I'm seeing an old house in Union City, NJ, that I'd like to buy to tear it down and create a 3 family one to generate income. What are the steps to take in this process and what kind of contract should I use with the bank? PS: I'm a first time home buyer and I don't have a lot of money to give up front.
By process, I assume you mean the financial process. Financially, this doesn't look any different to me than buying an empty lot to build a rental unit, with the added expense (potentially significant) of doing the tear-down. Given your lack of experience and capital, I would be very hesitant to jump in like this. You are going to have to spend a lot of time managing the build process, or pay someone else to do it for you. And expect everything to take twice as long and cost twice as much as you expect. If you really want to get into the landlord business, I would suggest starting with a structurally sound building that needs some renovation work and start there. One you have that up and running, you can use the cash flow and equity to finance something more aggressive.
If you still think you want to do this, the first thing to do is figure out if the financials make sense. How much will it cost to do the tear-down and rebuild, plus the typical rental expenses:ongoing maintenance, taxes, insurance, vacancy rates and compare that to the expected rental rates in the area to see how long it will take to 1) achieve a positive cash flow, and 2) break even. There are a lot of good questions on this site related to rentals that go into much more detail about how to approach this.
Thank you for your response KeithB and Ross. I was researching more about this and looks like I have to follow all these steps (please, correct me if I'm wrong):
- first search for a good real state broker dealer and explain my plan. Probably he's going to suggest using the "construction-to-perm" type of contract. In New Jersey we also have incentive for first-time home buyers, not sure if it's applicable here.
- with the letter of credit approved, make a bid to the homeowner and buy the house
- choose a builder and an architect
- work up house design with the builder/architect
- tear the home down.
- draw the money and receive inspections from the bank at specific milestones (the money is not paid in advance)
- pay interest to the bank meanwhile the construction it's in progress
- after completion, conversion to permanent mortgage financing