Pros & Cons of adding a studio to an existing 4-plex building

[Spencer Perron]

Hi all - I have a 4 unit building in St. Paul, Minnesota. I'm considering renovating part of the basement to add another unit, effectively converting it to a 5 unit building. Wondering if anyone has ever weighed the pros & cons of adding an additional unit to a 4-plex?

While this would improve the cashflow and cap rate for resale, I'm wondering if it would shrink my market of buyers, since they could no longer use conventional financing as it would no longer conform to a 2-4 unit building. On that note, I'm also wondering if I'd be violating anything in my current loan (30 yr, fixed rate conventional financing on 2-4 unit investment property). Appreciate any thoughts folks have on this. Thanks!   

[Tim Swierczek]

@Spencer Perron check the data. Determine what it would sell for on a comp-based approach as a 4 unit (they don't sell based on cap rates) and determine what it would sell for as a Cap rate 5 unit. Try hard to find 5-7 unit property cap rates. Buyers of 5-unit properties are different from 10+ unit buyers. This data should give you a better answer than we can give. Randy is correct on the insurance, check out those rates. and then make your decision.