How could you demo something that you are still paying for?
If you own the house free and clear then have it but you still owe the mortgage company their money. You will first have to pay off the house. Go to a lender to see if you can be approved for a 203K loan. If you are, then start talking to a builder. While you are measuring things up with the builder, start giving notice to your tenant about not renewing the lease.
Yea I assumed getting the full loan wouldn’t be a problem as I have good credit and good income.