Tun a 5-Plex into a 4-Plex?

[Scott Armstrong]

Hey all, rookie getting started here!  Hoping to buy my first small multifamily by the end of the year, and need a little advice from more experienced investors.

I'm looking at a 5-Plex consisting of five 1 bed/1 bath apartments.  Seller is asking $175k, and current rents are $2,350/mo.

It's my understanding that anything over a 4-unit will be appraised as a commercial property, using NOI and Cap Rates, while properties with 4 units or less are appraised based on comparable housing, including SFRs. I'll admit that I'm not well-versed in how to analyze comps for anything over 4-units (although I've begun reading up on it).

5-bed SFRs and 4-bed duplexes in the area have sold for around $230k, leading me to believe that if I combined two of the units into 1, making it a 4-Plex, it might allow for some easy equity, as well as allowing me to refinance into a low-interest conventional loan.  Obviously I'd have to factor in construction costs, but I'm more curious about any ramifications of turning a 5-unit property into a 4-unit property that I might not be aware of.

Is my thinking sound here?