BRRRRing a 4-unit into a 5-unit

[Timothy Doenges]

Hello all!

I'm posting to MF Commercial forum because I'm interested to hear your thoughts on a deal I'm trying to analyze now.

I found a MLS listing for a 6 bed 5 bath home in my target market, listed for 160k and in really good shape. After looking into it, it seems that the home was converted into three units, and there is a second free-standing 2bed 1bath on the same lot behind the larger home. It almost seems like it was an old bed and breakfast with an owner house behind it. I believe that leaves the three main-home units as 2bed2ba, 1bed1ba, 1bed1ba. Looking into this as a straight rehab-rent situation, I would end up with four units, the 1bed1baths for around 600 each, the 2bed2ba for 750, and the free-standing 2bed1ba for 750. This comes out to 2700, and the deal looks pretty good at that mark, knowing the entry point of 160k. Of course, this is assuming I purchase at list price, but the home has been on the market for almost 2 1/2 months so I may be able to come in at 125-130k and negotiate from there.

However, the main home also has a large unfinished basement with an external entry. I was thinking about doing a BRRRR strategy on this property by renoing the basement into another 2bed1ba unit. Depending on electric/plumbing situation, I would look to put around 30-40k into setting up this fifth unit, but I'm thinking it might not be worth it since this would move me from 4 units to 5 units and I would no longer qualify for residential financing options. However, the benefit I see here is that the four units that are already mostly set up would almost eliminate the "holding cost" period of the HML so that I could build out the fifth unit while the four are covering HML expenses, and I think the fifth unit would more than cover the difference in cost between the pricier 20 year commercial loan versus the 30 year residential loan.

What are your thoughts? Would you reno the basement, get another unit pumping rent, and have a bit higher rate over 20 years for the commercial loan, or leave it at 4 units and take the deal as is? 

Fourplex Rental Stats:

Purchase price: 160k

Reno on 4 units: 10k, cosmetic

Loan stats: 20% down, 5% interest, 30 year mort

Rent: +2700/month, a conservative estimate for the area

Property Tax: -182/month

Power: -400/month

Water: -160/month

Trash: -50/month

Utility Billback: +300/month (I assume the utilities are not split, so I would eat power/water and bill-back a $75 flat rate utility fee per unit)

Vacancy: -270 (10%)

Prop Mgmt: -270 (10%)

Cap Ex: -135 (5%)

Property Insurance: -150

Growth assumptions: 2% / 2% / 2%

Sales expenses: 8%

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Cash flow: $396/month

Cap rate: 8.13

10% CoC return

Five-unit Stats:

Purchase price: 160k

Reno on 4 units: 10k, cosmetic

Build-out of fifth unit: 40k

ARV: 258k assuming 8 cap in my area

Loan 1 stats: HML for purchase and rehab, 12% interest, 2 points

Loan 2 stats: (193,500, assuming 75% LTV), 4.5% interest, 30 year mort

Rent: +3450/month, a conservative estimate for the area

Property Tax: -182/month

Power: -500/month

Water: -200/month

Trash: -50/month

Utility Billback: +375/month (I assume the utilities are not split, so I would eat power/water and bill-back a $75 flat rate utility fee per unit)

Vacancy: -345 (10%)

Prop Mgmt: -345 (10%)

Cap Ex: -172.50 (5%)

Property Insurance: -200/month

Growth assumptions: 2% / 2% / 2%

Sales expenses: 8%

_______________________________________________

Cash flow: $602.50/month

Cap rate: 11.9%

30.2% CoC return

Thanks for taking the time to check out my deal!

Tim