Duplex Chick

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Last night, a group got together at my office and played Robert Kiyosaki’s game, Cash Flow.

Even though I work every day in the business of duplex and real estate investment, the game was an important reminder of some basic principles that are easy to forget.

For example, the players who fared the best were those who were the most tolerant of risk. They were the ones least afraid to plunge into an investment opportunity. There took risks the other players weren’t willing to.

Those players also understood the importance of leverage.

While the game allows bank loans to acquire stocks and businesses, in real life real estate is the only investment a bank will lend you money to buy.

Think about it. If you are looking to invest in a duplex, in exchange for coming up with 20-30 percent to buy it, the bank will pay for the remaining 70-80 percent.

And, finally, those players also clearly understood they would never get out of the “Rat Race” based on their salaries alone. They knew they needed other avenues to secure their financial futures.

Isn’t it time we all get started?

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If you are considering buying a Minneapolis duplex, or just exploring the possibility of real estate investment,  I have an absolutely free way for you to sharpen your skills.

On Thursday, January 19, we will be playing the game Cashflow from 7-9 PM at my office in Edina.

Created by Rich Dad Poor Dad author Robert Kiyosaki, the game is designed to help you quickly raise your financial I.Q., as well as teach you how you can become financially free even on a small salary.

There can be up to six players on each board, and we will have up to three boards going.

Whether you’re a first time investor, real estate professional, or just bored and looking for something to do, please call or email to let me know so we can be sure to save a seat for you!

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Many new duplex investors think the first thing they should do when buying a duplex is hire a property manager.

While I believe in property management for experienced and out-of-state duplex owners, there are a number of reasons I think this is a bad idea for your first duplex investment. Here are the top three:

1. Managing the Duplex You Know Your Property - Granted, investment property management can be time-consuming. All of the maintenance and repairs necessary in home ownership are part of owning a duplex as well. Learning that furnace filters need to be changed periodically, or that a downspout has a bad habit of getting knocked off during lawn mowing (resulting in water in the basement), will ultimately help you better keep the duplex in better shape, as well as supervise and gauge the competency of the property manager you do hire.
2. Tenant Selection And Management – If you plan to become a lifelong investor, learning how to advertise a property, screen tenants, and keep tenants happy will help keep your duplex occupied and profitable.
3. Save The Money – On smaller investment properties, like duplexes, it’s often difficult to generate enough income to cover the costs of a property manager and have cash flow left over. In some communities, property managers typically retain somewhere between 5 and 10 percent of the rental income. In other markets, like Minneapolis and St Paul, duplex property managers charge as much as $100 per rental unit.

Once you’ve become confident in your knowledge of the duplex, and it’s generating enough income to cover the expense, it’s perfectly fine to hire a competent property manager.

That will leave you more time for things like buying other duplexes!

Why?

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I must admit, never would have thought about using duplex investing as a way to buy a professional sports team.

I might have had I known the history of Los Angeles Lakers owner, Dr. Jerry Buss.

Now I’m a long time Laker fan. But I just assumed he made his money as a doctor. You know, the kind that tells you to open your mouth and say “Aaahh.”

Turns out he made the money he used to buy the team as a real estate investor.

It seems when he was a chemistry professor at USC, he thought he needed something to supplement his income. So, in the 1960s he took $1000 and invested in a West Los Angeles apartment building.

Over time, he was doing so well as an investor that he gave up being a professor.

When it comes to professional sports team ownership, he’s not alone.

Minnesota Vikings owner Zygi Wilf is known as a real estate developer. However, after a brief stint as a used car salesman, he and his brother Harry started buying apartment buildings.

Today, they own over 100 commercial properties and over 30,000 apartment units.

Owners of the Miami Dolphins, St Louis Rams and Denver Nuggets, among others, also made their fortunes investing in real estate.

In a down real estate market, with single family homes, duplexes, triplexes and apartment building selling at clearance sale prices, can you think of a better time to start investing?

Can you imagine owning the Lakers?

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According to the National Association of Realtors (NAR), sales of investment properties, including duplexes, constituted 17 percent of all home sales in the United States in 2010.

As there were 5.28 million homes sold last year, that means 897,600 were  duplexes and investment properties. Divide that by 50 states, and it’s an average of 17,952 per state.

That’s a lot of real estate investing!

According to recent data, there’s uptick in that figure this year.

In fact, in July alone, NAR found 29 percent of all purchases were all-cash deals; likely involving real estate investors.

In a down economy featuring high unemployment, just who are these real estate investors anyway?

Half of them are people under the age of 45, while those under 54 comprise another 26 percent.

Are they millionaires?

Hardly; 58 percent of them earn less than $100,000 a year.

While 39 percent of last year’s investment property buyers used a mortgage, 59 percent of them did not.  And of those who used a loan, 50 percent contributed more than 30 percent toward the down payment.

Of these buyers, 45 percent saw real estate as a good opportunity to diversify their investment portfolio.

A whopping 77 percent of all real estate investors in 2010 think now is a good time to purchase real estate. So good, in fact, that 52 percent of them plan to buy another duplex in the next two years.

What’s holding you back?

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If you’re thinking about buying a duplex with a friend, spouse or family member, the single most important thing to discuss isn’t cash flow, rate of return, or how rich you’re going to get from investing in duplexes.

The single most important thing to discuss is how you’re going to get out.

But why? Nobody ever fights, changes plans, gets sick or loses a job, right?

Haha.

No matter how well intentioned we are, or how much we love the person we’re buying a duplex with, the sad fact is things happen. And the only chance we have of preserving not only our investment, but far more importantly, our relationship, is to have a pre-determined understanding of how we can exit if we need to.

