In my last entry in this series, I talked about how to find the right neighborhood if you’re looking to buy a rental property. But there’s more to understanding an area than just seeing the neighborhood: invisible factors which could cost you big-time. Here’s my next tip.
3. Be aware of local rental regulations.
In many locales, rental properties are treated more like businesses than residences, and while 8×10 might constitute a proper bedroom in your personal home, it likely won’t be considered such for a rental property. In one local township where we presently own three properties, there are minimum ceiling heights (7′) and square footage (100 sq. ft.) for bedrooms, substantially different from what is required for residential homes. Occupancy is calculated by the township based on the square footage of the unit, so what the local realtor touts as a four bedroom home may only legitimately be a two bedroom home if rented.
Plus, in this township, fire blocking is required for all habitable spaces, which means that a finished basement may not be considered living space unless it was finished in accordance with the code. And basement bedrooms need to have windows of a certain size and opening radius to meet egress standards. The township’s code officials can actually require that if a basement was not finished to code, all finish work be either upgraded or torn out if the house is to be rented. If you have tenants already residing there, you are not spared – you can be forced to relocate the tenants at your own expense until these standards have been met and fined heavily if you refuse.
These types of township-enforced renovations can be a massive expense; in fact, I personally know someone who paid nearly $50,000 to get two basement bedrooms and a bathroom upgraded to meet this code. He’d bought the house with a “finished basement” which the previous owners had completed without a permit. Because rental properties are treated as businesses, he was not allowed to do the work himself but had to hire an architect to draw and seal the plans, then licensed plumbers, electricians, and building contractors to do the work.
Once bitten, twice shy, but it’s better to know exactly what you’ll be getting into before you buy. Ensuring that all additions or renovations were completed with permits and that all living space meets local rental property code can save a great deal of expense and heartache later.
Carbon Monoxide detectors and hardwired smoke detectors are an additional requirement, and special parking rules may be in effect as well, as I’ll discuss further in the next tip.
Rental properties need to be licensed (for a fee) and have a Certificate of Occupancy inspection (for yet another fee) annually, and the township requires that issues identified during this inspection be resolved and reinspected before tenants can move in. Therefore, it is a safe assumption that you’ll need to bring your property into accordance with local rental regulations prior to your earning any income from the property. Knowing the issues, you can budget accordingly.
Updated September 30, 2007 and originally published August 30, 2007.