Archive for March, 2011
said on March 31st, 2011 categorized under: Tenants
One of the biggest mistakes I see new Minneapolis duplex investors make over and over again is that of over-improving a property.
What do I mean?
The new duplex owner thinks the only way anyone on the planet will ever rent their property is if they completely gut the kitchen, install granite counter tops and hardwood floors and even, in one instance, move the tub from one side of the bathroom to another.
While many of these improvements are nice amenities, most of the time they aren’t necessary and won’t ever generate enough additional rent to justify the expense.
What’s the most important investment to make?
And I don’t mean just running a vacuum over the carpet.
All trash and personal belongings should be removed from the property prior to making it available. Clean the carpets. Scrub beneath appliances and inside of them, in cupboards and on their doors and sweep out the garage. Freshen the caulk around the tub in the bathroom In short, clean everywhere.
Try to de-personalize the unit by using fresh, neutral colors for paint and flooring.
And here’s an often overlooked detail…change the switch plate covers!
Nothing screams “has been filthy” like freshly painted walls with black marks all over the light switches. It sounds picky, I know, but I notice it immediately. It will cost just pennies to swap them out, yet immeasurably help your vacant unit rent quickly.
What if your vacant duplex is hospital-clean and you still don’t have anyone calling from your Craigslist ads? Lower the rent. Fifty or one hundred dollars a month can price you out of the market, leaving you scrambling to make up for months of vacancy. It’s always better to get $850 a month for rent immediately than hold out for three months to get $900.
Duplex vacancy rates both in Minneapolis and across the nation are at lows not seen in more than a decade. It shouldn’t take being featured on HGTV to fill an empty unit.
The Minneapolis duplex market still has many owners facing foreclosure.
I do everything I can to track down as many of these property owners as possible so I can help them explore alternatives to losing the property through foreclosure.
After all, a foreclosure can cause more than just damage to credit. In fact, it can not only impact things like employability and security clearance, but may also be a taxable event for a real estate investor.
And yes, even if the duplex is owner occupied, the portion occupied by tenants is considered an investment property, and may trigger a tax obligation.
I don’t know whether it’s due to a sense of defeat or depression, but I am always surprised by how few duplex owners are willing to explore their options.
First, while the odds are long, in the last three months I have spoken with two duplex owners (both owner occupants) who have succeeded in getting loan modifications. While they seem to be the exception to the rule, places like the Minnesota Home Ownership Center can help property owners through the process.
Second, in Minnesota, if a duplex is sold at the sheriff’s sale for less than the amount owed to the bank, the property owner has the right to purchase the property back at that adjusted amount priot to the end of the six month redemption period.
The duplex owner may also sell the property for that amount or more and pocket the difference (provided there isn’t a second mortgage on the property).
Finally, there is the short sale option. If the duplex is too far along in the foreclosure process, this may not be as beneficial to the owner’s credit score as it is early in the process. This is largely as a result of the impact of additional late payments.
Nonetheless, not only does a short sale drop off a credit report much more quickly than a foreclosure, it also tends to result in a higher sales price for the duplex owner.
According toRealty Trac Senior Vice President Rick Sharga, the average sales price for a short sale in 2010 was 16 percent higher than an REO.
In other words, if a distressed property happens to be owned by an investor, the short sale reduced their potential tax obligation by 16 percent.
To me, that’s quite a savings.
Minneapolis Duplex Sales Race For Home
The Kentucky Derby is still a month away, but the Minneapolis duplex market is acting as if it’s running in a qualifying.
For the week ending March 19, the duplex and small multi-family market finished in a virtual dead heat with the same week one year ago.
This year, 26 sellers received and signed purchase agreements. Of these, 26.9 percent were traditional sellers.
For the same stretch a year ago, 25 sellers received offers. Of these transactions, 28 percent did not involve negotiations with a lender.
This is of particular interest when you think of this year’s transactions having to ride with the added weight of not having an $8000 first time home owner tax credit as an incentive.
Unfortunately, the week’s market did give up some turf when it came to new listings. There were 14.6 percent fewer new listings for buyers to choose from this year than came onto the market one year ago.
The good news is listings that will involve lender negotiations were in a virtual dead heat year over year. Last year, 48.8 percent of the new inventory was offered by traditional sellers; just slightly ahead of this year’s 48.6 percent.
The single family home market probably won’t qualify for the Triple Crown, with pending sales trailing last year’s transactions by 16.6 percent, and 36.9 percent fewer new listings coming to market.
