Converting 4-Plex to 5-Plex?

[Joe Ferguson]

Hey BP, 

I am looking at a 4-unit property that has 3 smaller units about 500 sqft renting for $650 and one massive unit about 1700 sqft renting for $1200. I do not like that one unit is almost 40% of the income which guarantees me out of pocket using an FHA loan. Also, $1200 is high for the area and will be harder to place tenants.

The large unit has two baths and 3 beds. It would be really easy to close off a doorway and add a kitchen making a 2/1 and 1/1 about 600sqft each renting for $650-700 each.

This is what I would be hoping to achieve:

- Relieve the pressure of keeping that unit rented and reducing impact of a vacancy

- Being dependent on the market, I do not expect much appreciation. At 5 units it is considered commercial and I can force appreciation through improvements, rent increases, reduced expenses, etc. 

Has anyone done something similar? I would love to hear the pros and cons of pushing a property from residential to commercial.

P.S. FHA is only good for 4 units. Would I be forced to refinance after the conversion or just keep it on the down low until I'm ready to refi?

Thanks in advance.