How do I finance a tear down and build of multiple units?

12 Replies

Hey folks, i acquired my uncle's home through probate. A little about the property:

Located in Bay Area, CA

Lot approximately 5300 sq ft

Existing dwelling is 628 sq ft 1b/1b house and a detached 2 car garage in the back corner of the lot. Bathroom and kitchen are gutted so I can't really have an appraiser walk through and get an accurate valuation. Built in 1952, outdated and too small.

Completed cash out refinance January 2021, took out max  of 250k, sitting in a 1% APY acct and owe 417,000 on the note with a monthly mortgage of $2162.

I initially wanted to explore ADU, multi-family options with multiple units yielding more profit. When I met with my builder and explained I had 250k, he laughed and said we're looking more in the addition spectrum, turning the home into a 2b/2b. and that's it. I spoke with my lending company and they said I qualified for a HELOC of an additional 100-150k. I haven't done that yet, just sitting on that information I decided to lean into a larger structure for a tear down and build of a 3b/3b 2 story.

After we got the drawings back from engineering my drafter is estimating loosely a cost of $675,000 to build. I don't particularly WANT to afford that, or even know how I could. I would be much more comfortable hitting the drawing board for a duplex or fourplex on the lot. My spouse is much more supportive of helping me finance the multi family build, we just have no idea where to start with financing. We both separately own 1 other rental home so only 1 loan currently under his name and 2 total for me including this property. We have no other debt. We live with my dad and pay cheap rent to him in order to save for future properties. 

If we can get the financing options figured out, we both are more than comfortable assuming the loan for the construction on a multi unit build. I would estimate we would need somewhere between 700k-1 million to do this.

I have currently paid my drafter about 6k to design and engineer the 3b/3b. This is less than half of the cost of other companies I shopped around with. I would have no problem going through the process again and starting from scratch to design and build a multiple unit concept, and engineer it, I just need to know that I will have the finances to back up the build. All suggestions appreciated.

Thanks for reading,


@Shira Laux ..thanks for all the info.  How many units are you thinking or would you be allowed to do as a multifamily build? (didn't know if there's any ordinances or zoning issues)  It's not clear regarding that.  Where in the Bay Area?   If the deal is good and the valuation is going to be there, you might not need to be as strong of a borrower, but you'll need to have a good team - architect, engineer, and def solid GC.  Feel free to pm me, to share more details.

Hunt around for a construction construction loan from a local/state bank. The loan terms will be based on many factors including the future valuation of your new build. 

I was approved for a construction loan in Colorado last year with suprisinglng generous terms.

@Shira Laux first thing you need to do is really understand the loans you currently have on the property. I believe most mortgages do not let you tear down a house because the actual security of that loan is the existing house... I personally have done a "remodel" in the SF Bay Area. I say remodel because we left 1 wall and the foundation, but everything else was torn down. We went from a 3/2 to a 4/2.5 and added about 1000 sqft, but that is beside the point. I pulled my construction loan from the same bank so they knew what was going on and they approved everything. I would suggest that you get the lenders involved before you start knocking things down.

Good luck to you!

Thanks @Arlen Chou for the information and example. I want to be completely transparent about what I'm doing and going to do on the property. Good to know on the correct order of operations. My assumption is that the steps are:

Zoning check

Contact lenders and start the conversation, finding out requirements.

Draft sketches and send to engineering and plans.

Take plans to GCs and get quotes.

Takes quotes and plans back to lender and acquire loan.

Do I have the order correct?

Thanks, Shira

To be honest I cant remember all the details and we never went through with the build or loan as things changed. What I remember about the discussion with the loan officer and what surprised me is that they didn't need the collateral I was willing to put up and they only required 10% down. I believe the loan starts out as an interest only deal and then is converted to a traditional thirty year mortgage when complete. Origination costs are a little higher because of the extra work the appraiser does projecting future valuations. We never had plans and everything we were doing was preliminary but two separate institutions gave me similar terms to consider.

sorry I'm not sure what forum we are in. But you should try asking the same question in the new construction forum the regular guys on there will definitely have answers for you.

@Shira Laux Definitely do your zone check first, then do a dep dive into the zoning ordinance for allowable height, stories, density, lot coverage, etc. Your drafter may draw something for you - but unless they're skilled at the nuances of the code that doesn't mean they're knowledgeable about what is allowed. Single Family, R2, and Rm (multifamily) lots are all differently located and have different allowables, are not always in the same area or side by side, and vary from county or city. In addition, 5,300 sf is small and can be tough to get a duplex + parking+ setbacks, etc. all to work out.

First figure out the maximum you can actually get to work based on the code, then decide from there what works for your budget and desires.