No good multi-family propeties, build instead?

Question

For you creative solutions people, this could be fun.

My wife and I are in our late 50s and looking at rental real estate as an income stream as we near retirement. We also desire to help our daughter/son-in-law (B&M) get a great start from an apartment to a house, who live 1000 miles from us. We have the usual concerns about owning a rental (maintenance, finding and keeping tenants, actually creating cashflow that is worth the effort), so we were thinking of ways to leverage helping B&M become home owners, us becoming real estate investors, and doing this long-distance.

They have some reluctance with renting out a part of a home they live in, so our next idea was to buy a multi-family unit where they live and have them manage the property and tenants. They would get reduced housing for a few years and then we might just sell them the unit after they could save up for it. Or, something along those lines. The issue is that we have not found any units worth buying. M works with a small construction company, and so our next idea is to look at building a new 3-4 multi-family unit. New would probably be more expensive but would nearly eliminate some of our maintenance concerns for years to come and make for very attractive and higher rent units in this city of 45,000 with a medium-sized state university. We were thinking of 3bed units and possibly 4bed for B&M. Land just outside of town is available and we think would attract families who need housing for several years or more.

There is a lot of room for alterations to this idea, and we are total newbies to all of this, so the major question is simply about the viability of such a plan. We tend to think and work a bit outside of the box, but we know what we don't know in this and need lots of help moving forward. Fortunately, we have a very healthy relationship with B&M. Another huge bonus is that we have met M's boss/wife (they own the construction company) and hit it off well with them, and feel we can completely trust them to do their part with excellence, honesty and fairness.

What aren't we thinking of that concerns you? How can we improve on this? We know that there is a financial feasibility part to this we have yet to do, but having the right idea comes first. We really appreciate any insight any of you can give. We want to get your input before we approach B&M and M's boss. Many, many thanks to this great community.

Jeff P. · Answer

Joseph and Jaysen, you guys are great to reply to my post - MANY thanks! These are exactly the type of questions and insights that we need as we look into this idea. You both brought up exit strategy issues, which is huge in this equation, along with the role B&M would play. You got me thinking about some other ideas. I like that. Will have to rethink this and come back with a modified plan. Really appreciate both of you and this community to take the time and help people like me out. Wishing you success! Jeff

Jaysen Medhurst · Answer

A few things to think about, @Jeff Peterson.The numbers on ground-up construction of small MFR almost never pencil out. SFHs demand the highest per-unit price and you don't really start getting efficiencies of scale until you're building a few dozen units (at least). The cost of land and labor are just too high in most parts of the country.Most banks have turned off the taps on construction loans. If you could find a lender willing to fund a project, you'll likely need 25-30% down, plus 12-18 months of reserves.The zoning for such a project may simply not be available. You can't just plop down a fourplex anywhere you want.There were a few other points in your post that I think need to be thought through:In most markets, 2/1s are the sweet spot. 3-bed units may do well also, but 4-bed units can be challenging. A very small slice of your potential tenant base would be interested in a unit that big."...then we might just sell them the unit after they could save up for it." This isn't how MFR works. If B&M want to buy one of the units, then the property would have to be turned into condos. This may be a viable and profitable exit strategy, but just make sure you understand what you're trying to do."...where they live and have them manage the property and tenants." I'm sure B&M are great, but do they have the skills, experience, and desire to be great property managers? This is the single most important role for a successful investment (aside from buying right), so don't assume that B&M can or should be doing it.Since you're having trouble finding small MFR where the numbers work, have you considered something larger? 5+ unit are not valued based on the residential market, but by the property's financials.

Joseph M'Mwirichia · Answer

B & M are so lucky to you have you and your wife for parents! You have a critical piece, the construction team already in place, maybe even access to family & friends pricing which could sweeten the deal even more. The other is boots on the ground. Ultimately let the numbers guide you, project cost, rents, is there demand where you are building, zoning (take a peek at future land use), exit strategies. B&M will be the main drivers of this, are they excited about it?