Zone as 5 unit (commercial) or 4 unit (MF) for cashout refi?

[Jennifer T.]

Hi all,

I'm analyzing this deal in Philly that is a 5 unit home not legally zoned. It's a SFH that's been divided and rented out as separate units. I'm thinking of using a lawyer to apply for zoning/use variance but I'm not sure whether to keep it as a 5 unit house or combine 2 of the units, or convert basement into laundry + storage rental and make it 4 units.

Price-wise it's a really good deal. As a 5 unit commercial unit, if I multiply the income by the Gross Rent Multiplier (~8) then there is a ton of upfront equity. If it's a 4 unit multi family then it's hard to say as there are basically no comps. (If I take the difference of a triplex vs a duplex nearby and take it up to 5 units then it's still a great deal).

My biggest concern is what my exit plan would be. I want to get it zoned legally and put in seperate meters and do a cash-out refi. Will it be easier to do this as a commercial 5 unit or as a MFH? 

Other relevant info: I will be purchasing this under a LLC. I have great credit score. Very little recent income to show but enough asset to cover this purchase + reserves.

I also want to get a small mortgage (maybe about 30% of the total cost) to finance the purchase. Is it possible to do this even if I have little income, but the numbers make sense? If it helps there are tenants on lease that comes with the building. 

Your input is much appreciated!

[Rich O'Neill]

@Jennifer T. before you get too excited, check into the zoning issue heavily. It's not always as easy as it sounds to get a zoning change in the city. Going from SFH to 4-5 units is tough if the zoning doesn't already allow it. Talk to your zoning lawyer before you go too far down this road. You also need to consider the need for a sprinkler system. Depending on your SOW, the city may require one to be installed.

As for 4 vs. 5, as long as the layout isn't too choppy I would argue 5 is better. Might be a little more expensive to finance but it sounds like you have more equity that way and you have more units to spread risk. 

Good luck!