Archive for the 'Multi-Family Property Investing' Category

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EinmaleinsOn real estate blogs across the nation new investors ask for guidance as to what is a “good” gross rent multiplier (GRM) on multi family property.

Remember, to determine a duplex’s gross rent multiplier, divide the purchase price of the property and by the gross amount of rent the property generates annually. So, if a building is listed at $200,000 and grosses $20,000 a year in rent, then $200,000/20,000 = 10. The GRM on the property is 10.

So is 10 a “good” number?

I wish there was a broad, all encompassing answer. But there isn’t.

Why?

There are a couple of reasons.

First, all real estate is local. A “good” gross rent multiplier in Beverly Hills, Calif., is likely one at which a duplex doesn’t come anywhere near breaking even in terms of the revenue it generates. However, a gross rent multipler of say, 18, may in fact be “good” because most duplexes in the market are selling at a GRM of 24.

The second reason there isn’t a sweeping general answer for the nation as to the definition of a “good” gross rent multiplier is GRM’s fail to take into account expenses.

They are, nonetheless, effected by things like who pays the heat, how much the property taxes are, where the building is located, and so on.

When I first obtained my real estate license, I did hundreds if not thousands of income property analysis spreadsheets for MLS properties. By doing so, I quickly realized there were consistent numbers at which properties cash flowed. And that number differed between properties where the landlord paid the heat and those where the tenants did.

Those figures worked pretty consistantly for years. And then the seven metro area counties caught up in what they perceived the taxable market values of Twin Cities area duplexes to be.

As a result, property taxes increased and with them, so too did gross annual expenses.

The result? The Minneapolis and St Paul definitions of the gross rent multiplier at which a duplex will cash flow changed.

In fact, the gross rent multiplier numbers I use to eyeball whether or not a property will break even or cash flow dropped in each of the heat-paying categories by two.

What are those numbers?

Call me. We’ll talk.

Comments Off on What’s The Most Common Type of Rental Housing Anyway?

victorian apartment building against blue skyWhen I say “rental housing”, what image springs to mind?

Is it a large apartment complex with hundreds of units sprawling over acres of earth?

Or is the image one of single family homes, duplexes or fourplexes?

Most of us dream of parlaying a collection of duplexes into a massive apartment complex or two capable of cash flowing our retirements. And yet, according to a 2008  Joint Center for Housing Studies of Harvard University,  less than 10 percent of all rental units are in buildings with 50 units or more.

Ironically, more than one third of rental units in the country are single-family homes. However, more than half of all rental units are in buildings with less than five units.

In all, the study counted 6.3 million two to four unit rental properties; 1.3 million of which are owner occupied. Eighty-five percent of these smaller properties are owned by either individual owners or couples.

The study also reports the number of households that reported at least some rental income from one to four-unit properties increased by almost a million between 2001 and 2007.

Guess it’s time to replace that mental image of a rental unit.

Comments Off on Is It A Good Time To Rent A Minneapolis Duplex? Or Buy?

Multi-ethnic GroupToday’s Wall Street Journal real estate blog post debated whether or not it’s a good time to sign a lease.

With higher vacancy rates due to unemployment, the article suggested rents will continue falling for the next few months. 

After all, landlords are offering incentives and slashed rents just to fill vacant units. Therefore, the article stated, it might be a good time to negotiate a better deal on a lease.

Of course, if you’re a prospective landlord, those words cause a sick feeling to start brewing in the pit of your stomach. Who would want to invest at a time when it will be so hard to fill vacant units?

As the article continued, however, there was a single line that nearly screamed out the fact that it is, in fact, a great time to buy.

It read, “Demographics favor landlords as the echo-boomers (the children of the baby boomers) will swell the ranks of apartment renters at a time when new supply is limited.”

Echo-boomers?

At a population of nearly 80 million, they are the largest generation since the 1960’s. In fact,  they represent nearly one-third of the entire U.S. population.

So?

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Don’t Pay Off That Minneapolis Duplex!

said on November 19th, 2009 categorized under: Multi-Family Property Investing

Comments Off on Don’t Pay Off That Minneapolis Duplex!

apr balanceOne of the most common things I hear new investors say is their goal is to buy a duplex, pay it off, and live off the cash flow.

This is a mistake.

What? Isn’t cash flow everything?

Of course.

But there’s also something called Return On Investment or ROI. ROI is the ratio of money gained or lost on a duplex relative to the money you have invested.

