Archive for June, 2017

Comments Off on What Every Minneapolis Duplex Seller Should Know About Equity

For the last decade, so many duplex owners have found themselves owing the bank more than their property was worth that the words and phrases equity, capital gains tax and 1031 or Starker exchange have rarely appeared in this blog.

My how times have changed.

If you’ve never heard these phrases, you’re about to hear them a whole lot more.

The Internal Revenue Service views your duplex as an investment. And, to that end, if you make a profit on it when you sell, they would like you to give them a cut. Oh, by the way, if you depreciated it all during the time you owned it, they would also like you to give them a piece of that.

By the time it’s all said and done, that nice check you thought you’d get at closing goes from fat to thin in a hurry.

So what can you do about it?

Enter a tax deferred exchange, otherwise known as a 1031 or Starker Exchange.

A 1031 exchange allows you to “trade” your equity from the sale of one property for equity in another property.

This DOES NOT mean you need to find a property just like the one you’re selling, or that you and another seller must literally trade properties.

Rather, it means you must follow a very strict set of rules laid out by the IRS. They are:

  • Buy something of equal or greater value. It may be one property or two, but the sales price of your replacement property needs to be equal to or greater than the one you sold.
  • Don’t touch the money. Any time you touch money from the sale of an investment property, it’s known as “boot”. You will be taxed on whatever amount of proceeds you put in your pocket from the sale. If for example, you have $200,000 in equity and take $20,000 out of it to pay some bills, you will be taxed on the $20,000.
  • Give the money to a Qualified Intermediary. At closing, your proceeds from the sale need to be wired or given to someone known as a qualified intermediary. There are many companies who specialize in this, as well as title companies and attorney’s who may qualify to provide this service. For a small fee, they hold your money until you tell them to wire it as a down payment on your replacement property.
  • 45 days. From the day of closing, you have 45 calendar days to name up to three properties that you may want to purchase as replacements for the property you sold.
  • 180 days. You must successfully close on one of the three replacement properties no later than 180 days from the date you closed on the relinquished property.

Perhaps the best news of all in this is you can continue to exchange into bigger and bigger properties throughout your life. If you choose to cash out at any point, you will have to pay taxes and depreciation recapture back to the day you started this chain.

And if you leave the properties to your kids? All they pay is an inheritance tax.

Give me a call today to find out how much equity you would have to reinvest!

How To Keep A Good Tenant Without Going Broke

said on June 28th, 2017 categorized under: Tenants

Comments Off on How To Keep A Good Tenant Without Going Broke

One of the greatest fears many Minneapolis duplex owners have is losing a good tenant.

A good tenant is usually defined as someone who pays rent on time, keeps their unit relatively clean, and is realistic insofar as what the landlord should repair in a timely manner.

Let’s face it; good tenants make like easier for duplex owners, and great tenants — the ones who truly treat the property as if it were their own, are a dream come true.

Generally speaking, the landlords I run into will do almost anything to keep a good or great tenant from leaving. Most often, this strategy entails keeping rents 20 percent or more below current market rates. After all, the theory goes, why would anyone leave if it’s going to be more expensive elsewhere?

I understand that logic. And yet, my question is; if rent was just 5 or 10 percent below market rates, wouldn’t it have the same result?

Tenants study Craigslist. They know when they’re getting a great deal. Odds are they aren’t going to spend money renting a truck and plying their friends with beer in order to get help moving if they’re still getting a good,  but not great deal.

And if they’re a long term tenant, odds are the property’s expenses have risen during their residency. Higher costs, without a corresponding increase in revenue result in reduced cash flow.

As a duplex investor, cash flow is important not only for the highest rate of return on the dollar, but also for the value it adds to the property when it comes time to sell.

After all, the financial rewards of real estate investment are why most of us got into owning duplexes in the first place.

 

 

Minneapolis Duplex Theme: Make More Money!

said on June 27th, 2017 categorized under: Selling A Duplex

Comments Off on Minneapolis Duplex Theme: Make More Money!

Sometimes it seems like there’s a theme when I meet with Minneapolis and St Paul duplex owners who are thinking of selling. The past few weeks have been a very good example of just that.

Many duplex owners who bought at the height of the market in 2004-2007 have spent the last decade waiting for the time when their property was worth as much or more than they paid for it. And that time has finally come.

And while that’s one of the themes I’m finding with recent appointments, it’s not the one that stands out the most.

It’s the fact that time and again, these very same owners who have struggled so long to stay afloat are charging far less than market rent! In several instances, simply following my suggestion to raise rent closer to the market rate meant more than $500 per month more in the owners pocket!

More importantly, perhaps, these duplexes finally became the great investment their owners were hoping for when they bought them years ago.

Keeping the rent you charge at or near market rate not only helps your peace of mind as an owner, but remember, it also plays an important role in what your duplex is ultimately worth. After all, it’s an income property, and its value is determined, in part, by the amount of money it generates!

 

 

 

Comments Off on Selling Your Minneapolis Duplex Contract For Deed – The Good, Bad and The Ugly

In the last year, many Minneapolis and St Paul duplex and investment property owners told me they would sell if not for one thing: taxes.

I suggest a 1031 exchange to all of them. Many, however, realize they will have a difficult time during a time of little inventory finding a replacement property. And others want nothing more to do with rental property whatsoever, so they are in a bind.

