Duplex Chick

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The other night, I showed a property where one an elderly tenant was home. Her unit, while impeccably maintained, clearly hadn’t been updated since the building was constructed in the late 1960’s.

I asked how long she’d lived there. She told me all of her life. She was easily in her 80s. (Clearly her math skills were slipping.)

Because she’d lived there so long, the property owner had kept the rent for her two bedroom unit at an artificially low rate of $650 a month.

My buyer’s instinctive reaction was to raise her rent after closing. Of course, this is the right answer in most circumstances.

However, in this case, I encouraged them to calculate the costs of updating her unit. It clearly needed new carpet in the living room, a fresh coat of paint and some updating in the kitchen. Conservatively, the total cost for these cosmetic repairs would be at least a couple of thousand dollars.

How much more rent would they get as a result? Maybe $250 a month.

Does it make sense for them to do it?

As it’s likely she would relocate due to higher rents, they also had to calculate the potential length of time they would be vacant. In all likelihood, it would take a month to rehab and re-rent the unit, during which they’d be out her $650 in rent.

With repairs of $2000-3000 and $650 in lost rent, let’s say they’re out $3150. How long would it take them to recoup the cost of their improvements?

Simply take the cost of the repairs and divide it by the rental increase. $3150/250 = 12.6. In other words, it would take them one year with a new tenant to break even from the rehab. It might be worth the investment.

Then again, maybe the tenant would be happyto pay $750 a month; still a good value for her, without the inconvenience of moving. That simple increase would mean it would take closer to 21 months to pay off the cost of improvements that resulted in higher rents.

Before you begin any multi-family property rehab project, be sure to consider the length of time it will take to recapture your investment.

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In all our focus on buying and selling duplexes, and what constitutes a good value, it’s easy to lose sight of a key component to any successful duplex investment: tenants.

The nation’s economic downturn has not only adversely impacted housing values and unemployment rates, it has also influenced the amenities tenants are attracted to when looking for a place to live.

According to a recent Associated Press article, like landlords, tenants are concerned about their budgets and employment. As a result, tenants are looking for value in a place to live.

The article cites a recent ApartmentGuide.com study which notes the top amenities prospective renters searched for the first two-thirds of this year were paid utilities and washers and dryers in units.

What’s more,  an effort to keep their units occupied, some landlords are including clauses wherby tenants can terminate their lease or stay for a reduced rent in the event they are laid off from their jobs.

According to the article, granite counter tops and stainless appliances no longer hold the power they once did either. Instead, tenants are looking for places with energy efficient appliances and windows that are in good working order.

Of particular interest to Minneapolis duplex owners was the observation that new tenants who are renting as a result of losing their homes to foreclosures still value home-like amemities. These include yards for pets, dishwashers, and washers and dryers in the units.

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The federal $8000 first time home buyer tax credit has been a lot like brushing your teeth.

We all know it’s good for us and the economy. And we all know if we don’t rush to take advantage of it, it, like our teeth, may well be gone.

But like brushing, buyers haven’t taken as much advantage of the tax credit as they should until they absolutely had to.

Realtors have been warning them for months of the coming rush, just as dentists warn of decay. And now, the deadline is near.

This fact is clearly reflected in this week’s Weekly Activity Report from the Minneapolis Area Association of Realtors.

The association reports that pending home sales for the week ending September 26 were up 41 percent from the same week last year.

To make matters worse for procrastinators, there are 20 percent fewer homes on the market to choose from than there were one year ago.

Things are even tougher over in the small multi-family market, where there were 40 percent less new listings for the week.

Of those duplexes that came on the market, 84 percent were listed below $200,000. Meanwhile, traditional sellers contributed 29 percent of the new inventory. This is up slightly from the 21.7 percent share of traditional sellers in the market in 2008.

Pended duplex sales were up as well, with 40 percent more receiving purchase agreements in the week than they had in the same strecth one year ago. While the average off market price was down 9.7 percent from last year’s figure, the properties that left the market did so after just 64.6 days. This is 12.4 fewer days than for the week in 2008.

Both years saw banks involved in the negotiations for about 84-85 percent of the transactions.

As we near the end of the tax credit, it looks like we’re all going to be squeezing the tube of toothpaste from every angle.

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I experienced a bit of frustration this weekend as a tenant stopped me from showing a duplex to a buyer.

The tenant was out of town and didn’t feel comfortable, even if the listing agent was present, letting anyone into her unit. As a result, the listing agent, my buyer and myself had to rearrange all of our schedules to accommodate her return.

Trouble is, the law said we didn’t have to.

While I’ve said it before, it bears repeating. In the state of Minnesota, tenants do not have the right to 24 hour notice if a landlord needs to enter their unit for business purposes. The law says “reasonable attempt to notify”.  Nowhere in state law does it define reasonable attempt.

Of course, this doesn’t mean a landlord should be inconsiderate. Not only does notice keep tenants happy, it gives them the opportunity to tidy up their unit, which ultimately helps it show better.

Many tenants, however, not understanding the process, use this as an attempt to thwart any sale of the property. It’s important, before going on the market, to explain to them that all of the protections afforded them in their lease will remain in effect upon and after the sale.

Fortunately for this seller, it is not a pre-foreclosure situation. Had it been, he would have lost three valuable days on the market, which could have cost him considerably.

Worse yet, had my buyer been less interested, he might never come back.

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When showing a duplex buyer a foreclosed property, I often hear them exclaim, “This one has appliances!”

What’s so special about a refrigerator and a dryer?

Plenty.

Large appliances like refrigerators, stoves, washers and dryers are considered personal property. As a result, they are considered to be owned by the people who lost the duplex to the bank.

More often than not, foreclosure victims take these appliances with them, either to use in a new location or to sell in a garage sale or someplace like Craigslist.

Of course, this means that the duplex buyer has to factor the cost of replacing multiple refrigerators and stoves into her purchase. This can cost several thousand dollars.

So finding appliances in a foreclosed property is a bonus. However, it’s important to remember they are still considered personal property, and the previous owner has the right to reclaim them. Therefore, the bank selling the duplex can’t guarantee a buyer that they’ll be in the property at closing.

Theoretically, anyway, the previous owner could pick them up before the house is sold.

Most of the time, they don’t; saving the buyer significant amounts of cash.

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In a lending market that requires an investor to put 25 percent down on a four unit property, and an owner occupant just 3.5 percent on the same building, it would seem happy days are here again for live-in landlords.

After all, don’t more units always mean more money?

In this case, yes. And yes.

It seems the FHAdoesn’t want any one of us to have too much fun. So, they’ve imposed something of a curfew on the triplex and fourplex market.

Guess what?

Before they’ll even think about giving you a loan, they want to know the net rental income of the property is greater than or equal to the monthly payment. In addition to the mortgage itself, the monthly payment also includes property taxes and insurance.

And with property taxes being based on the artificially high values of a few years ago, that’s tough to do.

What’s the net income? Well, that’s 75 percent of the rent collected from the three units you don’t intend to live in. In other words, the property has to be able to pay for itself with 75 percent of the revenue collected from just 75 percent of the units. Read the rest of this entry »