All Forum Posts by: Account Closed

I have a question for all of you investment property veterans: 

We are currently under contract to buy our first investment property, a duplex built in 1895 with one unit on the 1st floor and one on the 2nd floor.  The sellers renovated the attic to add bedrooms and also added electric heat to that floor...all without permits.  We opted to purchase the property in our individual names and get lots of umbrella insurance, but I'm very concerned that if there's ever a fire, our insurance would refuse to cover it and we could be held personally liable.  We are past the inspection and financing contingency periods under our contract.  

In your experience, what's the risk here?  What are our options? 

I can think of a few:

1. Ask the sellers to pull permits on the work.  They will likely tell us no, but it's worth a shot.

2. Pull the permits ourselves after closing and cross our fingers that it won't be too costly to get it up to code... and that the inspector won't find any other "surprises."

3. Change course and purchase the property in an LLC (and pay the extra interest on our mortgage rates and perhaps delay the closing).

4. Terminate the contract.  We would lose our down payments, inspection fee, and the money already spent related to the mortgage process.  

Hi James, 

Your first step would be to set up the LLC. An attorney should be able to help you do this for a fixed fee, file the appropriate documents with the Secretary of the State, and get other basic organizing docs together for you. You may also need a Tax ID # for the business, just to keep things separate. Also, set up a separate bank account for the business. Then have your real estate attorney deed the the properties you already own to the LLC, and start running your rents and expenses through the LLC bank account. Rental checks should probably be made out to the LLC and expenses cut from the LLC bank account. Each year, your state will probably make you pay a small fee to keep the entity in place. You can (and should) get specific advice from your attorney in your state. They should be able to give you more detail. Best of luck!

Thanks so much for the advice, everyone. I got rental figures from the agent and the numbers are way off, so we're going to set it aside for now. Just to give you a sense, the office lease (which is not NNN) is $500 / month below market according to our dental accountant, and the residential unit is $600 below market based on comps from multi-families on the same street. Cash on cash return was projected to be -5% and monthly net income about -$450 per door. It's a great area, but I think I should run (not walk) away from this one and just keep learning and looking.

@Zach Scheer - Nice to hear from a tenant with first hand experience living above a dentist! I would imagine they're pretty good neighbors, and the dog walking is certainly a bonus.

@Andrew Johnson - Thanks for adding value to a newbie discussion all the way from California, and that's a really good tip about the parking spots.  It's important to see things through the prospective commercial tenant's eyes.

@David Wolber - You were right - it was zoned commercial and there was no NNN in place. I don't know any commercial agents, so I reached out to a residential agent who also seemed a bit lost. I'm glad it didn't get too far. Dentists in the area usually enter 20 year leases and invest significantly in the space. I doubt this doc, who is younger, would be going anywhere any time soon unless the practice were to hit hard times... but always good to consider the possibility. Given that his lease is $500 below market and is not NNN, he should be pretty happy.

I am analyzing the potential purchase of a Connecticut multi-family with a dental practice on the 1st floor and a residential tenant in the 3BR on the 2nd floor.  My husband is a dentist, so we feel comfortable having the practice as a tenant and we understand the market rates for that type of space.  I'm crunching numbers, but this seems to be a weird hybrid of residential and commercial with some unusual risks.  So, to all you experienced dealmakers out there:

- What is this? A multi-family or a commercial space?  

- What type of real estate agent should I be using?  

- Is it reasonable to expect that the dental office would have a triple net lease in place, or because there's a tenant upstairs would it be a regular lease?

- Is it reasonable to ask to see the lease agreements before getting under contract?

- Does anyone have experience with a dental / medical office tenant leaving you with a space that's only suitable for... dentists (or a very specific specialty)?   Do we need to budget for extra vacancy, or for changing the use of the space?  

Any advice or direction you can provide would be great.  

Thanks - Allison