Current Zoning = non lendable?

Question

I'm currently under contract for a duplex (my first rental) and have done all the due diligence associated with the property and I'm comfortable moving forward. There are currently tenants in place and this would be a day 1; net positive cashflow of roughly $675/month.

My question relates to the zoning and refinancing. I've received confirmation from the city zoning department that my property is zoning M-1 (light industrial) however the duplex is in legal standing per the City and recognized "as-is". I'm not allowed to expand and in the event of a catastrophic loss, I'm not allowed to rebuild residential - it would need to be light industrial. I've confirmed appropriate insurance coverage and my policy states specifically that I would receive repair cost value even if I'm not able to rebuild residential.

What I'm having trouble finding out is my ability of refinancing after 6-months. I plan to do some light to medium rehab within the "as-is" allowance in addition to raising the under-market rents at renewal... I'm already getting the property at a solid market discount ($160k vs. rehabbed comps in the $230k range).

Are there lenders (either QM or non-QM) that would lend on a residential property with M-1 zoning designation without the ability to rebuild?

Devin Peterson · Answer

Short answer - No. You will not be able to use traditional nonqm or DSCR here. It needs to be able to be rebuilt as is. Commercial / industrial lending is your best bet.

Pepyn Thomas · Answer

The lenders are right to flag it but the nuance matters. M-1 with a legally recognized residential use is different from M-1 with no residential history. What you want is documentation that the residential use predates any zoning changes and that the city has formally acknowledged it in writing, not just verbally.

The insurance piece you've sorted is smart. The financing challenge is real though. Most conventional and DSCR lenders require rebuild-as-is capability. Portfolio lenders and local community banks are your most likely path since they can underwrite to the actual income and existing legal status rather than Fannie/Freddie guidelines.

Erin Schaefer · Answer

Thanks for the responses everyone! I've DM'd a few of you and looking to continue the conversation.

Jake Yuskaitis · Answer

is the county has signed off on this as a legally conforming or legal non-0conforming zoning then you should be fine to find a lender. i will take a look at this for you if you send me details.

Erik Estrada · Answer

No unfortunately. Most DSCR lenders will see the appraisers comments and condition for a rebuild letter from the city. If you are not able to get a rebuild letter, or if the zoning is not grandfathered in, you won't be able to close on it.

Current Zoning = non lendable?

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