For example, if you buy a $100,000 duplex, and put 25 percent down, you would calculate your return based on the amount of your down payment; $25,000.

If you held that duplex for thirty years, however, and paid off the mortgage, the amount of your investment would be $100,000, and you would calculate your return based on that number. Of course, that’s assuming it doesn’t go up in value at all over the next 30 years; an unlikely scenario.

I met with a married couple the other day who owned their duplex free and clear. The investment property is not only a considerable distance from their home, but as retirees, they have a genuine desire to simplify their lives.

Of course, like all sellers, they want top dollar for their property.

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Comments Off on 8 Reasons A Minneapolis Duplex Is Still A Good Investment

mortgage and down paymentIn today’s turbulent real estate market, it’s easy to dismiss the idea of real estate as a long term investment strategy.

On one level, this makes sense. Prices are down; there’s a threat of more foreclosures on the horizon which may cause prices to tumble further. Vacancy rates are up, causing more landlords to scramble to find quality tenants and, in the competition to do so, rents to go down.

Maybe it’s better to just leave your money in the stock market, right?

Real estate as an investment isn’t just about how much a duplex goes up in value. In fact, appreciation is just one of the eight ways you benefit by owning investment property.

Real estate provides you with:

  • Equity Growth – due to your ability to use leverage, your equity grows much more quickly in real estate than it does in other investments.
  • Principal Paydown – every month a portion of your mortgage payment on the property is paid off by rent collected from tenants. Even if the duplex never goes up in value, and you continue to pay off the mortgage over thirty years, at the end of that time you would have the equivalent of the initial purchase price in equity. Managed properly, the only money you would have into it would be the original downpayment required to obtain the loan.
  • Increasing Annual Income Stream – on average, the amount of rent you collect every year will increase. This revenue will continue to grow in accordance with the cost of living; providing you with spendable income that has adjusted to economic conditions.
  • Leverage – using some of your money as a down payment, banks are, for all intents and purposes, willing to partner with you on a property. If you want to buy a $100,000 duplex, simply put up $25,000, they’ll put up the other $75,000, and pay them back with some interest. Left to your own devices, you’d only be able to buy a $25,000 duplex. But thanks to banks, you can leverage your way into real estate wealth.
  • Early Withdrawal Penalties/Annual Contribution Limits – the positive cash flow your property earns is spendable income. It is not subject to early withdrawal penalties or limits to the amount of money you can save.
  • Depreciation/Tax Shield – every year that you own a duplex, the government allows you to shield some of your income in the form of depreciation.  Essentially, depreciation is the rate at which the government says something gets used up. And because something is, at least theortetically, wearing out, you get a tax break.
  • Appreciation – there will come a time in the not too distant future that property goes up in value again. The duplex my grandparents lived in before World War II is today worth approximately 22 times what it was when they were tenants. Historically, there’s no reason to think a duplex won’t cost even more twenty years from now.
  • 1031 Exchanges/Cash Out Refinances – both of these are methods for you to harvest the money you’ve earned in both appreciation and principal paydown and reinvest it in bigger properties with greater returns; tax free.

Not all of these reasons to invest in real estate are obvious to a new investor. However, they are the very reasons real estate will always be a terrific financial strategy.

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House with Foreclosure tapeWith the bargain basement prices on single family home foreclosures in the marketplace, I’ve been getting calls from homeowners who, seeing the cheap house down the street, are thinking about becoming first time real estate investors.

I like that they’re thinking like that. Real estate offers investors growth in equity, an annual passive income stream that grows with the cost of living, appreciation, leverage, and the opportunity to use depreciation as a tax shield from other income.

However, most of these novice investors are thinking of single family home ownership as a path to wealth. What they don’t realize is more often than not, single family homes as rental properties do not cash flow.

In other words, the investor will have to reach into her pocket every month for money to pay the bills the rent doesn’t cover.

A duplex, on the other hand, will pull its own weight.

Surprised?

For the first time in decades, small multi-unit properties like duplexes are actually breaking even or producing positive, spendable cash flows.

To illustrate this point, this morning I pulled two properties from the Nokomis neighborhood from the MLS. The first is the least expensive home listed in the area of 42nd and Cedar.  It’s a short sale, built in 1949 with two bedrooms and two bathrooms, listed at $149,900.

Just a couple of blocks away is a 1947 built duplex, priced at $145,000. It has two bedrooms on each side, appears to be in reasonable condition,  and is a bank owned property.

