How do I convert a SFH/Business to a MultiFamily dwelling

Question

Hello BP Fam!

In my search for SFH investment properties, I came across an interesting property that also doubled as a business. The numbers caught my attention because they would work as a SFH with a few updates and converting the business side to an ADU.  But it got my wheels turning even more.

If the property doubled as a business and a residence, I’m assuming this means it’s zoned for commercial and residential.

Can I level the existing property and build a 4 Plex in its place?  I never studied how this works cause I’m new to investing and viewed this as an advanced strategy.

Theoretically, how do I run numbers on this type of project?  The numbers for this property are as follows:

1. Purchase price: $385k

2. 2 Bedroom, 2.5 Bath, 1540 sq ft

3. Lot Size: 6500 sq ft

4. Business side has 4 parking spaces separate from the home’s 2 parking spots with room for storage.

If the goal is to tear it all down and create a multi family 4plex in its place, what are my first steps to doing a project like this? What are the costs I need to take into account - Demolition, Architectural design, New construction? What are all the hard costs and soft costs associated with this?

David M. · Answer

@Marc Estepa

The zoning is the local town/muncipality reg telling you what you are able to do with the property, the setbacks, if residential, if commercial what sort of businesses, etc.  if we want to some sort of "mil speak," that's basically your allowable 'mission/target set.'  Usually, on a constructed property, you never have to worry about this unless you doing some sort of signficant modification, such as adding on an addition or maybe putting up a fence (e.g. how far does the fence have to be off the property line, how high can it be, etc.).  Zoning is what the municipality has said is allowed to go on "there."  When you want to due something different, e.g. put a 8' privacy fence when in NJ I think generally 6' is allowed (again I'd have to check each municipality), thats when you apply for a variance.

For new construction, you need to apply for the building permit, and it might include variances among other things.  Here, you need to convince the town that what you intend to build meets their criteria, or why they should approve your variance.

Sorry, not trying to make you feel bad about asking a "confused question."  Just trying to understand you, and answer your question w/o trying to type out more of a lecture than I normally do here on BP.

Oh, I'd start with the municpality's website to look for their zoning ordnances.  Of course, you could always call them.  At least in NJ all the codes have been digitized.  Services such as ecode360 seem to house many municipality's codes. But, I have no idea who is hosting, if at all, yours.  So, start with the municipality.  If you are really into this, start looking for architects.

Marc Estepa · Answer

Hey @David M. nice to hear from you again!  This is precisely why I’m asking. I straight up don’t know what I don’t know.  If I’m asking a stupid question (and it seems like I am) then I’ll continue on with the Google machine.

Since we last talked, I’ve been solely focused on SFH and nothing else.  I know how to break down those numbers and evaluate that type of property.  We actually close on our primary residence this week!  It was a long road getting here, but we finally found one.

Anyway, anything dealing with commercial or mixed use zoning is obviously foreign to me.  If I wanted to make that a 6 unit dwelling instead of a 4, does that make a difference in the zoning of area?  I know that if I wanted to update a home in a residential area that’s easy.  But if I wanted to take a SFH and simply turn it into an apartment, I can’t necessarily do that.  This is the extent to what I know.

After listening to podcasts, I understand that there’s some kind of limit to what I can do to update a SFH in a residentially zoned area.  But I know that this changes if the area this SFH is located at is zoned for mixed use.  In this case, it is.  So with what you’re saying, I’m assuming I can build more than a 4 Plex?  Like I said, I have no idea what my left and right limits are or where to even start with such a project cause I’ve never even considered such a thing until I came across this one.

If you’re saying I can’t do that based off the zoning, then that’s what I need to know so I can plan ahead. Where do I need to go to look this stuff up and do my homework on commercial vs mixed use or residential zoning and new construction so I’m not asking menial questions here?

I figured this place would be it.  I thought this would be a reasonable question to put out here for a newbie, especially since I’ve asked some stupid questions in the past that I’m frankly embarrassed to have asked.

David M. · Answer

@Marc Estepa

Hey Marc!  You really need to do your own homework before coming here.

Just because its a mixed use zone, doesn't mean you can for a 4fam on it.  Not knowing how your zoning works, that just makes no sense to me.  4fam is still considered residential so it has nothing to do with commercial.  the mixed zoning just allows for both residential and commercial to co-exist on that property.

Furthermore, does/will the 4fam that you envision "fit" in that neighborhood?  Again, I don't know your market.  I saw one 4fam in my area that actually had 4 relatively large units.  It was a really large building as it was basically 4 "small-ish houses" put together in quads.  However, it worked because the neighborhood had large houses to begin with.  Granted, the rest of the block were larger single family homes...  Just something else to think about.The "costs" should be lots of time upfront.  You'll need an architect to prepare the plans and help you prepare and give the presentation to the town for your building permits.  Then, its demo and new construction.  Those are exhaustive lists.

Running the numbers...  What can you get for it now vs...  paying $385k to purchase, the architect (lets SWAG $10k), building permits, the time for all of this upfront work, then demo and construction.  SWAG'ing, lets say you did 1500 sqft units so 6000 sqft with a $200/sqft broad estimate for construction-only (probably too low with covid material pricing and usually for single family), that's $1.2M.  Also, I thought multfamilies were more expensive to build since you have that many more expensive rooms to fit out, e.g. kitchens and baths.

I'm curious what else the community has to say.

That's my initial take on it.  We've chatted before.  Be happy to chat some more.  Good luck.