How would I do this?

Question

I have been interested in a duplex property next to one on my rentals for sometime. It came on the market about 6 months ago for $169k. The owner bought it about 3 years ago for $165k. He's now dropped to $155k. My plan would call for a price no higher than $120k. The property is really, really rough. No possibility of rehab. It has a couple of renters at the moment but it has to be tough to rent. If I could get it at a good price I would rent for about a year to get everything set up for a demo and rebuild. Nice 2/2's could easily fetch  $1000-1200 pm. I would build a duplex that would easily convert to SFH. Have the 3 car garage constructed so that a 2/2 apartment could be built at a later date there by keeping 2 units. The SFH with a rental should fetch a premium come sale day. How would you finance a demo and rebuild?
                        All advice appreciated,

Michael Baybut · Answer

Thanks all,
Bart, you got me thinking. The structure is a definite tear down, no if's, ands or buts. But what might work is to build the new structure before tearing down the old. This may work.
Mike

Bart Pair · Answer

If you are going to wait a year, then the loan you get now will have to be paid off when you demo the property.  (Unless as Rick is asking, the value of the land itself is worth more than the loan.)

But most likely, you will need to get a construction loan or some other type of financing to do the construction an rebuild.

Double check with your local agency about what permitting requirements you may need to meet when you demo the entire site.

It may not be anything for a simple duplex, but you could be causing yourself problems that a simply refurbishing and expanding the existing structure could avoid.

Rick Tripp · Answer

Michael,
  What will the land appraise for after demolition? What are the costs of demo?

Jason F · Answer

That's a good question. I know if you use a traditional mortgage you will default the minute you tear down the structure.

Maybe go to the bank and try to obtain a construction loan? I'm sure they would require some sort of plans for what you are looking to do.