owner-occupied 5-unit? - Posted by Marc

Posted by Marc on September 06, 2005 at 24:03:23:

Thanks for your advice. I agree with you and Craig about the practicality of investing in 4-units. This has been my game plan to date, and I currently own one 4-unit and 2 SF that have been very successful. And for the most part I have been looking at 3~4 units and rehab projects.

But this 5-unit I am looking at is a special place. It is a grand old mansion in a NE mill town that used to belong to a mill owner. I don’t expect it will be a great investment. But it might be a great house for me. The apartments would simply defray my own costs of owning a grand old home. I would not expect to make a lot of money on it; it is more a quality of life issue. My day job would probably qualify me for an overpriced MacMansion SF in the suburbs, if that is what I wanted. But I would rather fix up a grand old home in my nearby low-income city , and have something I can be proud of. My specialty is renovations, kitchens, custom cabinets, etc. I would have a great time restoring at least the owner’s unit; and I would also improve the existing rentals. If I can get a decent interest rate I could do it and come out ahead in a few years. This is the purpose of my questions.

Do I really have no option other than to go with a commerical loan at 8.5%+ In theory i could afford it as a SF – so it seems funny that adding some rental units increases my borrowing costs, when in reality it should lower them. Do some local banks deal with these more individual cases?


owner-occupied 5-unit? - Posted by Marc

Posted by Marc on September 03, 2005 at 14:51:12:

I’m looking at a house that has a large owner’s unit on the first floor and 4 smaller apartments on the 2nd and 3rd floors. For most conventional financing anything above 4 units is typically regarded as commercial, and I see the rates for these kinds of loans are almost 2 points above a conventional loan. A little frustrating for me, since I actually could afford to buy the house as a single-family – no apartments at all – and I would qualify for the mortgage at the lower rate. Yet the same house – with extra income coming in – apparently requires a higher rate.

(1) are there lenders who would give me a conventional rate (6.5%) for a 5-unit owner-occupied house?

(2) can I propose to the lender that I convert from 5-family to 4-family and qualify for a conventional rate this way ? (2 units are currently vacant anyway). If so, could this be done as a construction loan – and pay for a bunch of repairs etc at the same time

(3) If in the future I decided to convert back to a 5-unit while keeping the conventional owner-occupied mortgage, could I get into a bunch of trouble? Is there a grey area where I could rent e.g. under the table to a relative as an in-law apartment etc, and not have it count? (I ask because I often see apartments on the MLS that disclose “in-law apart” or even “illegal basement apartment”). I know in theory a lender can call the loan, but in practice I imagine if you are making the payments they wouldn’t care. And how would they know?

(4) what kind of rate can one get if you own 5 condos in one building rather than one 5-unit building?

any creative ideas would be appreciated. I want to pay 6.5%, not 8.5%. The seller will not finance long-term.


Re: owner-occupied 5-unit? - Posted by John B. Corey Jr.

Posted by John B. Corey Jr. on September 04, 2005 at 15:03:07:


I think you have this backwards.

Commercial finance kicks in at 5 units because Fannie Mae and similar secondary lenders only deal with 1-4 unit property for their mortgage pool. Similar to lumber coming in standard sizes. There is nothing that magic about it.

So, you can reduce the place from 5 to 4 though getting construction finance could be more expensive then you think.

Or you can pay the extra 2% and have the added unit producing income.

Rather then focus on the specific rate, focus on the gross cash flow and then the after mortgage cash flow and adjusting for expenses. It could be that the 5 units are going to be a better deal even with the higher rate.

As Craig suggests you can just focus a bit more on the 1-4 unit properties that fit the loan programs. No use fighting the whole industry to fit your goal when you can just find a different property.

John Corey
Chelsea Private Equity LLC

Re: owner-occupied 5-unit? - Posted by Craig (IL)

Posted by Craig (IL) on September 04, 2005 at 12:33:36:

Purchasing a small multi-unit often is a good starting point for the beginning investor. Why not forget this 5-unit and look for a 4-unit or smaller? Simply because 2 units are currently empty is not a reason to combine the units. Not only are there logistical problems (utilites, floor plan, and rehab problems) the costs will at minimum hurt if not make the proposition prohibitive. Rehabbing this way to fit a lender’s requirement is a mistake.

If the 8.5% loan doesn’t work for you with the property as is, pass on it and find another. There are other properties out there for you.