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by Michael Monteiro
Although converting a unit into a larger (or different) space may be cheaper than purchasing a new property that fits your expanding investment property needs, it’s nonetheless a huge undertaking, both in terms of logistics and expense. If you are thinking about a conversion, make sure that you carefully consider three important questions: Why? When? How?

Floor planWhy should I convert my unit? For the purposes of this blog, we all consider unit conversion in the context of creating more bedrooms (for example, converting a one-bedroom unit into a two-bedroom unit). The obvious reason for this sort of conversion is to increase your cash flow.

Examine rental rates in your area to determine how much more money can be generated by renting out a multi-bedroom unit. Also consider the type of tenants that are generally seeking rentals in your area. For example, if your demographic is college students (who generally like to rent with roommates) or families (who generally have more people and, therefore need more space), chances are you would benefit by offering units that are set up for more than one tenant or couple.
Research is essential. In some cases, multi-bedroom units may generate only slightly more rent that single-bedroom units. Also, consider the costs of the conversion and calculate if the additional rent will not only cover the renovation, but also generate a higher profit margin over time. Last but not least, when considering the costs of conversion, make sure you account for rent that will likely be lost (not only in the unit undergoing conversion, but potentially in other units as well) during the construction process.

When should I convert my unit?If you are at a point where you feel as though your tenant pool has outgrown the spaces you are offering or if you are looking to increase the value of an investment property, it may be time to consider a conversion. You may also want to think about converting units as an alternative to buying additional property. Particularly during periods when it’s a seller’s market, converting may actually be more profitable than purchasing a new property with larger units in the long-run.

There is another element of the when equation to consider as well: What time of year is the best time to convert your units? If you live in a region with harsh weather or unpredictable patterns at certain times of the year, plan your construction schedule accordingly. The last thing you want to do is have the project extended (i.e., lose rental income) due to factors beyond your control. If you live in a more temperate climate and weather is not a factor, consult with local contractors to find out when their slow season is. This may well guarantee you more attention and better rates. Finally, timing your conversion around natural rental cycles such as a month when the majority of your leases expire or (if you rent to college students) summer break will help minimize income lost during the construction period.

How should I convert my unit?Conversion is one of those instances where you are definitely best to hire a professional. Even if you have the know-how to handle this undertaking on your own, chances are the process will move along much more efficiently with a professional on the job.

Any way you cut it, converting your units will be a significant expense. Make sure that you thoroughly research potential contractors, striking a balance between cost and quality. Not only do you want to find an affordable contractor, but you also want to make sure the work is done correctly and efficiently. Ask other property owners for referrals and look on dependable review sites such as Yelp. Also be sure that you talk to a few different contractors so you can carefully weigh different options and, ultimately, choose the one that works best for you.

Much like investing in a new property, converting your units involves a significant up-front expense that can pay off in spades in the long-run. Carefully consider your whys, whens, and hows before beginning the conversion process and you have already mastered half the battle.

Michael Monteiro works for Buildium LLC, maker of online property management software for landlords, professional property managers, condos and homeowner associations (HOAs) and is author of the The Buildium Property Management Blog.

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  • Hi, I’m both a landlord and a lender that does multifamily loans for both banks and Fannie Mae. When receiving a request for financing a multifamily property, a mandatory check for us is the allowable zoning and a copy of the original building permit. Units that have been converted without the approval of the city are not eligible for financing until the converted units are converted back to their original state. Some of the reasons for this is the parking ratio for the complex, and huge losses in the past in the case of a fire, there are clauses in fire insurance policies that allow the insurance company to get out of paying for claims if the units have been modified without the consent of the building/zoning departments. I would use caution in recommending the change to floor plans without checking this out further and telling people that they can create themselves an expensive nightmare if they don’t follow the rules.

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