Taking a 5 Unit to a 4 Unit

[Rick Albert]

Hello All,

I'm looking at a 5 unit to BRRRR. They are all 1 bed/1 bath. I'm thinking of downsizing it and combining two of the units to where it might at least a 2/2 but maybe a 3/2. I thinking of this for the following:

1. Better unit mix (I know the total rents would be lower but for resale)

2. Better financing (don't need to go the commercial loan route)

3. Don't need an LLC, which adds to the cost (for now since everything is in a trust and I have an umbrella policy for liability, eventually I will get an LLC where I can spread the costs out)

I wanted to get everyone's thoughts on this. The plan is buy cash and then refi after the work.

Thanks!

[Evan Polaski]

@Rick Albert, the general rule is more units are better.  That being said, this isn't a simple answer.

Pros:
Better financing terms for 4plex.  Likely, a slightly larger buyer pool.

Cons:
Less revenue each month.  Fewer doors to sell.

I would compare loss of revenue to savings in loan.  And I would look at what 5 bed vs 4 bed with one larger unit are trading for.  Since you will have what I assume is an atypical unit mix, you will likely need to look at what different unit size buildings are selling for.

I.e. 5x 1/1s are $250k/door.  4x 1/1s are $265k/door and 4x 2/2s are $325k/door, you could assume covering to a 4 unit will value the property at around 1.12mm (3x265 + 1x325)vs 5 one beds being worth 1.25mm.  Clearly these are just example numbers, but it is how I would look at it.

And then layer in if refinishing all the 1 beds is a $100k renovation, but converting into a 4 units is a $150k renovation, now you are spending more money to create less revenue AND have a property worth less at the end of the day.  The savings on the loan side would need to be substantial to make up for all of this.