Commercial lending on 4-plex w/ two ADU units (6 units total)

[Kevin Z.]

Hi,

Sorry if this has been covered before. The only thread I could find on this topic was pretty old ...

I have a 4 unit building in Los Angeles that I am considering adding two additional ADU units. I have heard mixed answers to the question of if I build these two accessory units, will I have to use commercial finance going forward, and or will this limit my buyer pool to those with commercial lending?

The bulk of the information I have seen is that we are in a sort of grey area, especially because the ADU laws around apartment buildings are fairly new in Los Angeles. Some have said that because these are accessory units not physically connected to the existing building that I can (i) maintain my current residential financing and (ii) I should not need to use commercial financing should I wish to refi/ a future buyer should be able to get a conventional mortgage. Others have advised that no, it will be considered larger than 4 units and thus require commercial underwriting/ loan.

Does anyone have any practical experience with this?  I will certainly consult with my mortgage broker when I am closer to pulling the trigger but am also hoping for a wider pool of experience.

Thank you very much!

[Jonathan Taylor]

@Kevin Z. for starters, this entire topic is grey area so you are not wrong. What I have seen in my experience is the choke point will be what the property is ZONED for. Meaning if you are zoned for four units, you will be in the residential 1-4 category. In LA you can legally build 1-2 ADUs/JADUs (property dependent) for extra cash flow but when it comes time to refi, at the writing of this post you will most likely not be able to use the rents received from the ADUs. You're nodding you head right now how dumb that sounds huh? If you have 6 units that are permitted by the city, then why can't you use the income? Zoning. On paper, why would a 4 unit have 6 rents received? Appraisers only appraise based on Zoning**** I want to be clear though, this is a maybe, sometimes, probably situation as we MAY change and adapt. There MAY be lenders willing to lend on these types of properties in the future, but what I am seeing is MOST lenders do not lend on properties that depend on rental income from ADUs at this time. 

So If you can cash flow on the 4 conforming units, then that would be your strongest foot forward but until then, build ADUs only for the cash flow and not for the appreciation.