203k Loan to convert multifamily to 4plex

[Will Feetham]

Hi there! This is my first post on BP, I'm very excited to have discovered the podcasts and this forum recently. I've been listening to the back catalog and loving the amazing content. I'm selling a house on property in Oregon this spring and converting my other house in the area to an AirBNB, and planning to invest in mutli-family/commercial properties in the Midwest using the 203k loan program. To add value here, if you are looking to learn more about renovation loans this podcast is amazing: https://www.listennotes.com/po... The host can ramble a bit but there is a LOT of pure gold from decades of experience to be gleaned here. 

So, my question: 
I know you can "down convert" a multifamily property into a 4plex (or a single unit I suppose) - I also know you can have up tp 49% of the building as commercial space. This opens the possibility of income from a street level market or shops with 4 large apartments above it that were made by combining the previous 8 or 10 apartments. My question is: what is considered an apartment? Can some of the apartments in this scenario be converted to offices? What is the functional or legal distinction between an office that has a kitchen and bathroom and an apartment? Any insight appreciated, I'd love to hear about your experience doing one of these deals.

[Paul Welden]

@Will Feetham

If you're asking what can be done with the FHA 203k and you like reading, check out HUD SFH 4000.1.

To answer your questions based on the idea of doing a 203k ....

1. Down Convert - Yes you already know you can convert a property into a 1-4 unit residential property. I don't think you can get an FHA loan on multiple properties that have their own separate tax parcel property numbers. I think all the units need to be under 1 single tax parcel property number.
2. Commercial vs Residential - the highest and best use of the property can determine its use and the type of funding you can obtain on it. If the property is located in a 100% industrial/commercial sector, the h/b use is commercial ... not residential and the lender may not allow residential funding. Zoning by your local jurisdiction will also determine the use for the property. 
3. Commercial space - The 203k will allow you to buy mixed-use residential but the rehab money cannot be used to rehab the commercial space. The rehab money on a 203k can only be used for the residential space. 

Hope this helps and don't forget to review HUD SFH 4000.1 where it has a specific section for the FHA 203k.