Hard money on 4 unit property?

[Grant H.]

I'm looking for some advice regarding the possible purchase of a permitted 4 unit property, but it needs an entire renovation. During the renovation, the plan is to add a 5th unit in the attic. How will this effect the loan? Does this change the requirements to that of a commercial loan since it would eventually be a 5+ property or can i still qualify for a conventional? I've also been told that I may not be able to get a conventional loan because the house is currently unhabitable. Is this true? If so, is my only option to get a hard money loan? I would need the loan for the property itself and also a construction loan, which I have read that you can often bundle. Any advice or direction would be great.

The goal is to flip after the house is renovated and filled with tenants.

[Jaysen Medhurst]

@Grant H., you've got a lot wrapped up in this. Point by point:

1. Before "planning" to add a 5th unit, you need to confirm with the town that you are properly zoned and that the town will let you do it.
2. Going to a 5+ unit property makes you commercial. The town may insist that you upgrade the entire building to meet commercial building codes. E.g. sprinklers throughout the entire building. That alone could be $25-35k easily.
3. You have to run your ARV as a commercial property. They are valued differently than residential properties. Don't assume that adding another unit will increase the value commensurately.
4. You could do a construction-to-permanent loan. Since you're making it a commercial property, you'll need a commercial loan. Expect to bring 25% of the total cost (purchase + construction) to the table.
5. HML may be a good option here as most of those lenders specialize in flips and BRRRR-type projects. In many cases you only need to bring 15-20% of the purchase price and you can finance the rest. Rates are relatively high, but that's the trade off.
6. Flipping may not be as easy as you think once you add in a 5th unit. Owner-occupiers will no longer qualify to buy it, so at that point you're only market is other investors. Have you considered making this a true BRRRR and holding it for the long-term cash flow?