Converting 7 Units into 8 Units

12 Replies

Hello everyone, so I found an off-market 7 Unit apartment building (seller financing) in the greater Lansing area in Michigan that is set up in a way that appears it can be converted into 8 units fairly easily. There are six 1bd units and one 2bd unit. The 2bd is 2 story unit that can be split in a way that would make the property look like 8 uniform units (Its a 2 story building with a 1 bedroom unit in each corner. I have never gone through the process of adding units to a property, but the property is in a really nice neighborhood. The subject property is the only eyesore on the street, it appears to need mostly just cosmetic interior/exterior upgrades, and it basically pencils out at 7 units-- with an 8-unit conversion it will allow a refinance of most or all of invested cash within 2 years. Does anyone have experience with similar projects? Would you invest in a project that depends on being able to split a unit into two? I have completed a bunch of SF flips and rented a couple of properties (SF and 4-unit properties) as well, however this current project is a new area for me. My vision for the property is clear (my strength), however I am lacking the commercial multifamily experience and deep pockets to jump in, so I'd love some help as I see good potential for this property. Any feedback is greatly appreciated.

-

My knee-jerk response is that if you are depending on the 8th unit to make the numbers work, you shouldn't do it. Of course, it depends a lot on your experience and ability to make the conversion cheaply and on budget. 

I added a unit to a building a few years ago. The most unexpected part was the process of getting an occupancy permit. I had to get mine from Allegheny County in PA. The process took a long time and effort getting all the application materials ready (architectural drawings and a bunch of other stuff). It was a hassle-- time consuming, a lot of fees and the outcome was pretty arbitrary. The outcome was decided by a bunch of people sitting around a table. If half of them hadn't had coffee, it would be denied. Then you would have to go through an appeal process. 

At minimum, you need 2 egresses and everything to code. More recently, I had a very small, but smoky fire in a 7-unit building. Fire marshal documented that it was the tenant's fault. Code enforcement made me get a centralized alarm system, so that is a possibility, as well. I try to keep my interactions with code enforcement to a minimum, but I would recommend starting there first.

Note: this was my personal experience adding a unit to a larger building. 

I agree with @Blaise P. , the deal should cash-flow as-is. What you do after is gravy. You will need to make sure your plans are in line with local ordinances. Talk to the city administrator or assistant about your plans. Next, make sure your contractor thinks it is feasible and find out the price to add a unit. Plumbing and electrical costs can sink your plan quickly. Finding a way to add a unit is a great way to make money in real estate. Great job for finding this one.

Promotion
PropStream
Web + D4D Mobile App for you & the team!
Trusted Provider of Real Estate Data, Marketing, Skip Tracing & A
#1 Real Estate Software for Investors, Agents & Brokers to find leads and close deals nationwide.
7 Day Free Trial!

Blaise, thank you for the thorough and detailed response. I have spoken with the city and at first they said I couldn't do it because, per code, you need a certain amount of sqft of lot space per unit. However, I looked up the code and found out that they were mistaken in their number- that their stated requirement didn't apply for this property, and that there is actually enough sqft per the actual requirement in the building code. That did make me nervous to deal with them though- and your experience tells me that it would probably end up being a hassle. The deal still pencils at about 20% IRR without the conversion, however with the risks associated and price, I'd prefer to do it only if I could navigate though the conversion, which would require partner(s). That would achieve an estimated 31% IRR. I can't afford to let my $ sit in the deal at this time, even if cash flowing which could happen without the conversation. So if this sounds like a tough sell to investors, I suppose I'll have to pass for now and revisit it later if available,

@Patrick Snyder

East Lansing- I agree that he's overpriced a bit. It has been listed multiple times and almost sold a few times. But the seller isn't very easy to work with. He's under no pressure to sell, but is willing to if someone pays his price. What kind of IRR and COC do you generally expect on small multifamily deals like this?

@Lethorn Irving II

Ohhh, east lansing...no wonder you have code issues with those units. And makes sense that the price is so high. He's gonna run into issues if his numbers are off since it won't qualify for a residential loan, unless he finds a cash buyer.

I don't really do rentals unless the numbers are too good to pass up, so clea.ry this doesn't fit. I was thinking I might have someone interested, but if the cap rate is too low he wouldn't touch it

@Patrick Snyder

I understand. I mostly just stick to flips as well. But I’m trying to add some apartments to build a portfolio over time. This is likely not a deal that will work. I also don’t think I’d put that much cash into a deal this small, so I’m certain you and your network wouldn’t want this one.

Promotion
Speed To Lead
Buy hot seller leads w/o subscription
Buy daily seller leads that are actually ready to sell
Finally there's a place where you can buy leads that asked for urgent help selling their house
Sign up for free