Here’s a hot tip for the race: if you’re either a traditional duplex seller or find yourself upside down in your investment property, this is a great time to sell.
No, it’s not 2005. And you’re not going to hit that exacta payoff. But c’mon. What were the odds anyway?
Here’s the good news. The right Minneapolis and St Paul duplexes are selling at healthy, fair prices.
If you’re considering buying an investment duplex in Minneapolis or anyplace else, which is the best measure to determine whether or not it cash flows? The cap rate? The gross rent multiplier? Or the one percent rule?
Remember, these measures are nothing more than first glance ways of turning apples and oranges into bananas and comparing the ripeness of each.
Never purchase a property without first doing a complete income property analysis, using actual rental income and expenses.
So which is the best quick measure?
The cap rate is simply the rate of return a property would produce if it were entirely paid for. It’s calculated by dividing the purchase price by the net operating income (NOI). Of course, NOI is determined by taking your total income for the year, less vacancy and expenses.
The gross rent multiplier (GRM) is arrived at by dividing the purchase price or present value by the total revenue the duplex could generate every year.
Read the rest of this entry »
In the past week, I’ve had two things happen more than twice in my corner of the Minneapolis duplex market.
I’ve had three prospective sellers who either owned their duplexe free and clear or were very close to doing so say they would rather stay put with their properties than move into another with a higher return on investment.
My prospective duplex sellers were content with a 5 percent cash-on-cash return on the buildings they owned.
This week I have also seen two new listings on the MLS; one a duplex and the other a four-unit apartment building, with anywhere from a 23 to 28 percent cash on cash return.
One needed some cosmetic work. The other didn’t need a thing. Both were in sought-after neighborhoods.
Why did the new properties fare so much better than those they owned?
There are several reasons.
We all learned about leverage in elementary school. Except back then, it applied to using a long stick or rod to move a heavy object with far less effort than it would have required had you simply tried to pick the boulder or whatever it was up.
The same idea applies here. Basically, you use a a down payment to leverage your way into more money.
You put down $25,000 and the bank helps you buy a $100,000 property. You use relatively little to buy a lot.
Second, depreciation. If you’ve owned an investment property for a long time, in all likelihood you’ve exhausted the two categories with the fastest rates of depreciation; personal property and land improvements.
When you can no longer use the savings these categories provide in your tax returns, you typically pay more in income tax.
A percentage of the interest you pay on a loan is also tax deductible. While Dave Ramsey will say you ultimately pay more in interest than you’ll ever save in taxes (and he’s right), waiting to have enough money to pay cash for a property will also cost you years in appreciation and principal reduction (paid by someone else).
Finally, the properties that were for sale actually had cash flows, even with mortgage payments, equal to or greater than the amount those owners were receiving on their paid for properties.
Many seasoned Minneapolis duplex investors have a difficult time believing a duplex can cash flow the first year you own it. In fact, most will say you have to pay into the property for a minimum of two- three years before it breaks even.
Times have changed.
And we probably won’t ever see opportunities like this again in our lifetimes.
Which is better? A five percent return on investment or a 28 percent return?
You tell me.
I wish every Minnesota duplex or investment property owner facing foreclosure knew this one thing: the amount the bank bids at the sheriff’s sale is the amount they want to redeem the property.
For example, if you owe $200,000 on your mortgage, and the lender offers the number $85,000 at the courthouse, it means if you pay them that, as well as approximately another 2-3 percent in interest, penalties and attorney’s fees, that debt is settled.
In this instance, I am referring only to the lender who is foreclosing. If you have a second mortgage or Home Equity Line of Credit (HELOC), that must be settled separately and, even if you lose your property to foreclosure, that indebtedness survives the proceedings and the lender can and will in all likelihood, chase you for the balance.
Knowing this, I am constantly amazed that more distressed property owners don’t choose to go ahead and sell their property prior to losing it to the bank.
What’s even more puzzling is if these owners could (and in many instances can) sell their property for well beyond the amount bid at the sheriff’s sale– they are free to keep the difference!
I have investors looking for exactly these kinds of opportunities and can, within days, quickly and painlessly end the stress and strain of foreclosure for distressed Mineapolis duplex owners.
Please call if you’d like to get cash for your property. You have more options than you think.
This week’s market statistics for Minneapolis duplex sales go a long way toward demonstrating what’s different about duplexes than other kinds of investment properties.
What is that?
A large portion of the Minneapolis and St Paul duplex market consists of first time home buyers who intend to live in one of the units.
