Archive for the 'Multi-Family Property Investing' Category

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Turn duplex investment into cashEver heard of the web site Bigger Pockets?

It’s a great site full of useful information for both new and experienced real estate investors. From simple, basic investment strategies and education to more sophisticated methods for the experienced investor, odds are you can find an article there that will be useful to your real estate investment career.

What you may not find there, however, is local market data that is specific to what your real estate goals and tolerances are.

For example, you may find someone who swears you can get a certain rate of return in your city. And while that may well be true, it might be in a neighborhood you either know nothing about, or one that may not be geographically convenient for you or even a place you’d like to invest.

You may also find that what’s true in Dalhart, Texas, isn’t what’s true in Minneapolis, Minn.

First, laws may differ between states, counties, and even cities. Second, one may have lower levels of unemployment than the other, which drives demand for housing, increases rents and the cost of acquiring rental property, and makes higher rates of return more challenging to realize.

Finally, it is the Internet. Sometimes people will tell you only part of the story. For example, someone may tell you they are able to purchase real estate in a hot part of a city at deep discounts. What they won’t tell you, however, is that they spend every single spare minute of their time tracking down people who are behind on their mortgage payments, or that the properties they purchase need tens of thousand of dollars of improvements and repairs before they can be rented.

So how can you make sure you have a local read on what the investment property market is like in your area?

Contact a local Realtor who specializes in investment property. Go in to his or her office and have a conversation about the market, what their clients are finding, and where they see the market going.

If you’re in the Twin Cities, please feel free to contact me for that conversation. I’m always happy to share what I know.

A Duplex Investor’s Moment of Truth

said on July 27th, 2015 categorized under: Multi-Family Property Investing

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Real story stampI spent much of my weekend doing the final cleaning on a rental property.

I have been working on it in earnest for three months. And as I thought about the amount of effort and money I’ve recently sunk into the place, I remembered that as great as rental property investment is, there are also times when it’s a lot of work.

This was one of those times.

If you’re new to investing, or are thinking about becoming a rental property owner, stories you hear from more experienced investors may be all glory or all horror.

Investment property ownership can be a little bit of both.

It’s wonderful that for little more the cost of a down payment, tenants will help you contribute substantially to your personal wealth or retirement account.

In exchange, every now and then, you’re going to either find yourself picking up after them or paying someone else to do it.

I have had many tenants who have left rental units in such great shape that all I had to do for the next resident was change the lock.

And I have had others who’ve let their pets destroy woodwork, not cleaned toilets for their entire residency, and left a household full of broken furniture behind.

Great tenant screening goes a long way toward solving these problems. But sometimes, life deals even the best person a blow and as a result, their habits and their standards change.

Everything worthwhile in life requires some effort.

Including rental property.


Minneapolis Among Top Rental Markets

said on July 1st, 2015 categorized under: Multi-Family Property Investing

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It’s a great time to be a landlord.

According to the recently released All Property Management‘s Rental Ranking Report for the first quarter of 2015, the U.S. home ownership rate is at its lowest rate in 20 years.

This has caused vacancy rates to fall and rents to rise, making rental property a great investment.

The Report considered factors like area vacancy rates, rent variance, capitalization rate, property appreciation, job growth, the average number of days it takes for a property to sell, job and rental availability and the costs of taxes and insurance.

When the numbers were crunched, Minneapolis and St Paul were named the top market in the Midwest to own rental property, and one of the top 5 in the nation overall.

The Twin Cities saw rents rise an average of 5.36 percent over last year, an average of just 43 days on market for a property to sell and a metro wide vacancy rate of 4.4 percent, which is just over half the national average.

Prices and rents have risen dramatically in the metro over the last few years; making it a great time to buy or sell a duplex, triplex or fourplex.

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Duplex Sales Lose Market ShareThe National Association of Realtors (NAR) recently issued my favorite of all their reports; the Investment and Vacation Home Buyers Survey 2015.

I love this report because it’s the only one I know of that offers a national data on current trends in the smaller sized investment property market. For NAR’s purposes, it’s important to note the term investment property may mean a duplex, small apartment building, condominium, townhouse or single family home.

In 2014, 19 percent of all homes sales in the United states were investment properties. While this represents a market share of nearly one out of every five sales, it does mark a downward trend. One year ago, 20 percent of all real estate purchases were for investment purposes. In 2011, investment property was 27 percent of the market , and even in the boom of 2005, 28 percent of all properties were purchased for investment.

