This may work in the long run because it gets the Seller their asking price and gives you the extra money you need to do the work, but you don't have to pay the Seller for years to come.

The taxes are exactly the same and if you compared the two side by side, there would be absolutely no difference between a sole proprietor and an LLC except that lines C and D are filled in on the schedule C with the entity's name and EIN and the LLC will have an additional expense each year of "Business Licenses and Annual Filing Fees"There is nothing wrong with a disregarded entity and there's no reason to go to extra lengths to have it file its own tax return, but if you're bound and determined, here are two options.1.  

It'd be great to see what li dog ROI the extra 3rd story yields.

And 1 extra to hold security deposits.

The buyer would have to pay the extra 10k.

I'm an educator from NYC with a family in tow looking to produce a little extra income (alright, ...maybe a lot extra) during my off time, and I've been browsing around the forums and blogs.

And the city may allow you to split it "in house" without having to take it through the full subdivision planning rigamarole since it will only be 1 extra lot.  

Banks generally will take 70% of gross rents and compare that to his loan payment.. so if 70% of gross rents was $1050, and his payment was only $500, it counts as extra income on the debt ratio...

Plus, you get a little extra cash out of it after the REFI that you can use to expand the portfolio in a slower fashion or enjoy with your family for now.

Even if deferred payments are an option, make sure to have extra funds to cover any unexpected costs or delays in the project that result in more/longer holding costs (deferred payment may not covered, as mentioned earlier).