Both require similar down payments, and will have mortgages at the same amortization and interest rates.

Assuming rent of $950 per month on the single family home, with the tenants paying all utilites, and the investor responsible for insurance and property taxes, this home actually has a negative cash flow of $1149.54 per year. In other words, every month, the owner has to reach into her pocket for cash in order to make up a shortfall of $95.80.

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Comments Off on There’s No Free Lunch With Minneapolis Duplex Ownership

nudelkäseauflaufAmong the many advantages of being a Realtor with a national and internationally known company like Coldwell Banker are the networking and educational opportunities available as a result of having a presence in so many diverse locations.

For example, today Coldwell Banker Burnet brought in Jon Swire, a multi-residential investment agent from Coldwell Banker, Beverly Hills, Calif., and author of the book, There’s No Free Lunch In Real Estate.

An income property owner himself, Swire stressed time and again in the day-long seminar why now is one of the best markets in years to get started in real estate investing.

First, interest rates on mortgages are at historic lows, meaning the cost of the debt on an investment property is cheap.

Second, due to the foreclosure crises and overall meltdown in the real estate market, prices are low.

Finally, Swire reminded us that all the money the federal government borrowed to fund the stimulus package will ultimately result in inflation. Inflation will cause the prices of everything to increase; including rent and the purchase price of the properties themselves.

Granted, after the binge and purge of the market the past few years, it’s easy to experience a loss of appetite for real estate investing. What if property values continue to decline?

However, many of today’s foreclosed duplex properties are the result of speculative buyers who failed to do adequate cash flow analysis at the peak of the market.

Remember, a property with a negative cash flow is a liability, not an asset. As long as a duplex, triplex or fourplex generates enough income to cover its debt and expenses, you can hang on to it indefinitely; regardless of what the market is doing.

If you’d like to learn how to do the numbers, drop me a line.

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it is party timeIn 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 »

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money treeWhile apartment buildings and small multi-family properties might be not be identical twins, they are, nonetheless, siblings. That’s why a report issued by National Association of Realtors research economist George Ratiu  last week was of interest.

There have been persistent reports in the last year or two of the real estate crisis striking the commercial market as well as the single family homes sector.

Retail real estate, for example, has seen declines in property values as consumers pinch pennies and stores close their doors leaving vacancies in their wake. Office buildings have suffered similar fates.

But multifamily properties?

They continue to bloom where they are planted.

According to Ratiu, during the second and third quarters of 2009, demand for rental units increased by more than 89,000 units nationally. It’s important to note that this measure was based on the net absorption rate, which is the amont of rentals leased in a specific area during a specific period of time, less the space vacated in the same area and stretch of time.

Lower vacancy rates mean apartments have not seen the same dramatic decline in revenue, which has allowed them to maintain their value.

The national apartment vacancy rate is now at about 7.4 percent, which is below where it’s been during previous recessions.

According to syndicated real estate reporter Kenneth R. Harney, two additional sources site multifamily property investments as faring better than other commercial buildings in tough economic times.

Harney reports The National Council of Real Estate Investment Fiduciaries reported earlier in the year that multifamily investment returns exceeded all others in the decade it studied.

A study for the National Multi Housing Council also found that over the last 20 years, multifamily buildings have averaged returns of 10.1 percent, while industrail properties have averaged 9.25 percent and office buildings 7.8 percent.

Of course, there’s risk with every kind of investment, and all real estate is local. But statistics seem to indicate multifamily housing like duplexes, triplexes, fourplexes and apartments, continue to be worthy of investigation.

Comments Off on The Ups And Downs Of Minneapolis Duplex Vacancy Rates

children playingIf you worked your way through all the Michael Jackson media this week, you might have heard about the report released by Reis, Inc., announcing the national apartment vacancy rate hit a 22-year high in the second quarter.

Reis, a New York based real estate research firm, also found vacancy rates rose nationally to 7.5 percent; an increase of 1.4 percent from the year before. Of the 79 markets they track, 45 showed increased vacancies.

Of course, Reis charges a small fortune for their reports. None of the information leaked to the media  so far included the Twin Cities in either the list of ten worst or best markets. We’ll have to wait for Saturday’s version of their report in the Star Tribune to know where we stand.

How does this impact a Minneapolis duplex owner?

Vacancy rates and rental income are like a teeter totter. When one goes up, the other goes down.  So it comes as no surprise that Reis says the amount of rental revenue dropped as well.

Why the increase in vacancies at a time when so many people are losing their homes?

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