And because of them, and the loss of last year’s first time home buyer tax credit, the Minneapolis duplex market was decidedly different the week ending March 12 than it was for the same week one year ago.
New listings were down 48 percent, as last year saw 54 owners try to sell before the end of the tax credit. This year, just 22 wanted to part ways with their multi-family properties.
Pended sales were down 15 percent.
The average price a property left the market dropped $27,260, which might not seem like much until you know that last year’s average sold price for the week was just $123,500.
This is once again in step with the impact the tax credit had on the single family home market, where the week saw 20.9 percent fewer pending sales, and 31.1 percent less new listings.
As there aren’t even whispers of reinstating any kind of tax credit, this may be the new normal.
said on March 21st, 2011 categorized under: Financing
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The other day I read a post by a Realtor in the advice section on a popular real estate site stating that FHA financing was not available for duplexes or any other kind of multi-family property.
I was appalled by the ignorance.
FHA insured mortgages are available for owner-occupied properties of up to four units. In other words, duplexes, triplexes, or fourplexes all may be purchased with as little as 3.5 percent down.
As much as 75 percent of the rental income from the property can be used to help qualify for the loan.
FHA has guidelines for each county in the country as to how much they are willing to lend for the acquisition of a property. This is largely determined by prevailing prices in the area.
In the counties closest to Minneapolis and St Paul (Hennepin, Ramsey, Dakota, Washington, Carver and Wright), FHA loan limits are:
- Single Family Home – $365,000
- Duplex – $467,250
- Triplex – $564,800
- Four Unit Building – $701,900
I don’t know whether you’ve been shopping for property lately, but I can think of less than a handful of listings active on the MLS right now that would fail to qualify for FHA financing as a result of price.
If you live someplace else, it’s easy to see what the numbers are for your area by going to FHA‘s web site.
FHA does require that you owner occupy the property for at least a year. And no, at the end of that time you can’t go buy another duplex with an FHA loan.
You can only have one FHA loan at a time, so to keep building your investment portfolio, you would either need enough equity in the first property to refinance into a conventional loan, or, have enough of a down payment for the second property to purchase it with conventional financing.
In the end, it’s an important reminder to see what the consensous of opinion is when you ask for advice from people who may or may not specialize in the specific real estate topic you have interest in.
A lot of people are afraid to speak with a Realtor when they’re thinking of buying or selling a Minneapolis duplex because they’ll “have to pay them”.
The irony is, a great deal of the time, agent representation is absolutely free.
When a seller and her Realtor decide to “list” a duplex for sale, what they’re referring to is putting it on the Multiple Listing Service or MLS. In order for that to happen, the seller, the agent, and his or her broker (like Keller Williams) negotiate an agreement among them where the agent and broker agree to help the duplex owner sell the property by marketing it in exchange for a percentage of the sale.
As part of those marketing efforts, the agent submits all of the details on the property to the MLS so it can be featured there. Access to the MLS is limited to its members, which are real estate brokers and Realtors who have their licenses with those brokers. (The MLS Online is NOT the MLS.)
To entice all of these agents to show the duplex, the broker agrees to offer any agent who brings a buyer to the property a split of the commission the company and the agent would earn on the sale. This is usually just under half of the total commission.
So, when the sale of the property is completed, the buyers agent, through his or her broker, is paid by the selling agent and broker, costing the buyer nothing.
What if you’re a duplex owner who’s upside down and facing a short sale on your investment? How are you going to find the money to pay both the listing agent and the buyer’s agent?
Relax. Even though the bank is losing money, they understand that Realtors are an important part of the transaction and willingly pay commissions out of the proceeds of the sale.
Realtors can be a valuable resource for market knowledge, negotiation expertise and advice. If you don’t have to pay us, why fear us?
said on March 17th, 2011 categorized under: Education
Just a reminder; the Tom Lundstedt investment property seminar is tonight at 6:30 at the Westin Hotel in Edina.
Thanks to event sponsor Keller Williams Realty, admission is absolutely free. Just let me know you’re coming, so we make sure we have enough seats. (Come anyway if you forget to tell me, we’ll figure it out.)
Lundstedt taught me how to do investment property analysis. This is the stuff that tells you whether an investment property of any kind, whether it’s a single family home, duplex, apartment building, strip mall or office building is a good investment.
In other words, this is the stuff that will help keep you from making a bad investment.
He’s funny, easy to understand, and a great teacher.
In fact, I hated math before I heard him speak. Now, at least when it comes to this stuff, I do it for fun.
No wonder I never get invited to parties.