It’s the conversation none of us wants to have. Nonetheless, it needs to happen.

Be sure to talk about how you’re going to take title or ownership. Will you be joint tenants, where if one party passes away, the other automatically inherits the deceased person’s half? Or will you take tile as tenants in common, where you can sell or will your share to an outsider or your heirs?

What if you get a job in another state? Will you sell? Trust your partner to manage the duplex in your absence?

What if one of you just needs her money out? Will the still interested duplex owner agree to list the property? Buy your share?

Once you’re ironed out the details of duplex ownership, it will cost you several hundred dollars to hire an attorney to put your agreement in writing. Always put it in writing. It will help each of your remember what your undertanding was when you bought the duplex, and preserve your friendship when it comes time to sell.

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Whether you’re an investment property owner or prospective duplex buyer, when you read or hear RealtyTrac Vice President Rick Sharga share their monthly foreclosure statistics, you should mentally respond with the following thought…

“And all of those people will need to rent.”

For example, while the headline on this week’s report was “Foreclosure Activity Falls to 44-Month Low in July”, the rest of the story went on to state that while lenders already have 850,000 homes on their books nationally, there are another 1.1 million property owners in earlier states of foreclosure…and all of those people will need to rent.

There may also be as many as three million more properties that will be foreclosed upon before the housing market improves…and all of those people will need to rent.

Remember the pay option mortgages? The ones where you could pay interest only, interest plus principal, and so forth? Well, $200 billion of those mortgages are due to start resetting this year. It will be difficult for those homeowners to refinance, because the mortgages are on properties that have lost a great deal of value.

And if those folks face foreclosure?

All of those people will need to rent.

The greater the demand for places to live, the higher rents go.

Has there ever been a better time to invest in duplexes?

Probably not in our lifetimes.

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On news of yesterday’s discouraging stock market sell-off, I found myself thinking of all the reasons duplexes are a safer place to invest money than Wall Street.

Yes, I know that flies in the face of everything you’ve heard about real estate the last 5 years.

But, if you buy a duplex that makes financial sense in the first place (and don’t speculate on appreciation), here are 10 reasons investment property is a wise move:

1. People Need A Place To Live. If a family has lost their home to foreclosure, they still need a place to live. In fact, everybody does. And if someone has damaged credit, job uncertainty, mistrust of the real estate market or simply isn’t willing to make the long term commitment of home ownership, they’re going to rent.
2. The Bank Will Lend You Money To Buy It. In spite of the foreclosure crisis, banks must think real estate is a pretty good investment. After all, if you put up a little of your money as a down payment, the bank will let you use theirs for the rest. They won’t agree to that arrangement at all when it comes to your Apple stock.
3. Thanks To Leverage, You Can Buy More Than One.  Unlike stocks, because you don’t have to pay for all of the property at once, you can diversify by purchasing more than one duplex (provided you qualify for a loan, of course).
4. Interest Rates Are At Historic Lows. Not only can you use other peoples money to buy investment property, but you don’t have to pay them much for the use of that cash either. In fact, doesn’t it make sense to pay someone 4.5-5.5 percent to use their money to make 13 percent cash back on yours?
5. Interest Rates Are Still Tax Deductible. While there’s been talk in Washington of reducing or eliminating the mortgage interest deduction, for now, the IRS still allows you to deduct a percent of the total interest you pay on your property. Read the rest of this entry »

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One topic duplex buyers and I have been talking about lately is the seasonality of rental property.

See, as much as we all hate thinking about it, winter isn’t too far over the horizon.

And guess what?

Nobody wants to move in the winter.

I don’t know if the same can be said about cities with extreme heat, but in the areas where extreme cold and icy sidewalks are, at minimum, psychological barriers to heavy furniture lifting.

In other words, if it can be helped, nobody wants to move during the winter. In fact, for the most part, they don’t want to move during the holidays either.

What’s the first “holiday” of the season?

Halloween.

Working backwards, with an eye toward having a duplex fully occupied before the holiday season, means at latest, duplex owners want do all they can to get leases signed before then.

If you’re thinking about buying, consider this: it’s going to take anywhere from 3 weeks to a month to get a loan funded, get through escrow and officially close on and own a duplex.

And if the investment property you’re buying needs some repairs, you need to allocate some time for that too.

This is true if you already own a duplex and presently have a vacancy as well.

As a result, it’s probably a good idea to start moving a little faster as we head toward fall.

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The research firm Marquette Advisors reporting the vacancy rate for Minneapolis and St Paul duplexes and apartments dropped from 6.1 percent in the first quarter of 2010, to 3.1 percent in the first quarter of 2011, there suddenly seems to be something of a rapid recovery happening in the rental market.

According to a report in this morning’s Finance and Commerce,  the apartment sector is the only area of commercial development showing signs of life this year.

To that end, there are an estimated 870 new apartments being built this year, with somewhere between 1100 and 1300 units on the books for next year.

This expansion is due, in part, to low vacancy rates allowing landlords to hike rents for the first time in five years.

Now, these aren’t huge rent increases. On average across the metro, rents are up just 1.7 percent from the first quarter last year. However, according to Marquette, increases have been much greater in hot urban neighborhoods like Uptown, downtown and near the universities; where rents were often up as much as 8 percent.

The suburbs and outer ring communities are likely to see rent improvements as well, but not at the same pace.

Clearly, tighter lending standards, a sluggish economy and swelling numbers of prospective tenants as a result of foreclosure have increased the demand for rental units.

And with an estimated 4 million plus more homeowners delinquent on mortgage payments nationwide, the trend is sure to continue.

Looks like it’s going to be a pretty good time to buy and own Minneapolis duplexes; for a long time to come.