'Great' Investment Ideas Sometimes Illegal

Every so often I'll receive an email from an assertive investor who has purchased a house and started running their own real estate investment business. Recently one such emailer received a letter from a county or city agency telling them to cease and desist their activity. The letter was directed to me for a sympathetic ear.

Below are some ideas that novice investors may think they can carry out, but need to be careful that they are not violating a local law or even fair housing.

Idea No. 1

Creating a multiple family housing unit out of a single-family house. When you see a house advertised with a nanny or in-law suite, be careful that the current homeowner hasn't just violated local building codes by installing a kitchen in the basement to allow the nanny complete independence from the family during off hours.

Installing a kitchen in many jurisdictions constitutes a separate living quarters and it may violate local occupancy restrictions. If your investment property is in a single-family dwelling zoned area, then it must be only for one family. Having space for another separate "family" or entity to live in may be illegal.

If the local housing inspectors find out (and they have their ways) you could end up having to yank out the kitchen just to ensure the house will remain a single family dwelling -- thus losing your ability to have two rental incomes from one property. Which brings us to …

Idea No. 2

Multiple renters in one house. Some investors have been able to increase the usual total dollar rental income by having several sets of renters in the same house. In college towns, for instance, the house may be rented out one room at a time instead of as one rental unit. If the local laws allow it and you're willing to have the threat of frat parties in your home, this is a pretty good way to increase your total rental income in a property.

While the going rent for the house in a college town may be only $1,200 per month for the whole house, if you could get $500 per month for each room instead, you might double or triple the going rental income for your investment.

The problem with this method is that you may be facing issues with local ordinances limiting your total rental income from the house. A type of rent control, this limitation has several purposes, depending which side of the legislation you stand. It could be used to discourage carving up a house for student rental, thus preserving the nature of a single family dwelling community. It also encourages investors to rent out to more stable renters than students, thus reducing problems with parking issues, neighborhood turnover, etc.

Idea No. 3

Renting to people just like me. Many people want to jump into the investment game but can't swallow the hard cold fact that they must rent their house out to anyone who can qualify to rent the property. The fear of renting to say, a nonwhite renter or a non-Christian or a non-heterosexual, just scares many investors. The investors says he doesn't believe they're bad people, he just doesn't want to handle the difference in lifestyle or culture that may invade their investment.

So they'll try to rent exclusively to people who attend their house of worship or to a certain age bracket or advertise only in limited media to ensure only the "right" people call them to rent. These are veiled attempts of housing discrimination no matter how you carve it up. If you want to invest, then buy in to the fact that housing is available to anyone who can afford it.

As you move forward in the investment game, be sure you understand and are willing to comply with local, state and federal laws regarding rental properties. It could make the difference of having a gain or loss in your investment.

Published: April 7, 2006