Income Property—Risk and Reward
A Good Duplex Can Attract a Move-In Buyer
Now and then we come across a duplex that appeals to a buyer who wants to live in there. The unit may be owner occupied and this can be an influence. But the key attractions for a move-in buyer are:
- The property’s overall superior condition, especially the owner-occupied unit, as well as its spaciousness and noticeable level of comfort,
- Stable occupancy of the 2nd unit by a quality tenant,
- Support of the property’s carrying costs with the rent received.
A Good Income Property Also Attracts Investors
Good property condition can also attract investment buyers, especially when the property has been retrofitted with a new roof, furnace, windows, flooring and other expensive upgrades.
The investor is willing to accept a small annual return on investment because the property has been upgraded, reducing capital costs during ownership. They know that the quality of the building will produce a good capital gain when selling down the road.
Good income properties can be hard to find.
Under certain market conditions owners tend to keep rental properties for the income they generate. This too promotes buyer demand when a good one comes on the market.
All of the above create the potential for competing offers, maximizing the price for the seller.
What if one of the units is Illegal?
At times we come across single family homes that have an illegal rental unit. It’s also not unusual to encounter income properties that may have three units, with only two being legal. The unlawful units are often basement apartments and their illegality is disclosed. Yet some buyers take the risk and buy with the intention of renting the illegal unit. For the move-in buyer, subsidizing their living expenses is tempting. For the investor, the allure of a greater return on investment is appealing.
In these circumstances we have the buyer acknowledge that the property has an illegal apartment and that if he rents it, he does so at his own risk. They are advised to obtain legal advice and warned of the risks, such as,
- Receiving an order from the city to shut down the unit, usually complaint driven,
- Liability for costs to the tenant for terminating the tenancy ,
- A court order requiring the owner to dismantle the illegal unit.
Is it worth the risk? Some buyers think so.