There is another solution. While it doesn’t always spring immediately to mind, a contract for deed can help reduce tax obligations. Capital gains tax and depreciation recapture are only levied when you touch the money from a sale. Therefore, if a seller carries a contract on a property, there is time to tax plan and offset any gain realized on an annual basis.

Other benefits of a contract for deed for a seller include:

  • Income – Sellers who don’t have a mortgage on their duplex can use the monthly payments as income. Contracts for deed are often at an interest rate that’s a higher return than other investment options generally return.
  • More Buyers – While we’re currently in a seller’s market,  in times when either the market favors buyers or banks are reluctant to lend money, sellers can broaden their pool of potential buyers by offering more competitive interest rates than a traditional lender or extending credit to buyers who otherwise are not able to qualify for a loan.
  • Cancel the contract and resell the property. If a buyer misses two payments, the seller can reclaim the property without having either a foreclosure sale or going to court. The seller may keep everything the buyer has paid to date and resell the property to another buyer.

Of course, there are also some potential pitfalls of selling a property on a contract for deed. They include:

  • Due on sale clauses in mortgages – If you have a mortgage on your property, selling it on a contract for deed may trigger what’s known as a due on sale clause. Most mortgages have it. Basically, if the lender learns you have sold the property, they can accelerate the repayment schedule and demand to be paid in full.
  • Buyer is unable to make the balloon payment.  Real estate and job markets change. If the buyer is unable to refinance either by using the equity accrued over the time of the contract or as a result of a job loss, the seller is left holding the contract. In this case, the seller can choose either to extend the contract and continue to receive monthly payments or to cancel the contract and evict the buyer.
  • Buyer fails to make monthly payments. If the buyer fails to make payments, the seller will have to formally cancel the contract in a manner consistent with what the law dictates.

While not terribly common in today’s hot duplex and investment property market, contracts for deed can be an excellent way to sell property.

 

Comments Off on Buying A Minneapolis Duplex On A Contract For Deed: The Good, Bad and The Ugly

Every now and then, duplex buyers tell me they want to purchase a property with a contract for deed.

A contract for deed is an alternative means of financing in which the seller acts as the lender for the duplex purchase rather than a bank. The buyer makes monthly payments to the seller and takes immediate possession of the property.

Terms of the loan are negotiable. The seller and buyer agree on an amortization schedule and interest rate.

One common misunderstanding is that a seller must hold a contract for deed for 30 years. Nothing could be further from the truth. Most contracts for deed are for five years or less, with a balloon payment. In other words, when the balloon payment is due, the buyer will need to refinance.

There are advantages and disadvantages to a contract for deed for both a buyer and a seller. In this post, let’s look at it from the buyer’s point of view.

Pros

  • Low down payment. Some sellers require little to no money down. (In my career, however, I have found this to be the exception.)
  • Homesteading. If a buyer intends to owner occupy a duplex, he or she can qualify for reduced property tax and other property tax benefits.
  • Mortgage interest deduction. As the owner, a buyer can qualify for the mortgage interest and real estate tax deductions of their income taxes.
  • Easier to qualify. A seller may decide to give a buyer with a less than perfect credit score a chance to buy, or not care about the buyer having a slightly higher debt to income ratio.
  • May not appear on your credit report. Unless the seller reports the terms of your contract and repayment history to the credit bureaus, which may help you qualify for a traditional mortgage on other properties.
  • May appear on your credit report. If you have credit issues and the seller does report payment history to the credit bureaus, it may help improve credit scores.
  • Lower transaction costs. Seller financing does not have loan origination fees or loan application fees.  While it is a very good idea to use a title company to close the transaction, some of their costs may be reduced also.

Cons

  • Higher down payment. Sellers typically want a down payment above and beyond their costs of selling. Agents commissions and title fees can be as high as 7-10 percent. As a seller may want at least a 10 percent down payment. Other sellers will only carry a contract for deed if the risk is low. To them, this may mean a 40 or even 50 percent down payment.e
  • Faster foreclosure. If the buyer misses two payments or defaults for other reasons, the seller doesn’t need to go to court. He or she simply cancels the contract and takes possession of the property.
  • Balloon payments. When it’s time to refinance, interest rates for traditional mortgages may be higher, or the buyer’s credit score may prevent him or her from qualifying for a loan. If the buyer is unable to refinance, the seller may opt to cancel the contract with a 60-day notice, and keep any down payment, equity, or principal that has been paid off.
  • Repair and maintenance.  While negotiable, the seller may require the buyer to be responsible for keeping the property in good repair.
  • Seller retains the title. In other words, the seller can put a mortgage or a lien on the property unless you recorded the contract with the county.
  • Unfavorable terms. Loans through banks are regulated to protect consumers. Sellers are not required to have the same standards and may offer terms that favor them.
  • Seller may sell the contract. Sometimes sellers have a financial need that causes them to want out of the contract for deed before it balloons. In this case, they may choose to sell the loan to another investor who may be less forgiving. The buyer, on the other hand, most likely will not have the option to sell his own interest in the property.
  • Property taxes and insurance are not escrowed. Most buyers using traditional financing choose to have a portion of their monthly mortgage payments escrowed to pay property taxes and insurance.

A contract for deed can be a wonderful way to acquire property if you can find a seller willing to carry the loan. There are advantages to the seller as well, and I will cover them in my next blog.