Consolidating separate 4-plex properties into a single 8-plex?

7 Replies

Looking to buy a commercial MFR with 5 or more units. I found 2 4-plexes in my market that share a parking lot but are owned and listed separately. Can I acquire both with a commercial loan and convert them to an 8-plex? Really wanting to drive up the valuation by increasing NOI and I am under the impression that it is necessary to have at least 5-units to do so.

I appreciate any feedback or input you may have.

Justin,

I am of the opinion that if you purchase them then you should do so on a conforming multifamily product and have 2 separate loans for each. It will be a 30 year product, save on fees, lower down payment, etc.

What folks are talking about is when the units go up it is easier to do the value add. You could still try to externalize all your costs through RUBs or any other way to eliminate all your out of pocket. Hope that helps.

Kai

Kai,

Thank you for the response. I agree that the debt service is much better and I understand using rubs to decrease expenses. However, I am really after the forced appreciation driven by the increase in NOI. I am trying to understand if having 2 4-plexes (total of 8 units) would be evaluated by the bank based on NOI or as 2 appraisals of the 4-plex.

If the valuation is the same, then I 100% agree that 2 residential loans would be the way to go. Hoping someone can help me better understand valuation of portfolios like this.

Thanks again!

This will depend on your market. What are comparable 4 unit properties worth in your area? What is the cap rate for 5+ units in your area? A commerical broker can help you determine this. Find out what a 8 unit building is worth and see if its more than the sum of two separate 4 unit buildings

@Justin Brown  

I would rather have the flexibility to split and sell, refinance, and get more favorable financing. I tend to think that 2 4 plex's will sell for more than 1 eight plex. I would really have to run the numbers with Cap, NOI, and comps. I don't even know then if I could get to a good conclusion.

I just get the feeling that if there is more buyers for a property than the price will increase. VA and FHA can get into a property for 0 or 3.5% for 2-4... I look at what people are paying for a 4 unit right now and think that number would not be doubled for an 8 unit, it would probably be lower.

If this is a long term buy. You could always finance as 2 loans and then when you go to sell advertise it as both an 8 plex and 2 4-plex's. That would give you the greatest exposure. 

At the end of the day I don't think you are adding any "value" to the property strictly based off of "loan type". Most folks buying or banks looking to do a refinance will not care. Buy it as 2 loans then when you go for a refinance, see what the commercial lender will do and what a conventional lender can do.

As to values , it can be pretty important when refinancing. 

For example, in my area there's a big problem with getting good appraisals for duplexes. Nobody sells their duplexes, because they're cash cows. The only ones on the market in the past year were major fixer-uppers, selling for 30 or 40K. 

I bought a fixed-up duplex from my partner a few months ago and we had several appraisers give up, because they couldn't get comps and weren't experienced enough to do it a different way. We finally got one that used the income approach to get to the 140K that the purchase price was (and for those who want to say that I should have just pushed the price down - this was a fair price and I own the 5 duplexes adjacent to it, so it's a good buy for me). 

So, getting 900-1000 per side in rent, if the income approach would have been used (as can be for a commercial loan for more than 4 units), the values for these units would be higher. 

So, I totally get what the OP is going for.