Taking a six plex to an eight plex

10 Replies

What says the group? I am about to close on a 6 plex. This is my first multi family. It's a great cap rate, good income, there's a maintenance guy already in place that wants to accept work, so overall, I feel like it's a great first multi family for me. 

Downstairs, there are two huge areas that are not being utilized well, IMO. One is a huge laundry room with only one washer and one dryer. The other is storage, that the last landlord is allowing people to use for free. I think there's great opportunity to turn those areas into two extra units, making the 6 plex into 8. There's another storage unit not being used that I could then put the laundry in.

Basically, I just wanted to walk through my plan and see what I'm missing/not considering, etc to make this 6 plex into 8. I would appreciate any feedback from those who have done this before.

My plan is to get at least 3 bids from contractors. Ask them what it would cost to turn this space into something rentable. Will probably only fit a one bedroom (or studio) and each of them need windows cut out in the building. Will a contractor recommend a layout for the space?

I also will work on getting a building permit (right?) and plan to apply for an exemption on the parking rules or add another parking spot if necessary.

For financing: it sounds like my options would be to pay cash for the reno, find private money, or go to my bank that financed the loan to start with? Any suggestions here?

Assuming all goes well, I've calculated that it will add about $1200/mo in extra cash flow. From there, do I sell as an 8 plex? Refinance to get the cash out? Or just enjoy the extra income? My long term goal is to move to larger multi families, so i see this as an opportunity to improve the building, sell, and 1031 exchange to something larger.

Any advice, feedback on any part of this is welcomed and appreciated!!

Code compliance is key. Find out first what it would take to do this. We haven't done a conversion, but we do have an 8-plex.  Is the building on one tax lot? Is the downstairs area below grade (basement) or above grade? Every sleeping room will need to have two forms of egress. Consider where your HVAC and ventilation /exhaust fans will go (for bath and kitchen).  Consider the noise factor between the ceiling of one unit and the floor of the one above. As you increase the density the other tenants will experience a loss... a loss of parking, a loss of storage, and more neighbors sharing common spaces, so there may be some push back there.

@Sara Peak I have not done any conversions, but I have taken, not one but 3x4plex's upgraded all units and increased rents between 85-100%, from $500 to $1000 per unit. I must admit I had the finance in place. Just another option you might consider in place of a conversion.
Also, you must look at the comps of both 6 and 8 units in your area before you start your conversion. Will you be able to get your money out. For example if you bought for 100K added 45K for conversion and then you find out the last 8 unit building that sold in your area was 120K. I know this is a oversimplification, but keep your eye on it.

Congratulations!@Sara Peak Way to follow your dreams. Great luck to you! 

I agree with others that you must look into codes: your livable area in relation to lot size, units allowed on lot per zoning, parking per unit, etc. You can go to the building department or look online. There is a decent chance you can’t do this for one reason or another.
Assuming you can do it: no, a contractor won’t usually do the layout and they are just looking for you to say I want x, x, x, done so they can tell you the cost. Checkout the magicplan app for your iPad. You can digitize the room and add in anything you want, windows, doors, walls. It will generate plans for your contractor and maybe enough for the building department in some areas.
Since the building is commercial and valued on NOI you can easily calculate the value of doing this. If you can get 700/mo per new unit added and you have 45% expenses (so keep 55% of the income) and an 8 cap (fill in with whatever values are in your market) then your value addition for doing this is 700*2*12=16,800*.55/.08=115,500. Can you do it for 80% of that cost? Probably! Talk with your commercial lender about your updates and your value add and see if they can change your note to account for this value add (prob will require commercial apprasil). They may want you to pay upfront for this and then they will cashout and to the note. If your goal is to trade up anyway you could skip this and just sell the building after a year or two to get something larger.

Changing 6-plex to a 7 right now.  I bought it a little over a year ago and spoke with a contractor about it and gave up on the deal because he told me it was going to be almost impossible to get to the sewer.  About 6 months later I figured out he was wrong.  Now I am getting through the county nonsense etc.  A couple of bids are important especially if you run into something tricky.  I just called the plumber myself and he told it wasn’t a big deal.  I am glad I didn’t give up after the first guy.

I had considered this with an attic space but also considered adding the space to existing units (additional bedrooms). The later wouldn't bring in as much but would cost less. One thing that stops me is what amount of renovation that triggers upgrades in the building. I would likely need to add sprinklers to meet fire requirements. Not sure if you would have this issue.

@Sara Peak I get lots of 'great ideas' on how to improve the value of properties. Like the time I tried rehabbing a laundry room at a small apartment complex. I spent $10k upgrading the electric and fixing it up and then we found structural termite damage and then it flooded...

Then there was the time I was going to split the water meters on a 4-plex and the plumber told me that not only would the city charge $1500/unit to split it but the plumbing in all of the units would have to be completely redone, drywall repairs, painting etc.

I have had some ideas like this work out but it's kind of an 80/20 rule where 80% do not pan out. Ask yourself why one of the previous owners did not do that? 

I hope I'm not being too negative and don't want to discourage you but just do me a favor and make sure you are not counting on that to make the deal work. If it does then great the property will perform even better.

For practical ideas, absolutely go to the building inspection/planning department and ask them about it right away. They may settle the discussion right there. But even if they can't tell you a reason why not, ask for a copy of the local building and zoning codes and you need to check a lot of things, how many units per acre is it zoned for and do you qualify? Are there enough exits? Apartments here have to have a front and back door. Can your sewer or septic handle the added load? Same for HVAC if a common unit is involved. Can the electrical service handle the additional load? How about the water supply? Adequate parking you brought up already.

One last suggestion. Find a really good, experienced local architect that does residential renovations and ask them to pay them for an hour of their time to talk it over with you. A couple hundred dollars to them could easily save you 10s of thousands. 

I just read back over your post and allow me to add one other piece of advice. The existing 'maintenance guy who wants to accept work'. He may be great but just be careful with that especially if you don't have experience yourself with handling maintenance items.

A property that small should not have a dedicated maintenance guy associated with it. Sometimes I see or hear about a small property like that with a maintenance guy handling things for an out of state or disinterested owner and generally they are overcharging for services.

Again, I could be completely wrong and he could be an invaluable handy man that will help you on many properties in the future. Just again do me a favor and make sure you are double checking any work he may be doing for you with the tenants and with other contractors. 

@Sara Peak

It could be a great Idea. We have a 16 with half a full basement unused so I've been thinking the same. 

The thing is.. How easily you could convert exsiting systems (plumbing,hvac,elec) to accomadate extra units?? It could be really easy or you could be retro fitting existing and be really expensive??? You most likely would need an architect to do your drawings.

Do it right!!!  Nothing I hate more walking into a cobbled up multi with converted units.. These pigs do no attract good tenants and are rarely a good long term investment.

Thank you all! I appreciate everyone that was able to give suggestions, comments and concerns. lots to consider and think about. Thanks, group!

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