Archive for January, 2015

Comments Off on To Every Investment Property There Is A Season

real estate investment cyclesHigh rent, low interest rates and even lower vacancy rates have made these fat and happy days for Minneapolis duplex owners. After all, properties are cash flowing at record rates of return, the overall quality of tenants in the marketplace seems to be high, and they seem to stay for a long time.

In fact, life is so good for Twin Cities landlords, it’s hard to imagine things could ever change.

And yet, history proves there is a season for everything, and in the end, all markets are cyclical. Stocks go up, stocks go down, demand for products increase prices, production increases to meet demand, and prices go down. Demand for housing increases as populations grow, supply rises to meet that demand, and then supply exceeds demand.

The same may be true for real estate investment properties.

Our record high rents are driven largely by a recession and housing crisis which made not only loans with which to purchase property difficult to obtain, but also cast doubt on the value of owning housing in the first place.

There comes a time, however, when the price of rent rises past the cost of home ownership, however, and that’s when tenants begin to take note. And as they realize en masse the savings of owning rather than buying, landlords see both vacancy rates and renter’s concessions rise.

For example, many long term investment property owners in the Twin Cities remember the peak of the housing market, when rental ads began with the words “first month free”, “free Internet” and “free cable” in an effort to attract tenants.

In fact, as far back as 1876, the author and political economist Henry George observed that real estate markets can be summarized into four categories:

  1. Recovery- As population increases, so too does the demand for goods and services. This demand is typically fueled by government intervention in the form of low interest rates. As things improve, companies expand their businesses, hire more people and buy more equipment. This increases the demand for locations where this increased economic activity can take place, which causes vacancy rates in every class of real estate (office, retail, industrial, residential, etc.) to fall.
  2. Expansion – This occurs when companies have purchased or rented most of the existing available properties. As unoccupied properties become scarce, rents rise. It takes a long time to build new inventory. By the time these new developments are ready, the economic expansion has been underway for five to seven years. And during this time, rents have been increasing so fast that now, investors build these increases into their economic forecasts. It’s at this point that properties are sold for what they may be worth in the future, rather than the fundamental economics of what they are. This is the hallmark of a boom.
  3. Hyper Supply – As long as occupancy rates are below normal, rents rise, which makes new construction feasible. However, the first sign of a change is a rise in the amount of unsold inventory and vacancy rates. This is a result new construction begins to satisfy the market’s need for real estate product. Rents no longer rise, but begin to decline.
  4. Recession – The second indicator of trouble is vacancy rates rise above the long-term average. As a result, new construction stops, but those projects already well under way are completed. Higher inventory leads to lower occupancy and lower rents, which reduces revenue for property owners. The third indicator of trouble is an increase of interest rates; a result of the Federal Reserve attempting to fight inflation. As vacancy rates rise and revenues fall, foreclosures follow. And the cycle starts all over again.

While no one is forecasting a spike in vacancy rates in the coming month and year, it is important to remember that like everything else, real estate is cyclical. And so it stands to reason that “first month free” signs are somewhere up ahead.

Can Your Friend Manage Your Minneapolis Duplex?

said on January 28th, 2015 categorized under: Legal Stuff

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Duplex Property ManagementSometimes, life’s circumstances require a duplex owner to move far from their property.

When that happens, owners are faced with a dilemma. Should they sell? Hire a management company? Or ask a friend or family member for a favor?

Over the last 8 years, many duplex owners have not been willing to consider the option of selling. There are many reasons. The market may have declined to the point where they would sell for less than they owe, triggering a short sale. Or, rents may have been so high that the duplex was suddenly a very good investment.

When the latter was the case, many duplex owners faced another choice. Should they hire a professional management company? After all, the radio ads promoting property managment services make it sound so easy. Sign with them and they’ll take care of everything while you just collect the cash.

Of course, those companies charge a fee. Locally, that runs around $80 per unit per month; a figure which can mean the difference between positive and negative cash flow for many duplex owners.

So that’s where the favor comes in. A friend or family member may be willing to take on the task of watching over the duplex on behalf of the owner.

But is that person required to have a real estate license?

