Building duplex for first rental

[Judah Emory]

I have an idea and am hoping to run the idea across you folks to punch holes in it.

Background: I have a full time job as a .gov employee close to my home town and make a decent salary. Job is stable. I have always been around constructions and real estate. Wife and I are both highly interested in real estate etc. My dad is a GC and owns about 30 rentals. Wife’s dad is a carpenter craftsman and her mother a real estate agent and prior mortgage officer.

My idea:

Use my dad’s business to build a duplex close to the military base/retirement community/coastal area . We cash flow the build approximately 80k in my dad’s business name. (Both dad and I will use cash to purchase materials) we will both be the laborers and sub out roofing, drywall etc as needed. I am handy with electrical and other trades.

Dads business sells me the house via a mortgage through a bank, just like a developer sells a house to an individual. Assume appraised value for both units is $140k. We get our initial $80k investment back plus $60k in profit to cover his business taxes/ expenses and I get some profit. Of course I have to have a down payment etc.

I live in one side of duplex and rent the the other side. Theoretically the other unit basically pays the 30 year mortgage, I live for free and have my investment back + some. Dad gets his initial investment back + profit. We do this again every year and I move to the new one duplex with a new mortgage until I have acquired a few units. Currently, I have no housing costs but within a year or two I will either need to rent or buy a place; therefore this is the plan I have come up with.

Basically, I get cash flowing rentals, a free place to live and get to keep my capital; however I have to put in a lot of time/sweat equity. My only issue is the legalities of transferring the money.....my dad would sell me the property through the bank mortgage (he gets paid) and then he would have to repay-me my initial cash investment. Dad would be helping me get started.

These are my initial thoughts and I look forward to anyone’s experiences in doing this or issues that you see in the concept. 

[Jaysen Medhurst]

@Judah Emory, your plan has a couple of potential flaws.

• Ground-up small MFR construction rarely pencils out. The cost of land + labor are just too expensive. That's why you only really see SFR (highest prices) and large MFR (big economies of scale) getting build. $80k all-in sounds VERY cheap for a duplex, even when you're doing a bunch of the work yourself. That being said, I don't know your market. Is $80k a number that your dad has vetted as a GC?
•  How much will each side rent for? If it's not at least $700/side (i.e. the 1% rule), then they may have trouble cash flowing.
• A bank won't loan you 75-80% of the ARV, they'll only lend 75-80% of the total project costs. You'll likely have to wait 6-12 months to use the full ARV price.
• The legalities of transferring the money...yes, this is something you really need to speak with a good CPA and/or lawyer about. There may be tax implications (if sold to you below FMV the difference may be considered a "gift" by the IRS), self-dealing, and since it is a non-arms length transaction, you should expect extra scrutiny.