4/5 Unit property and how to finance?

Question

Hey everyone,

I'm looking at a property that will end up at an 8 CAP for a 5-unit in an A-class area, value-add deal. The main unit is a quadplex, and the garage is converted into a studio apartment to make the 5th unit. I noticed on the tax assessor's site that it is registered as a 4-unit, and the current owner does have a residential loan with about 80% equity build. My issues are this:

1. Will this qualify for a commercial loan with the 5th unit being a garage unit? The zoning says it is CRO so I don't believe I would have any zoning problems, mostly lending...

2. Would it be possible for me to take a loan out for 100k to pay off the outstanding loan and then seller finance?

I'm trying to determine what creative ways of financing I should look at here. As much as I'd like to use some OPM, I'd prefer to get my first couple deals under my belt before taking on the responsibility of others' hard earned cash, that's just a personal preference for the time being.

Thanks in advance for the help!

Benjamin Seibert · Answer

If the 5th unit isn't legal and permitted then banks wont like it very much. Some may stay away others may just not consider it in the value of the property and it just be a 4 unit.

Connor Koehler · Answer

@Benjamin Seibert Thanks for the response, and that is what I suspect I’d try and do, but do you think the 5th unit will create some problems? I searched for county permits and there was never one pulled to create the 5th unit. Will I suffer any consequences of that or is that something that depends more so on the lender? I am trying to BRRRR by matching rental values in the area with small cosmetic changes (most likely) but that all depends on what comes up during the due diligence process, I just like to have a decent plan in place for financing ahead of time. Then, refinance for the long term and look for the next deal where I may be more comfortable bringing in OPM.

Benjamin Seibert · Answer

Hey @Connor Koehler since you're going for a 5 unit you'll likely have to use commercial lending or hard money. I'd recommend going with a commercial loan on this (a little higher rate than conventional - probably around 5-6% right now). You probably can find one that loans on the rehab as well and has more preferable terms, like less than 20% down. Are you trying to BRRR this property?