After all, property management and leasing are considered real estate brokerage services under Minnesota real estate licensing law. Any property manager who is going to lease,list, procure prospective tenants, negotiate, assist or offer to perform any of those acts is required to have a real estate broker’s license.

There is an exception. Employees of the owner or manager of a residential property (like a duplex, triplex or fourplex) who lease units in the property are exempt from the license requirement.

While this may come as a relief to many duplex owners, it may be wise to encourage to ask the friend or family member to take classes offered either by the Minnesota Multi-Housing Association (MMHA) or the Minneapolis Police Department’s Rental Property Ownership Workshop to ensure compliance with all fair housing and rental property laws.

Minnesota Landlords Face Annual Deadline

said on January 22nd, 2015 categorized under: Tenants

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duplex owners face state deadlineIt’s almost the end of January, which means Minnesota landlords are facing the deadline for issuing Certificates for Rent Paid (CRPs).

All rental property owners and managers must issue a certificate to anyone who rented from them in the previous year.

The CRPs must be provided by January 31, 2015 if you either paid taxes on the property or made payments in lieu of taxes.

Renters need this form in order to file for what’s often called the “renter’s refund”, more formally called the Homestead Credit Refund and Renter’s Property Tax Refund.

Failure to issue the CRP on time may result in a fine of $100 for each incident, so it’s best to get them done.


Section 8 Wait List Expected To Hit 60,000

said on January 20th, 2015 categorized under: Tenants

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section 8If you have a tenant struggling to pay rent, you may want to encourage them to explore Section 8;  federal program that helps low income residents pay rent.

While this isn’t an immediate fix, last week, the Metropolitan Council did announce for the first time in 10 years it will add new names for a wait list for Section 8 housing vouchers in the suburbs.

Section 8 is a federal program that helps low income residents pay rent; covering as much as 70 percent of the monthly charges.

It’s expected that 60,000 people will apply for just 2000 spots chosen by lottery to be placed on the wait list.

The demand is the result of a 2.4 percent vacancy rate across the Twin Cities; down from 2.5 percent one year ago. High demand has forced rent to rise.

The Met Council found in 2013 that one in three rental households could be considered “housing cost-burdened”, meaning they spent nearly 30 percent of their income toward housing. Another 13 percent of households were severly housing cost-burdened, spending 50 percent or more of their income on housing. This means that almost half of all tenants in the seven county metro area are cost burdened.

On average, it’s taken seven to eight years for a family to move from the Section 8 waiting list into an apartment.

Vouchers for those who receive assistance in this case may not be used in Minneapolis or St. Paul. They may, however, be used within Carver, Anoka, suburban Ramsey and Hennepin counties.

The Section 8 application window will be online only, with applications accepted through the Met Council’s Housing and Redevelopment Authority from 8 a.m. Februay 24 through noon on February 27.



FHA Lowers Duplex Mortgage Insurance Premiums

said on January 16th, 2015 categorized under: Financing

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save money on duplex financingLast week, the Obama administration announced some important changes if you’re thinking of buying and living in a Minneapolis duplex.

The changes involve Federal Housing Administration (FHA) insured duplex loans. As you may know, buyers who wish to owner occupy an investment property may use FHA financing for not only single family homes, but duplexes, triplexes and four unit apartment buildings too.

In exchange for a low down payment option, buyers must pay a monthly mortgage insurance premium.

This amount is being reduced from 1.35 percent to .85 percent by the end of the month. The mortgage insurance premium is charged for the entire life of the loan; regardless of how much equity you accrue.

On a purchase of a $200,000 duplex, this reduction may mean a savings of $80.42 a month with a 3.5 percent down payment.

The announcement comes on the heels of last month’s announcement that some borrowers may now be able to buy with as little as a 3 percent down payment.

Of course, this is an enormous benefit to first time duplex buyers. And it’s good news for anyone considering selling their duplex too. Historically, first time home buyers comprise 40 percent of the annual housing market; a share far larger than what we’ve to date in the real estate rebound.

All forecasts suggest that’s about to change.


Comments Off on 2014 Minneapolis Duplex Market Full Of Promise And Shortages

median duplex sales priceWhile I usually blog on Tuesdays about the most recent data we have on listings and sales in the Minneapolis and St Paul duplex market for the week that just finished, January is a great time to look back on the year before.

