If This Were Your Property — How Would You Make It Pay Off?

[Anthony T.]

Hi BP Community!

Long time lurker, first time poster. I’ve appreciated the information this community has shared and hope to tap into the knowledge base to get guidance on leveraging our existing property.

My brother and I own a multifamily rental property that our father transferred to us in 2021. Because he transferred it to us, we are subject to potential capital gains.

Property is 4 units (duplex, house, cottage) with a remaining mortgage of $390K at a great rate (3.5% / 30yr fixed). Property appraised for $2.7M in 2021. Before taking over, our father had kept rents below market in favor of keeping long term tenants. We generate solid cash flow and our cap rate based on FMV is <3%. Property is in ok shape - built before 1990. The duplex and house are decent but I'm worried the cottage may require investment in the near future.

We both live in California, the property is in our name as joint owners. Our experience in real estate has been managing this property ourselves. The property is in Silicon Valley close to tech companies and is in a prime location where there is strong housing demand.

We're exploring the best ways to leverage our property and are especially focused on opportunities that can generate wealth and a one-time ROI. That said, we're also interested in hearing creative ideas—especially if they could provide strong, sustainable cash flow over the long term.

Here are some of scenarios we’ve been contemplating:

Option 1: Develop the land and build 6 (or more) multifamily units. I'm thinking of townhomes 3BR/3Ba ~1500 sqft. We're zoned for that many units at a minimum as I have spoken to the city. I have seen lots of similar size and zoning develop projects like this. We realize this would be a huge undertaking and we would need to bring in a lot of expertise to help lead development. I have spoken to a couple of lenders and it seems our biggest challenge would be bringing ~20% of construction costs to the table as capital. Broad strokes, I believe this scenario has the biggest ROI potential from one project however this will come with big challenges including capital, expertise, and risk.

Option 2: Pursue the same as Option 1 but just entitle the land and sell it / reinvest.

Option 3: Explore subdividing the lot and build individual SFRs? I am not sure about zoning restrictions for something like this. My understanding is SFR construction is less expensive. Would this be any different from Option 1? I am not sure what our financing options are for this scenario.

Option 4: Leverage the equity via HELOC/cash out refi for further real estate investment. I believe we have a lot of leverage here so we could grow the portfolio significantly. I've read about DSCR options and feel like we could easily qualify and bring capital to reinvest elsewhere.

Option 5: Same as Option 4 but house hack a multifamily property for my brother to live in as a primary residence.

I’d love to hear your thoughts on the different ways we could approach this. If anyone is open to connecting, I’d appreciate the chance to talk it through. We don’t feel we are leveraging our situation to its maximum and with so many options, it’s been overwhelming. It would be helpful to get a reality check on what makes the most sense so we can narrow in on a strategy.

[Dan H.]

Quote from @Anthony T.:

Hi BP Community!

Long time lurker, first time poster. I’ve appreciated the information this community has shared and hope to tap into the knowledge base to get guidance on leveraging our existing property.

My brother and I own a multifamily rental property that our father transferred to us in 2021. Because he transferred it to us, we are subject to potential capital gains.

Property is 4 units (duplex, house, cottage) with a remaining mortgage of $390K at a great rate (3.5% / 30yr fixed). Property appraised for $2.7M in 2021. Before taking over, our father had kept rents below market in favor of keeping long term tenants. We generate solid cash flow and our cap rate based on FMV is <3%. Property is in ok shape - built before 1990. The duplex and house are decent but I'm worried the cottage may require investment in the near future.

We both live in California, the property is in our name as joint owners. Our experience in real estate has been managing this property ourselves. The property is in Silicon Valley close to tech companies and is in a prime location where there is strong housing demand.

We're exploring the best ways to leverage our property and are especially focused on opportunities that can generate wealth and a one-time ROI. That said, we're also interested in hearing creative ideas—especially if they could provide strong, sustainable cash flow over the long term.

Here are some of scenarios we’ve been contemplating:

Option 1: Develop the land and build 6 (or more) multifamily units. I'm thinking of townhomes 3BR/3Ba ~1500 sqft. We're zoned for that many units at a minimum as I have spoken to the city. I have seen lots of similar size and zoning develop projects like this. We realize this would be a huge undertaking and we would need to bring in a lot of expertise to help lead development. I have spoken to a couple of lenders and it seems our biggest challenge would be bringing ~20% of construction costs to the table as capital. Broad strokes, I believe this scenario has the biggest ROI potential from one project however this will come with big challenges including capital, expertise, and risk.

Option 2: Pursue the same as Option 1 but just entitle the land and sell it / reinvest.

Option 3: Explore subdividing the lot and build individual SFRs? I am not sure about zoning restrictions for something like this. My understanding is SFR construction is less expensive. Would this be any different from Option 1? I am not sure what our financing options are for this scenario.

Option 4: Leverage the equity via HELOC/cash out refi for further real estate investment. I believe we have a lot of leverage here so we could grow the portfolio significantly. I've read about DSCR options and feel like we could easily qualify and bring capital to reinvest elsewhere.

Option 5: Same as Option 4 but house hack a multifamily property for my brother to live in as a primary residence.

I’d love to hear your thoughts on the different ways we could approach this. If anyone is open to connecting, I’d appreciate the chance to talk it through. We don’t feel we are leveraging our situation to its maximum and with so many options, it’s been overwhelming. It would be helpful to get a reality check on what makes the most sense so we can narrow in on a strategy.

San Jose is up ~45% over last 5 years (source neighborhoodscout) but the last couple years have been better than the start of the 5 year period.  This implies your property s almost certainly valued at significantly more than $2.7m.  You may be looking at a valuation near $3.5m.   

https://www.neighborhoodscout.com/ca/san-jose/real-estate

it does not help your gains tax, but it does imply that you likely have significant equity to leverage in what ever you decide.

i am a big fan of sophisticated value adds.  I define sophisticated value adds as primarily  knowledge based versus actually doing the work and have the risk of rehabs/development.  I once had my value add being a law that was passed the legislation and recognizing what this lawwould do to valuations of certain properties.   My first protege sold a property for $1.5m that had current use value below $1m due to a recently changed/resvinded ADU bonus density program (before it was changed).  No rehab or development required.   This means no risk and little effort.

good luck