Purchasing a MFH in which all units are occupied?

[James Hunt]

Hey BiggerPockets,

I'm currently on the market for my first multi-family property in San Diego, California. I've recently seen a few properties for sale in which all units are occupied by tenants which prompted a few questions about the prospect of inheriting tenants. 

In the case that tenants in all units have just re-signed 1-year leases, can one not use an FHA loan to purchase the property? Would one have to potentially negotiate a renter out of their lease agreement?

Can one place an offer contingent on the seller selling the property vacant? 

How does inheriting a tenant's lease mid-term work?

What strategies have any of you used when purchasing occupied units that are currently rented far below market rates? In San Diego I believe rents can only be raised by 10% per year (or 5% + local rate of inflation, whichever is lower)

The idea of evicting a long-time tenant is awful, but I realize being a landlord involves difficult decisions and the real estate business is a business.

Thank you for your thoughts!

[Nick Maugeri]

Quote from @James Hunt:

Hey BiggerPockets,

I'm currently on the market for my first multi-family property in San Diego, California. I've recently seen a few properties for sale in which all units are occupied by tenants which prompted a few questions about the prospect of inheriting tenants. 

In the case that tenants in all units have just re-signed 1-year leases, can one not use an FHA loan to purchase the property? Would one have to potentially negotiate a renter out of their lease agreement?

Can one place an offer contingent on the seller selling the property vacant? 

How does inheriting a tenant's lease mid-term work?

What strategies have any of you used when purchasing occupied units that are currently rented far below market rates? In San Diego I believe rents can only be raised by 10% per year (or 5% + local rate of inflation, whichever is lower)

The idea of evicting a long-time tenant is awful, but I realize being a landlord involves difficult decisions and the real estate business is a business.

Thank you for your thoughts!

If you are considering MFH in San Diego, hopefully (1) you are working with an astute agent who has or can address these issues. 

FHA - yes you can purchase 2-4 and one tenant needs to vacate for you to occupy.

Everything is negotiable, you can place an offer contingent on the seller delivering the property vacant and you're (1) unlikely to get the offer accepted and (2) not going to find someone who will do that. If you back out of the deal post eviction then the seller is stuck with placing tenants. It's important in RE to view both sides of the transaction's perspective.  

Far below market rents in CA with the rent cap and rate adjustment - you're spot on. The way to get around it is with structural modification of units that displaces the tenants or if they don't pay rent. 

[Jon Schwartz]

@James Hunt, work with a realtor who understand San Diego's local rent control. Does San Diego have local rent control? If not, then it's just the statewide rent control you have to deal with.

Good news! Statewide rent control allows you to evict a tenant if you're the owner and want to move into a unit. If you're getting any kind of owner-occupant loan, FHA or conventional, you'll need to send the letter the notice of eviction as proof that you'll be moving in.

But again: use BP to find an agent who's done this already.

Good luck!

Best,

Jon

[Dan Heuschele]

Quote from @Jon Schwartz:

@James Hunt, work with a realtor who understand San Diego's local rent control. Does San Diego have local rent control? If not, then it's just the statewide rent control you have to deal with.

Good news! Statewide rent control allows you to evict a tenant if you're the owner and want to move into a unit. If you're getting any kind of owner-occupant loan, FHA or conventional, you'll need to send the letter the notice of eviction as proof that you'll be moving in.

But again: use BP to find an agent who's done this already.

Good luck!

Best,

Jon

 You cannot break a lease in order to move in.  OP will need to buy out a tenant or wait the year to when the leases expire if they want to move into a unit. 

San Diego city has a rent control more stringent than the statewide AB1482.   Other cities and the county is greater San Diego area do not have their own rent control.  

[Kenneth Donaghy]

@James Hunt

To answer you questions, 

I think the FHA rules are you have to move in within 60 days of upon purchasing, you or the seller will need to negotiate a cash-4-keys agreement.

Yes, you can write an offer contingent of selling vacant. Depending on the seller's situation and desire they may/may not be willing to negotiate this. Most likely not, yet I have had success in the past. I have client who have purchased vacant, and tenant occupied multifamily. When tenant occupied, my clients have had success negotiating with tenants.