Converting a 4-plex into an 8 unit, does this make $$ sense?

Question

This is the breakdown of the deal:

1. I own a 4-plex (2-1 story duplexes side by side) with a-lot of equity.

2. Get a Heloc on my property for a deposit to get construction financing

3. Apply for a construction loan to build a second story (can be built for 100k-150k....I am a GC)

4. Once done, apply for a new loan and pull out equity (or do a 1031 exchange after I sell the property)  from my project for my next investment. (8 units in my area sell for 475k -575k)

Your input is appreciated, thanks.

John Baughman · Answer

I like it.  If you cannot find 4 units that generate approx. $2140/month for the $100-150K it will take to double your space, and it won't eat your time up too badly.

@Dan Voykin will you lose revenue downstairs during construction?  I'd consider lost rents.

Brent Coombs · Answer

@Dan Voykin, what are they worth as-is? My first instinct would be to arrange them to be 2x 4-plexes (rather than 1x 8-plex), or is that already a given? ie. Are Titles already separated?

Reason: So as NOT to eliminate FHA-Loan Applicants/Buyers, who want/need to "house-hack".

Otherwise, the only thing Buyers will take into account is the local cap rate (to try to beat it). My 2c.

Chris Martin · Answer

Man, I thought you were a GC;) I'm surprised at your last post, since this project wasn't even feasible to begin with.

Albert Bui · Answer

It would also depend on how low cap rates have been compressed in maricopa county. Last I heard they were around 5.5-6.5% so He could value his NOI based on the prevailing cap rate and compare 4 plex comps to see which route would yield the most value from a market perspective.

Typically I've seen income/cap/method as a means to force/display value higher than the comparable method but, every area varies.

Brent Coombs · Answer

@Dan Voykin, I'm surprised that its current value as a 4-plex is significantly less than half of what it would be if it was already an 8-plex. Any particular reason for that?

But if you can turn it into an 8-plex for 25% less than it would cost to buy another 4-plex, why not?

Dan Voykin · Answer

UPDATE......

I had an in-depth with City of Phoenix Planning and Zoning dept. Yesterday.  My lot size and setbacks do not allow me to build 4 more units :(  Getting the property re-zoned does not make financial sense either, so back to the drawing board and on to my next play.

Thank you to everyone for your valued input....such great ideas and knowledge on Bigger Pockets!

Chris Martin · Answer

The bottom line is the numbers work. Regarding "...build a second story (can be built for 100k-150k....I am a GC)" why do you have such a wide range of cost on this project? I guess the numbers are good enough either way, but you also need to (as pointed out by @Thomas S.) account for the opportunity cost. The $100k-150k doesn't include, I assume, your time and labor. That's why I'm a little surprised you don't have numbers down to 4 significant figures (e.g. $126,300) with and without opportunity costs, lost rents, etc.

Laura Tokgozoglu · Answer

Hi little brother! I don't have any advice as this is not my area of knowledge, but I did want to say hello and good luck with whatever you decide!

Christpher Schuebel · Answer

Are you including a Sprinkler system into our construction cost.  Any addition to an existing structure with more than 2 dwelling units will most likely require a fire suppresion/sprinkler system.  an additional water lines and meter may need to be provided for this system depending on your local codes.

Brent Coombs · Answer

Aah, but will they GET $475k? My guess is that if yours is (only) worth $200k, the MARKET value of the 8-plexes you mentioned might be (only) ~$400k? And if you could turn yours into an 8-plex for just an additional $150k (including lost revenue while building), then maybe for-sale 8-plexes would be worth an offer of just $350k? You could certainly justify such an offer to their Agent, right?

Hint: What have 8-plexes ACTUALLY sold for there? For that matter, proportionally, what about for more/less units? If your numbers are wrong, so might be your justification to build? Cheers...

Converting a 4-plex into an 8 unit, does this make $$ sense?

Most Popular Reply