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?
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.
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.
One angle worth thinking about here is the financing side. At 6 units you're stuck in commercial loan territory — shorter amortization (usually 20-25 years), balloon payments every 5-7 years, and rates that are typically 1-2% higher than conventional. Drop to 4 units and you can potentially refi into a conventional 30-year fixed at much better terms. That alone can shift your cash flow by a few hundred bucks a month depending on the loan amount.
The flip side though is you're losing two rent-paying units permanently. So you'd want to run the numbers both ways — what's your total gross rent at 6 units vs 4 larger units with higher per-unit rents, then factor in the debt service difference from better financing. In my experience the financing savings often surprise people but they don't always offset the lost rental income. What are the current rents on the individual units? That'd help figure out if the math actually works in your favor.
High level first glance, I’d say it is generally a bad decision to reduce the number of units.
If the 6 units now rent for $1000 a month, the units in new 4plex would need to rent for $1500 to achieve the same gross income.
And while you get better financing on 4 units then 6, remember the 25 year amortization on the 6 just pays principal down quickly increasing your equity and net worth. Yes cans flow is less but it’s not like those dollars are lost - they are simply stored as equity in your property.
Each case is different but my initial assessment after 47 years as a RE investor is keep the 6 as it is.