there at one point.  There is definitely a bedroom, which has heat, lights, and a sink (no egress unfortunately).  Then there is a stand-alone toilet next to the washer and dryer (it's weird, like outhouse style).

So that got my friend and I thinking.  Why not rent both units and then fancy-out the basement a bit and just live down there.  (Add a shower, or even an egress).

Really it's a two-parter:  Does FHA allow it, and does the city allow it.  But for now I'm hoping to focus on FHA rules.

Thank you all.

Ben Zimmerman · Answer

The rule simply says you have to live there for at least 1 year as your primary residence (51% of the time), it doesn't say anything about renting a portion of it.  So as long as you live there as your primary residence then you have fulfilled your responsibilities.  You likely won't be able to claim the income from renting the upstairs portion if you are living in the basement for purposes of the loan or any potential future loans, but that's about it.

As far as the city is concerned, all sleeping areas must contain an emergency exit. It doesn't matter if you call it a bedroom or call it a basement, if you sleep there - it needs an egress. However there is roughly a 0% chance the city would ever find out and your liability is probably pretty small if you yourself are the one living there. Things could get significantly worse if someone else was sleeping there. For example if someone else was sleeping there and you knew about it and the house burned down killing the person, you could potentially be held liable for their death. But if you were sleeping there and you died, well then that's just a risk you knew you were taking.

Even if you add a shower, you're still missing a kitchen, and even the ultimate bachelor gets tired of eating microwaved hot pockets every day. Unless you knew the person living upstairs and had unrestricted access to the upstairs portion then I sure wouldn't want to live in the basement without some serious remodeling. That combined with the fact that you don't have your own private entrance means that some people will naturally not want to rent the upstairs portion.

Personally -IF- I were going to go that route, I would see if it makes sense to reclassify the property as a tri-plex (quad?) and actually finish the basement correctly with a legitimate bathroom/kitchen area and separate entrance instead of just an egress window.  But the amount of remodeling required is going to get costly rather quickly so you would need to carefully analyze to see if its worth it.

Miller McSwain · Answer

My wife and I live in the basement of our SFH House-Hack. We separated the levels so that it is similar to a duplex; HOWEVER, we didn't have a kitchen in the basement. We ended up getting a tabletop stove and oven that just plug into 110V outlets, and we added some countertops. The utility room in the basement was very large, so we put the countertops and temporary appliances in there.Perhaps a similar approach could help your situation.

Albert Bui · Answer

The lending answer is that you’ll need to be able to occupying one of the units prior to close or within 60 days of closing in order to use a owner occupied loan on a duplex - fourplex property.however after closing, technically if you’re living there then that would qualify however lenders won’t allow you to use rental income from all legal units, they will still assume you’re going to live in your designated unit. So from a qualifying point of view and income use you’ll only be able to count the units you’re not assumed to be living in however what you do post closing is your prerogative so long as you live there 51% or more per year as your primary residence and yes they never specifically in what manner you have to live in the property or how you have to live at the property. I just know how an underwriter will underwrite your file from a pending point of view. However if you can close on the property what you do after with that basement living or closet living strategy is up to you.@Carlos Valencia

@Matthew Kwan

Will Greenlee · Answer

Oh very good thoughts!

And yeah the kitchen is an issue.  I try to be the "ultimate bachelor" but even I can get picky.

And YES, that is a bummer about the egress.  I got a quote for doing one on my current place.  It's $$$.

So the short answer to my original question of "what is stopping you".  And the answer is "nothing, but do you really want to?".

And no, not really, I don't want to live in the basement.

But, you've got my mind going here, I could rent the lower unit, and then share the upper unit with a roommate. I could even sleep in the basement and then only use the upper unit for kitchen/bath/etc.  It wouldn't be great for luxury living, but I'm trying to hope for the best and plan for the worst.  Half the people in my life tell me buying this place right now is SUCH a good idea, and other say it's going to bankrupt me for years.  Sooo contingency plans being developed!

Ryan Thomson · Answer

I would say nothing stops you from doing that with the loan. Once you buy it the FHA doesn't know what you do with the home. The city may have an issue with it, but chances are great they will never know or care. I would ask your lender "off the record" what the issues would be with doing this.

In other news-If you wanted to not go the duplex route here are a couple of other good options for house hacking that don't involve a duplex:

An easy way to split into multiple units:  a walk out basement, an ADU, or a garage that could be converted to an apartment, multifamily - this allows for airbnb or more rental income to a long term tenant

Josh Young · Answer

@Will Greenlee

You could do a rent by the room strategy on your unit and just rent out all the bedrooms and the basement is your bedroom, so you still have access to the kitchen/bathroom/living room. When you are qualifying to buy your next place you won’t be able to use the actual rent that you are collecting for your unit, but you will be able to use 75% of market rent.

Will Greenlee · Answer

Oh I absolutely love that!  Single family hack in the basement.

Csaba Kukucska · Answer

This is a very common theme here in NYC, I’ve got multiple friends who are homeowners and living in remodeled basements while renting out the other apartments. It’s usually an apt that was fully renovated without any permit at all or an almost fully renovated unit with no gas but an electric stove down there. In this particular case they take a cash tenant for the first 1-2 years whose address they use….

What stops you from living in the basement/attic/garage of an FHA Multi-Family Hack

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