Residential or Commercial Mortgage? 4-Unit Convert to 5-Unit

[Robert Leonard]

Hi everyone,

Happy New Year! 

My team and I are working on a multifamily deal in New Hampshire. The property is currently a 4-unit (two 3-bedroom units and two 4-bedroom units) multifamily. However, there is ample space in the basement that can easily be converted into a 1-bedroom or studio apartment for a great value-add opportunity.

We've been talking to some lenders about financing options, what they'd require us to do, the city about zoning/permits, etc., but I wanted to reach out to the BP community and see if anyone has firsthand experience with this type of situation, and if so, what you did. 

Would you get a residential mortgage since it is currently only a 4-unit, and it is not guaranteed (yet) that the basement can be turned into a 5th unit? If the 5th unit does become possible a few months after closing with a residential mortgage, what did you do about financing at that point? Must the loan be refinanced to a commercial loan? Would you just start with a commercial mortgage?

Thanks for the input everyone!

Robert