Need advice on converting 6 unit to 4 units

[Sandy Sandy]

Hi,

I have a 6 unit property and it’s zoned commercial due to which interest rate, taxes and other utilities are pretty high. Would it be beneficial if I make 6 units to 4 units? What are the pros and cons? 

[Kevin Sobilo]

@Sandy Sandy, a few thoughts:

1. To take your thinking to an EXTREME! What if you tear the building down to bare land? That would lower the taxes and eliminate utility bills entirely! 

2. The point of #1 is that an investor doesn't focus unduly on the expenses only. There are always expenses to be paid when making money. 

3. Its hard to give specific guidance but yes there are scenarios where I would convert 6 units to 4 units. I'll give one example:

The property is in need of a FULL rehab. It is not in rent-able condition at all. The units are small and not set up to keep a quality tenant over the long term. The units/building as configured lack amenities a quality tenant expects like laundry facilities. 

In a case, like that since I need to do significant rehab work anyways, I might make 4 larger units that will be more desirable to good tenants. Add on-site or in-unit laundry facilities. I might also separate out utilities to get those bills out of the landlords name as much as possible. 

Yes, my rent roll might decrease a little, BUT I would feel I MORE than make up for it with lower vacancy/turnover, better quality tenants, and lower expenses. 

4. Do case studies. Get an idea of what you would convert the units to and study what the result would give you in financial terms and then also figure out the cost of making those changes. With a case study you can lay out a few options and compare them apples to apples and then the pros and cons present themselves to see.