All local laws apply but i would think you are illegally operating a multifamily home that has not been permitted.

I wanted to apply for home equity loan for investment property but I am not sure when its more beneficial to do it.

That may translate to your start applying to real estate oriented jobs while you still work your day job… or more sweat equity on your days off to learn more and more.  

When applying for a mortgage loan...

Thank you.Learn, Apply, Produce!

I have seen cases where the rule is not applied, but this would be a risk.  

I recall seeing a recent post from someone else in a situation like this, he even paid the collection but score is still too low to apply for a mortgage.Certainly speak to an attorney to double check your options.

@Aqsa MugheesRecommend you first figure out the property Class you want to invest in, THEN figure out the corresponding location to invest in.If you apply Class A assumptions to a Class B or C purchase, your expectations won’t be met and it may be a financial disaster.So, when investing in areas they don’t really know, investors should research the different property Class submarkets.

Different rules apply to brokers and property management companies, but the state is much more Laissez-faire with unlicensed homeowner landlords.

For some reason, if the current owner applies for the rental license, they don't get flagged while the new buyer has a higher likely hood of running into trouble.