I’ve recently been look at a property right down the street from me.
This property is a 6 unit building, with 4 units currently rented and 2 units that’s currently need rehabbed.
The building is a fantastic deal. 6 units for $125k, each one rents for about $600-$700 a month.
Is this deal so good, because in order to rehab the last 2 units I would need to install fire escapes and sprinkler systems?
What’s are the rules and regulations from converting a 4 unit into a 6.
What would you do?
Thanks for the help!
@James Baker how long has it been on the market? You or your agent needs to call the Zoning folks and ask how the building is zoned, how the area is zoned and what permits were pulled.etc. lots of research. It is possible the building works as a six with four occupied. Do the math and find out what is legal and what you need to do to bring it to code if that is even possible. rules and regs change depending on location.
@James Baker - You should call your local code enforcement department and explain to them the age of the building and the setup and ask them what requirements there are if you fix up the 2 empty units
@James Baker if you are dealing with the seller or seller's agent you might consider a buyer's agent depending on your level of experience.
@James Baker what you should take into account although 4 units are rented, what shape are those units in? Do they need repair - major or minor? This has to be taken into account. I'm assuming you checked rent rolls, so what are the expenses per door for the 4 units?
Is this deal so good, because in order to rehab the last 2 units I would need to install fire escapes and sprinkler systems? (You may also need plans drawn, so permits can be pulled for the work being performed. This must be taken into account.)
What’s are the rules and regulations from converting a 4 unit into a 6.(I'm a little confused. Originally you said in your beginning statement "This property is a 6 unit building" Is this property not a true 6 unit?)
What would you do? (Take all of these good points into consideration and many other individuals that will weigh in on this post. There are quite a few unknowns here to really determine how good of a smokin' deal it is. Good luck )
@Tj Hines the 4 units rent for $600 each right now.
It is a true 6 unit. The last two units are just in such bad shape that they cannot be rented. They are on the 3rd floor.
Thanks! Building has been on the market for 6 days
@James Baker as everyone else said, look into zoning. But regardless, it sounds like a great cash flow opportunity if you provide more info. It seems like you would potentially have to factor in a sprinkler system either way and from there have a couple of options:
1. Rehab the other units (what’s the estimated cost?) and rent out all 6, bringing in ~$3,600 rent
2. If you don’t have or don’t want to spend the cash, leave the other 2 units vacant and still collect ~$2,400 rent
3. Figure out what the cap rate is and determine if you can refinance to pull cash out. Keep in mind that appraisal will be based off of NOI with 6 units rather than comparable sales, so having 2 vacant units will impact that
Either way, I have a hard time seeing how you’d be unable to pull out enough to cover the cost of sprinklers and potentially rehab with a refinance at that amount of income.
Finally, make sure you take into consideration the nuances of a commercial loan since it’s 6 units. Rates are a little higher, amortization period is shorter (usually no more than 20 years) which means higher monthly payment, and it’s typically either a balloon or variable rate after 3-5 years. Be sure you understand that and take it into account
@James Baker Why do you assume you need to add fire escape and sprinklers? If it was previously occupied you are probably grandfathered depending on the level of upgrade you are planning. Unless you are expanding the sq Footage and are just doing things like paint, flooring, cabinets and basic repair you generally don’t need to upgrade to those systems -unless it is your choice. There are fire scape ladders you can include in a unit if you choose for under $100 (Lowe’s, Amazon).