4-family to 5-family with owner occupied unit

[Nicholas Haubner]

Hello All,

I purchased my first rental property a little over a year ago. The property is a 4-family house in Montvale NJ. The question I have is as follows. The house has 5 units; however, it is only zoned by the town as a 4-family. Where it gets interesting is that the house has 5 mailing addresses associated with it and the fire prevention bureau has on their records it is also a 5- unit house, and I am billed as such upon annual renewals/inspections. I also have five gas/electric meters. The DCA has on file that the property is only a four unit building. It currently only has four units rented, although I would like to turn the 5th unit into my own, so that I can move out of my parent’s house and “househack” for a little. I am not sure of the legality associated with this and the issues of going from 4 units(residential) to 5 units (commercial) even if one unit will only be owner occupied. Any advice at all would be greatly appreciated!

Best regards,

-Nick

[Andrew Syrios]

One unit being owner occupied doesn't change the number of units there. It would still be a 5plex. I suspect the person who originally turned it into a fiveplex only applied for permits to make a fourplex and then did the 5th unit fly by night (perhaps at a later date) in order so the property would still be considered residential and allow for better financing possibilities. That's the reason there are so many fourplexes and so few fiveplexes or even sixplexes.

From what I gather, post offices and utility companies rarely care much about the permitting/zoning issues, so it probably wouldn't have been hard to get those set up. You can probably just go ahead and live in that 5th unit, but I believe whenever you go to refinance it with a bank or what not, the 5th unit will make it require a commercial loan and not residential regardless of what the county records show the property to be. 

[Nicholas Haubner]

@Andrew Syrios

Thank you for your reply, I greatly appreciate you taking the time to read through and give me your advice. Do you know if this would be an issue when it comes time to having my 5 year DCA inspection in ( mid 2025) as the property is only register with them as a 4 family? I know they are compensated per unit for the inspection, do you think it would be an issue if I just registered a fifth unit and made sure it met all the requirements?

[Andrew Syrios]

Quote from @Nicholas Haubner:

@Andrew Syrios

Thank you for your reply, I greatly appreciate you taking the time to read through and give me your advice. Do you know if this would be an issue when it comes time to having my 5 year DCA inspection in ( mid 2025) as the property is only register with them as a 4 family? I know they are compensated per unit for the inspection, do you think it would be an issue if I just registered a fifth unit and made sure it met all the requirements?

I'm in Kansas City so I can't say for sure but I would highly doubt they'd raise any alarm bells. Health and safety inspections don't seem to care much about zoning or permitting issues. But again, I can't say for sure if New Jersey is wildly different on this than KC. 

[Shawn Mcenteer]

5 units make a huge difference in NJ. There is a lot more state regulations and lending laws change when 5 units or great. If I were you keeping the property as 4 units and renting out bonus unit under the radar may be your best option especially if you plan to refi or do HELOC while occupying.

[Earl White]

@Nicholas Haubner Contact Montvale's tax assessor and building department to see it is currently classified. 

If it is a legal 4-family, you should have it converted to a 5-family. Building department can advise on specific next steps - municpal hearing and presentation of plans will be required in most cases. This would improve the property value and also allow you to lease out the 5th unit. This would be the ultimate goal if you are house hacking to lease all the units once you vacate. When you go to sell, Montvale requires a certificate of occupancy so this issue has to be resolved in advance of a sale.

Although I am not a lender, I assume you will not be approved for an owner-occupied mortgage on 5-units if it is a legal 4-unit without some type of mortgage fraud whether in reported rents, units, or another legal document or representation (very very large issue from a legal perspective with multiple arrests in the last year for anyone playing fast and loose).

As far as the DCA, I would recommend coordinating your work with the city with the DCA. When you go to sell the property, if you produce a certificate of inspection for the wrong number of units, buyer unless you are giving them a great deal and they will throw caution into the wind, would insist on the correct designations. That said, green card is not a legal requirement for closing so buyer could waive this - though I don't see why they would unless deal is great for them. I also believe you have an obligation to discloss if property is being used inconsistent with DCA record - even if attorney/buyer fails to pick-up on the issue.