While FHA loans are only for owner-occupied properties, you can buy a quadplex with one of these loans.
That’s because FHA considers a property “owner-occupied” when you live in one of the units. This applies even if you rent out the remaining units.
But the question arises: what if you find a quadplex that you plan to buy is fully occupied by tenants? Can you buy it and displace one of them?
Let’s dig into this complex issue.
Run your scenario by an FHA multifamily lender.
In this article:
- About displacing a tenant
- Check lease expirations
- Remove for owner-occupancy
- Cash for keys
- Check for tenant lease violations
- More tips
- FAQ
- Start your FHA multifamily purchase
Displacing a tenant when you buy multifamily with FHA
FHA rules state that you must move into one of the units of a duplex, triplex, or fourplex within 60 days of closing the transaction. There are no exceptions for fully-occupied properties.
Whether or not you can buy the home depends on being able to move one of the tenants out.
Most, if not all, states require the new owner of a rental building to honor terms of the existing leases. So you can’t just tear up leases and start over.
Dealing with tenants is tricky and fraught with legal issues as well as decency. Always check with a lawyer before trying to move a tenant. With that being said, here are ideas to purchase the property and move into one of the units.
Connect with an FHA multifamily lender here.
Check the lease expirations
With any luck, one of the leases may be up soon or already converted to month-to-month.
For instance, one tenant has a lease expiring on June 30. You make an offer in April, close in mid-May, then move in on July 1 after the lease expires.
Even better, the tenant is on a month-to-month lease where all that’s required is a 30-day notice to vacate.
While you may have an unhappy former tenant, either of these situations can be legal, above-board, and ethical.
Research state laws about tenant removal for owner-occupancy
Certain states will allow the property owner to remove a tenant if they want to live in the unit.
As an example, the state of Washington says an owner can evict a tenant if, “The landlord of a dwelling unit in good faith seeks possession so that the owner or his or her immediate family may occupy the unit as that person’s principal residence and no substantially equivalent unit is vacant…in the same building.” The owner must provide 90 days’ notice.
Oregon has a similar law. Under SB608, a qualifying reason for ending a tenancy is if the buyer purchasing the property intends to owner-occupy the premises. The termination notice cannot be sent until the offer to buy is signed and accepted, and you may have to help with moving costs.
These are two of the most tenant-friendly states in the country. So it’s reasonable to assume that other states permit landlord owner-occupancy. Check your state, city, and county regulations. This might be your best option.
Keep in mind that each state is different, and your city’s guideline might be more strict than the state’s.
It’s a good idea to check with an experienced property manager or lawyer before committing to a purchase of a fully-occupied quadplex or other multifamily property.
See if you qualify for an FHA multifamily loan.
Cash for keys
“Cash for keys” means paying a tenant to leave their lease early. It’s quite effective, but it can get expensive, especially if a tenant pays below-market rent.
Still, you might be able to agree with a tenant and it could be a win-win.
There’s no law against cash for keys; the tenant is agreeing to leave and forfeits their right to stay in exchange for payment.
Get everything in writing, including a paper trail that you paid the tenant. Build a water-tight case in the event the tenant comes back and says you unlawfully forced the move.
Related: FHA Self-Sufficiency Test For 3-4 Unit Home Eligibility
Ask the owner about lease violations
In many cases, an inexperienced or passive landlord ignores lease violations.
A tenant gets a dog when there’s a no-pet policy, they smoke in the home, they hang blankets over the windows.
In some circumstances, the current landlord has every right to evict a tenant immediately, per the contract signed by both parties with the tenant moved in.
If this is the case, have your real estate agent contact the listing agent to uncover such a situation. If one exists, make an offer requesting the current landlord evict the tenant.
This accomplishes two things at once: You clear a unit for owner-occupancy and avoid dealing with a bad tenant after you own the home.
To take it one step further, consider making it a condition of the sale to evict all tenants who are in violation of their lease. Then you can start fresh with your own high-quality tenants and avoid lost rent and property damage from existing ones.
Start your FHA multifamily loan by speaking with a lender.
Other tips when buying a fully occupied quadplex
Here are more tips when buying an occupied multifamily with FHA.
Make a plan to assess and move out bad tenants: For better or worse, you inherit a tenant “as-is”. As mentioned, you have to abide by current leases. Take note of lease expirations. If a tenant isn’t up to your standards, give them notice of non-renewal of the lease when you’re legally able to.
Make sure tenants know where to send rent: You don’t want your rent money going to the former owner. Inform the tenant in writing and even face to face.
Consider not telling the tenants you’re the owner: One landlord on BiggerPockets had an interesting idea: pose as a regular tenant who has been put in charge of collecting rent and managing the property when you move in. Then, you can avoid being the “bad guy” when you have to enforce terms of the lease.
Be firm: It’s easy to become too friendly with tenants, especially when they live across the wall from you. Hold your ground on payment and lease terms. If you let the tenant be a day late this month, soon it will be 5 days then 30 days. Be firm on lease rules.
Request a call from a lender about your FHA multifamily loan.
FAQ
Many states allow a new owner to remove a tenant if there are no vacant units in the same building. Check your state, county, and city regulations to be sure.
1. Check for current expiring leases; 2. Evict the tenant for owner-occupance; 3. Check if any current tenant is in violation of their lease; 4. Pay the tenant to leave using the “cash for keys” method.
No. You must move into the 2-4 unit home within 60 days of purchase. You must try to legally remove a tenant prior to that deadline.
You can buy a fully-occupied duplex, triplex, or quadplex with FHA
It’s certainly harder than buying a typical owner-occupied single-family home, but buying a 2-4 unit property with FHA comes with longer-lasting rewards.
Though it seems like a complex process, there is probably a way to remove a tenant so you can occupy one unit and meet FHA’s guidelines.
Get pre-approved, then start your FHA multifamily home purchase.
Start your FHA multifamily loan with a lender here.
