Major Life Decision: Build SFHs or Mixed-Use Development??

Question

Hi my name is Lauren, my family owns a piece of property on one of the busiest streets in our city, near the airport and military base. This property use to be home to a well-known restaurant in town and is paid off free and clear. For months, we have been planning on tearing down the old restaurant building and developing a mixed-use property with 28 apartment units and 4 commercial spaces.

However, we have been receiving a lot of calls from investors looking to buy the property outright. We had our minds set on developing the mixed use, but with these offers coming in, we are starting to second guess whether this mixed-use development will be the best decision. We have been home builders for 20 years, so home building is our bread and butter. My father is starting to consider the idea of selling the property and using that capital to build single family homes to lease, so that we can still reap the benefits of a passive income strategy and not incur the debt of the mixed-use project.

So long story short, we don't know what to do. We are aware that we don't know enough about the MFH world but we are excited for the challenge and ready to learn. SFHs are our bread and butter, but we would like to diversify our portfolio with MFH (and we known that good dirt can be hard to come by). At this point, if you have any feedback in this area, we are more than open to hear it!

ANY experience on MFH vs. SFH preferences, cashflow, tenants, or just your personal experience with the matter is especially welcome!

Lauren Alia Mlouhi · Answer

@Jaron Walling

Wow thank you Jaron, this is what we were leaning towards but getting advice from someone with experience like you is very valuable.  The existing property is paid in full and we would be obtaining a construction and mortgage loan for the build out of the mixed-use development. And we have absolutely no experience in property management, although my mother is a Broker and I am licensed, we are very aware about how little we know about managing a property like this.

Thank you for taking the time to share your experience and personal recommendations. If by chance you are ever in the El Paso, TX area, let us know and we would be more than happy to treat you to lunch. Thanks again!

Jesus Ojeda · Answer

Hi @Lauren Alia Mlouhi, always nice to run into fellow El Pasoans in this forum. I am a licensed agent here and an investor as well, I have a few single family homes and I partner with my dad on a few commercial buildings, land, franchises and such. I think multi family would be excellent in a location like that especially if tailored toward military personnel. I do think Jaron hit some important points, as I'm sure you're well aware construction costs are steadily rising, I've noticed new construction builders within the past few weeks increase prices 5%, which will ultimately hurt your cashflow unless you have great connections. The second point would be the property management aspect, it's all about your systems, we have in house property management that handles over 50 tenants, and we continuously strive to improve but without good systems dealing with tenets could be a nightmare.

All in all it's all about your risk tolerance. Do you continue on what's tried and true? Or expand on a new yet potentially very fruitful venture. The truth lies within your research and numbers :)

If you guys ever need anything don't hesitate to reach out, we're always looking to meet great like minded people and make great connections here in El Paso.

Jaron Walling · Answer

@Lauren Alia Mlouhi It sounds like your family is in a great position so don't stress. The investors can keep calling all day long but in the end it's your choice to sell or not. You have two glaring issues that came to my attention when you talked about building new properties. Regardless of your experience MOST investors do not build new property for rentals. The numbers don't work or the cash-flow is poor at best. I rarely see it and I invest in a strong cash-flow market. The cost of construction kills the deal unless you have great connections with contractors etc.

The second issue is building a 28 unit apartment building. How are you funding that deal? Do you have experience with property management? Your family would be entering into a new ball game for business and investing. Most investors don't buy a 28 unit building on the first deal let alone build one. I would sell the property, stay in your lane, work the numbers since you guys make great toast :-) and figure out if you can cash-flow on new construction SFH.

Lauren Alia Mlouhi · Answer

@Kyle A. Isaacs

Very beneficial information Kyle, you have given us a lot to consider. Thank you!

Kyle A. Isaacs · Answer

@Lauren Alia Mlouhi - thanks for the positive feedback and I'm glad that you found the article insightful.  I'm actually running a survey right now and have had a massive response from service members.  As it stands, the top three qualities that military look for is:

1. Safety (i.e., little crime in the area)

2. Near quality schools

3. Affordability

Therefore, if your place meets these criteria than consider renting to military folks.  Often times, you can find younger Soldiers (E5-E6 and O1-O3) that like to live together and split to rent to pocket more cash and would sacrifice the traffic noise for more coin in the pocket.  Also, I've seen a mixed bag between apartment dwellers and people who live in SFH.  However, all of my properties of SFH and my renters prefer to live in a house with a yard versus an apartment because of personal preference.

Lauren Alia Mlouhi · Answer

@Kyle A. Isaacs

Wow Kyle, what a stellar article. Really made our decision more difficult. We are leaning towards the SFH rental route but this really made us think twice.

Our property is on one of the busiest streets in the city, so traffic noise has been a concern of ours. However the property is less than a mile away from our military base. In your experience, do you think that traffic noise will be an issue for military tenants? Or do you find that your military tenants are they mostly driven by affordable rent, close proximity to base, and a nice living space?

I would also love to hear your opinion on whether military tenants are more likely to rent an apartment, or if they prefer to rent a new single family home that is a little further from the military base?

Regardless, what an awesome article, very thought provoking and it really shines light on the military housing problem you mentioned. My hats off to you.

Lauren Alia Mlouhi · Answer

@Jesus Ojeda

Hi Jesus, your feedback and suggestions were very helpful, especially as a fellow El Pasoan familiar with the area. Construction costs are becoming crazy (especially lumber), which has been a growing concern of ours when it comes to calculating the cost of constructing the mixed-use. In addition to the management of the property.

Thank you for taking the time to share your experience, if you ever need anything please don't hesitate to reach out.

At the moment, we are leaning towards selling the property. If by chance you know of a good appraiser in the area knowledgeable about commercial properties, or a good company that handles 1031 exchanges, I would love to hear any suggestions you may have.

Kyle A. Isaacs · Answer

@Jesus Ojeda @Lauren Alia Mlouhi - see my recent article about military tenants here.

Major Life Decision: Build SFHs or Mixed-Use Development??

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