And when we look at 12 months of data, rather than a week or even a month, we can start to see trends.

Take, for example, the Active Listings Dollar Volume for December, 2014. For the month, there was $92,600,365 in inventory available for purchase. While it wasn’t up much from December 2013’s $87,202,620, it nonetheless represented an increase.

However, when I say there’s very little on the market for duplex buyers to choose from, nothing underscores this more than looking at the Dollar Volume for Active Listings in December 2006, when it was $342,941,330; the last year considered part of the real estate peak.

Yes, many of those properties were over valued. However, that can’t explain everything. Closer examination of the numbers reveals in the month of December, 2014, there were just 468 active listings for duplex buyers to choose from; the lowest number of any month in more than a decade.

To put it in perspective, in December 2006, that number stood at 1395. In 2007, it was 1660.

Of course, if buyers have nothing to purchase, there are bound to be fewer sales. And so it was that in 2014, there were 1208 duplex listings that sold. This was the smallest number in more than a decade. For comparison, again to the boom years, there were 2033 sales in 2005, 2057 in 2010, and even 2013 saw 78 more deals than 2014.

Granted, values haven’t yet hit the $250,000 Median Sales Price of 2005, either. However, the $166,500 we ended 2014 with is still a great impovement over the $83,250 Median of 2009.

If you’re thinking of selling your duplex this year, things are looking up. Changes in FHA lending requirements (see my blog post later in the week) and pent-up demand are pointing toward a big 2015. Just remember, the spring duplex market always starts the week after the Super Bowl . This year, that’s Monday, February 2.

Of course, there might be a slight delay if we have -50 wind chills that week!

Investment Property Demand Should Remain Strong

said on January 9th, 2015 categorized under: Twin Cities Real Est

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businessman choosing rent or buy  real estate conceptI spent the morning at the Minnesota Real Estate Journal’s 2015 Apartment Summit. The conference showcased eight separate panels of investors, researchers, lenders and multifamily property developers.

Much of what was said was relatively specific to large apartment complexes and developments.

There were several opinions that held relatively consistent among the various panel members:

  • The demand for investment properties should remain strong through the end of 2015.
  • Today’s tenant population covers a broad spectrum of people, ranging from milennials to empty nesters.
  • Rents should see a 2-3 percent increase through the end of the year.

When I listened closely, however, I also picked up some not so subtle hints things may be starting to change.

Toward the end of the morning, managers of numerous large, upscale multifamily properties owned by Greystar, IRET and Timberland Partners shared what their 2014 tenants had named their top reasons for leaving when they moved. They were:

  1. Job relocation.
  2. Buying a house.
  3. Rent increase or losing a roomate.

All three said it was the first time they could recall “Buying a House” ranking that high in their exit poll in years.

That may be a sign of good things for the housing market.

It may also be among our first subtle signs of a changing rental market.

We’ll be watching.

Washington Extends Duplex Debt Forgiveness Break

said on January 5th, 2015 categorized under: Short Sales/Foreclosure

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TAX BREAKJust before the holidays, there was some good news for distressed duplex owners that got little fanfare.

President Obama signed a bill called the Tax Increase Prevention Act of 2014, which retroactively extended 55 tax provisions that had expired at the end of 2013.

Perhaps the most important provision was the one that provides distressed duplex owners with tax relief on forgiven mortgage debt. The tax provisions are retroactively extended for one year, and will be effective on income tax returns filed for 2014.

Essentially, this is an extension of the Mortgage Forgiveness Debt Relief Act of 2007. This means that property owners who either sold their homes as short sales or in other distressed scenarios may not have to pay taxes on the amount of debt that was forgiven.

The new bill also allows homeowners to count qualified mortgage insurance premiums as interest toward the mortgage interest deduction on their tax bill. In light of the increased rates for many of these premiums, that should help many duplex owners ease some of the sting.

There is no word yet as to whether Congress and the president will extend the act to include short sales in 2015. At some point, the economy will have recovered enough that it likely won’t be deemed necessary.

So if you’re a duplex owner who’s still either upside down on your mortgage or behind on your payments, give me a call. Making a move to resolve the situation now may not only relieve your stress, but reduce your tax burden too.