Decision factor - 4 units or 5 units on renovation

[Steve Fernandez]

I’m about to make an offer on a latge home with a large detached garage.  Meeting with an architect, and the question came up on the renovation. I have the ability to convert the property to either four or five units.  I will buy the property all cash, but will refinance after renovations completed and tenants in place.  I seem to remember reading somewhere on BP, that 4 units is the maximum for traditional mortgage financing.  At 5 units and above, it’s treated differently.  

Any guidance on this topic is greatly appreciated!

Steve

[Stuart Udis]

I wouldn't allow the financing terms to determine whether you elect to convert the home into 4 or 5 units. I believe you will find the financing terms will be outweighed by other factors. Lean on your architect and understand how the 4-unit building will be laid out compared to the 5 unit. How many bedrooms, how big are the units? Does the 4 larger unit concept offer more marketable floor plans and demand premium rents? Once you understand the possible unit mixes, put together a construction budget for the 4 unit &  5 unit renovation and match your total project costs up to the 4 or 5 unit projected rent roll and operated expenses and see which version performs better. You will find the 5 unit renovation will require a higher price per SF renovation budget because most of your budget will be MEP'S, kitchens and bathrooms. In some instances the premium rents for the larger units combined with the lower construction costs of the larger units performs better but its circumstantial based on the building characteristics and market. Most make the mistake of automatically assuming the maximum unit yield will provide the best outcome. It's not always the case. I believe you will find the better interest rate you may receive with a 4 unit building will not be material to the underwriting.