Buying a 4 unit, and adding a unit. First time house hacker.

[Travis Kumar]

I am currently looking to house hack a multi-unit property in MD, VA, PA. I just submitted to a few lenders recommended here, and have begun speaking with realtors. My question is, some properties I see have 4 units that are currently rented. They then also have space I can convert. Cash flow is very hard to find, but they look like opportunities to force equity and cash flow. Assuming i can get the permits, can i buy a 4 unit, rent all 4 units, and convert the basement to a live-able space for me? Does this then turn it into a 5 unit, or once i purchase, I am free to do this. If I should be thinking about this problem differently, I am open to all insight. I know there are other ways to make money, and cash flow isnt everything, but I think if I can convert an area and rent current units, I will be further ahead. Thanks in advance for any feedback.

[Travis Kumar]

Quote from @Andrew Postell:

@Travis Kumar thanks so much for posting this.  This is a really important question.  3 layers here. Let's take it one section at a time:

- If you get permits can you add a unit? - of course!  You want to buy this property with a traditional loan, then come out of pocket with your own money and get all the necessary approvals then you can absolutely execute.  

- SHOULD you add a unit? - Absolutely not.  If you formally add 1 unit to a 4 unit you will officially be converting your property into a commercial building.  This means, no refinancing, no selling, nothing.  You would be forcing yourself to keep the property forever or reducing your buying pool to a fraction when you go to sell.  You would be completing crushing any future resale engagement by doing this.

Now, having said this...I would imagine that local building codes would prevent you from changing the property from a 4 unit to a 5 unit.  I'm not sure about your jurisdiction but most cities have zoning laws against this (most, but not all).  So, once you started the process you would see that this may not even be possible.  Even if it is...I would high recommend against it.  Like the HIGHEST POSSIBLE RECOMMENDATION against it.  

And the final layer here....then how do I find properties that cashflow? - and the answer is...you don't.  Nothing cashflows now.  And to be frank...cashflow has really only existed in recent years.  That doesn't mean you shouldn't buy real estate...that just means that you need to analyze deals differently.  I wrote an entire post on this a few months back that you can read HERE.  I think that might help some with the perspective. 

Hope all of that makes sense.

 This is very helpful, thank you. Even though I wont be able to find cash flow, I assume part of my house hack strategy should be to use rents to eat into as much of the monthly payment as possible. I appreciate the insight.