What you would presumably do is find land, buy it, ask for a construction permit, hire an architect to make plans and hire a builder (the developer) for the construction.

I’ve personally house hacked in the Irving park neighborhood in Chicago with a multifamily so not completely relatable experience to what you’re looking to do but hopefully can provide a few insights.If you go with the suburbs in a SFH, you could rent by the room and presumably increase cash flow.

When you talk about replacing income, the safety of that cash flow is much more imperative, since presumably you are living on it, too.And then you combine both thoughts: safety in income stream to live off of, and cap rates/yields from assets.  

If the building is currently recognized as a single family residence,  then you are changing use and presumably will need to sprinkler the building and satisfy other fire rating and STC rating requirements not to mention the added costs of having to run mechanicals for multiple units, multiple kitchens, additional bathrooms etc.  

To pause distributions two years into the fund (when, presumably, some contingency was built into the financial model at outset for 'surprises') suggests a magnitude of issues that were not caught during due diligence. 

In my limited experience, HML may not care too much about your credit but they will care about your, presumed, lack of experience.  

Otherwise, weigh your options with estimated vacancy and remodeling time, but how you may be able to mitigate losses longer-term with the higher rents you'll presumably be able to collect with new tenants. 

The upside to holding as a rental is, presumably, you have an income stream for a while, so you take reinvestment risk out of the picture.  

@Albert HallEveryone is talking about how section 8 is recession proof, but presumably HUD can’t print their own money.

Richard welcome to the BP family there’s so much opportunity right now in the midterm space I presume you will do very well.