Converting 4-family into 5-family apartment

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Converting 4-family into 5-family apartment

Jeffrey Butler
Wholesaler · Mamaroneck, NY · Member since 2015 · 6 posts · 4 votes

Hello fellow BPers!

It took me about 5 years to finally make the decision to invest in real estate and now that I feel I'm late to the show, I want to jump in full speed ahead.

I could probably fill this post with thousands of questions and comments about next steps, and how-to's.. But I'll stick to a few most straight forward questions I have about a legal 4-plex property I'm interested in purchasing. 

I'm interested in buying this property as MY FIRST using a private loan with $0 down with rehab included in the loan.

Basically the property is currently a legal 4-plex with 2 illegal apartments in the ground floor both having their own exits. There are 5 electric meters (4 for tenants and 1 for landlord). The landlord's family members are currently staying in the 2 small illegal units. I am thinking about combining them into 1 additional legal unit to make 5 in total.

I am wondering; 

1) how easy/quick/expensive would it be to legally change the property into a 5 unit building? It is located in a "Central Commercial" zoned location where most other properties are either MF or commercial. Property is located in Westchester County, NY.

2) the property is currently not the best deal with 4 units rented out but adding the 5th unit makes it a MUCH better deal. Is this something recommended to do to "create" a deal on a property that would rather be 6% cap rate and $5K cash flow/yr, but when adding the 5th legal unit makes it 9-10% cap and $20k cash flow/yr?

I understand all municipalities are different but I am just trying to gauge how difficult a task it would be and if it would cost an arm and a leg to do.

Any info is appreciated! THANK YOU

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Peter Sosnow
Investor · 06820 · Member since 2019 · 43 posts · 24 votes
6y

@Jeffrey Butler

Check within Mamaroneck zoning dept. if it is even possible to change from a 4 to 5. I would discount the purchase price to reflect only the legal income and expenses.

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  • Peter Sosnow
    Investor · 06820 · Member since 2019 · 43 posts · 24 votes
    6y

    @Jeffrey Butler

    Check within Mamaroneck zoning dept. if it is even possible to change from a 4 to 5. I would discount the purchase price to reflect only the legal income and expenses.

    3Reply
  • Account Closed
    San Jose, CA · Member since 2015 · 4k+ posts · 3k+ votes
    6y

    Also, look at how long it would take before you actually start profiting from the 5th unit after the cost to create it or make it legal.

    I'd talk to the local building department about what would be involved to make it legal.  If it's zoned multi-family, you wouldn't have the hassle of trying to change zoning - so that should be a plus.  But, you need to see if more parking would be required for more units.  Is it on public water and sewer?  If not, there may be minimum septic/well requirements.

    You can often find all of this info online, if you're willing to wade through all the codes.  If you can find a friendly person in the building/planning/zoning department, it could save you some time and migraines sorting through the legalese.

    1Reply
  • Pat L.
    Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
    6y

    We have multi here in upstate NY that the Building Inspector mandated a complete fire sprinkler system just to meet multi-unit fire safety. In so doing we made it a legal 6-unit, complete with a 'thanks for improving your property' much higher tax assessment. Our cash flow improved significantly, eclipsing our rehab costs quickly. But as others have said what is your 'return' after all the costs for the rehab & inevitable code-compliance etc. 

    3Reply
  • Eric Bassett
    Rental Property Investor · Plattsburgh, NY · Member since 2020 · 16 posts · 8 votes
    6y

    @Jeffrey Butler

    Do you know what exactly makes them illegal units currently? Knowing that is going to give you the best idea of time/expense to fix. If it were me I would speak to code enforcement directly and ask them exactly what they are going to require to give you a CO for that apartment. A lot of times they are familiar enough with most properties to know. At least thats what I’ve found in my market in upstate ny. Similar to what @Pat L. was saying, we just renovated the third floor(attic) of one of our student housing buildings to add a couple more bedrooms and a bathroom to the upstairs apartment. Turns out that code in this particular area says that everything above the second floor has to have fire sprinklers. An added 10k to the Reno. Still worth it as two extra bedrooms in a student rental pays for that quickly but in some cases it may have made it not worth it.

    2Reply
  • Jeffrey Butler
    OP
    Wholesaler · Mamaroneck, NY · Member since 2015 · 6 posts · 4 votes
    6y

    @Peter Sosnow

    @Peter Sosnow It would be best to discount the property based on 4 units, but the seller isn't coming down much on the property. I might not pursue this property any longer, especially if I can't convert to 5 units.

    @Account Closed Thanks for the great info and adding to the questions I need to ask about :)

    @Pat L. That's one thing I didn't calculate into the property analysis, updated taxes.. Is there anyway of estimating this number after updating or will this be based off the assessment afterwards?

    @Eric Bassett I think the only thing making them illegal, is that the property is registered as a 4 family. But I will ask the seller and code enforcement these questions as well. I just don't want to get the seller in trouble by asking questions about a property that is illegal to code enforcement.

    0Reply
  • Nicholas Mann
    Valhalla, NY · Member since 2013 · 132 posts · 84 votes
    6y

    @Jeffrey Butler

    Hey Jeffrey,

    I’m also looking at multifamily’s in Westchester!!

    I recently went to my towns building department to inquire about changing zoning on a property and pretty much got puzzled looks that its pretty much impossible to change the zoning. Also my realtor has a property that was originally 2 family and now is 4 and had trouble listing it even as the original 2 family. For now I plan on staying away from any illegal MFs although I’m sure many people use them.

    Good luck

    2Reply
  • Pat L.
    Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
    6y

    @Jeffrey Butler depends on the assessor & how hungry they are for the tax income. We picked up a Tax Lien property that had been vacant for 5 years & our successful bid was 50% of the assessed value. We rehabbed the exterior to code for a cost of $8,500 & as the assessed value of other properties on the street remained static our assessment doubled. Another multi we bought triggered the usual visit from the building inspector & as requested we corrected several code compliance issues & then the assessment immediately doubled. It was an estate sale & we had paid below the assessed value, we fought the new assessed value several times but were denied. We owned it 10 years, did very little to it by design & the assessment had tripled by the time we sold it, for way less than the assessed value.

    I see in some of the southern states tax assessments are doubling & a friend in TX tells me his tax assessment has risen 200% over the last few years. 

    Good luck 

    2Reply
  • Rich Ramjatan
    Contractor · Bronx, NY · Member since 2020 · 27 posts · 15 votes
    6y

    @Pat L.

    Hey Pat, what areas upstate do you invest in ?

    0Reply
  • Pat L.
    Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
    6y

    @Rich Ramjatan Erie; Niagara; Orleans county

    0Reply
  • Account Closed
    San Jose, CA · Member since 2015 · 4k+ posts · 3k+ votes
    6y

    This is something that California does right - taxes can't be reassessed as long as you own the property and you can pass it to your heirs and the tax base continues at the purchase price you bought it for.  Taxes can't go up more than 2% per year per state law.  That doesn't stop local extra taxes for bonds, etc., but the assessed value doesn't change until it's actually sold.

    0Reply
  • Jane S.
    Flipper/Rehabber · Colorado Springs, CO · Member since 2016 · 499 posts · 167 votes
    6y

    RUN DONT WALK! You could end up wasting hours days, and weeks with gubmint inconsistencies and disinfo. Better use of your time, find a nice clean multi with no issues. Also your private money lender will probably agree.

    1Reply
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