This may be the result of declining bank inventory, low vacancy rates and higher rents nationwide. Forty-four percent of those investors purchased a distressed property (foreclosure or short sale).

Thirty-seven percent of investment property buyers bought with the intention of renting to others, while 17 percent purchased primarily because the property was a good deal. Fifteen percent of buyers purchased the property for it’s long term potential for price appreciation. One curious statistic for the year is the median price for investment properties dropped from $130,000 to $125,000.

The vast majority of these transactions– 58%, were in urban or suburban areas. Sixty-one percent of these sales were detached single family investment properties. Twelve percent were detached single family homes, 9 percent were townhomes or a row house, 13 percent were duplexes, triplexes or fourplexes, while 5 percent were condos or apartments in buildings with more than 5 units.

Eighty-six percent of investment property buyers in 2014 believe now is a good time to purchase real estate. In fact, 62 percent said there’s a reasonable chance they will buy another within the next two years.

Of course, that’s good news for investment property sellers, who will find a pool of strong buyers waiting for new inventory.

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.

Is Your Minneapolis Duplex At 50 Percent?

said on October 6th, 2014 categorized under: Multi-Family Property Investing

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Have you ever heard of the 50 percent rule about duplexes?

Do you know what it is?

The 50 percent rule is a general rule of thumb which states that all of your expenses on a rental property should run about 50 percent of what the property’s gross income is. This does not include your mortgage payment or interest.

It does, however, include your taxes and insurance.

In other words, if your rental duplex generates $28,800 in income, you can expect your expenses on the property to run approximately one half of that amount, or $14,400.

These expenses would include repairs, utilities, insurance, vacancy rates, and so forth.

Once these are deducted from the property’s income, you should have approximately 50 percent of the $28,800 left. Out of that $14,400 you will pay your mortgage and interest. Anything left over is your cash flow.

Of course, there are some neighborhoods where the vast majority of duplexes are owner occupied (and therefore are valued on a slightly different basis than just income) where this rule may not be true.

While you should perform more due diligence on any property than just an eyeball analysis, the 50 percent rule is a good way to determine whether a seller is off on their numbers, or you’re outspending on your own.



Comments Off on Why I Won’t Show You A Duplex Until I’ve Met You

Missing Arkansas Realtor Beverly Carter

Missing Arkansas Realtor Beverly Carter

While I’ve blogged about this topic before, last week’s news was a great reminder why no Realtor should ever meet someone at a property, simply because he or she called.

Arkansas Realtor Beverly Carter went to show a home, and has been missing ever since.

I don’t know the circumstances that lead Ms. Carter to show the property. However, this sort of thing seems to happen to a handful of Realtors every year.

Think about it. Someone calls a Realtor about a sign in front of a property which, if not totally vacant, will be when the sellers leave for the showing. And the caller, a total stranger whom the agent has likely never met, expects he or she to drop whatever tasks are at hand to meet them there and show the house or duplex.

The caller often offers the Realtor no proof that he or she can afford the property through either a bank pre-approval letter, or, in the case of cash, proof of funds.

In fact, I had a call exactly like that over the weekend. The caller alleged he had cash, but wasn’t willing to provide proof. When I asked him to meet me at my office first, he was resistant. So I politely ended the call as quickly as I could.

I truly believe the vast majority of people are good at heart, and I would be just fine showing them a property. But it’s always those few lone individuals we hear about in the news who make all of our lives more difficult.

And frankly, no real estate transaction is worth my life.


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How much concept.This morning I saw a headline stating high rents may be keeping potential buyers from owning homes.

While this wasn’t news to me, it is something duplex owners need to pay careful attention to. According to Zillow’s July Real Estate Market Report, just 12 metros of the top 100 in the country have affordable markets for both housing and rent.

Zillow found that in July, national home prices rose to $174,800. This represents an increase of 6.5 percent from the median price last year.

The Twin Cities saw a 3.4 percent year over year increase in Median Sales Price, finishing July at $215,000.

Meanwhile, tenants who signed leases at the end of June saw a whopping 29.5 percent of their income go toward rent. Rent used to take 22.1 percent of a renters monthly income.

Frankly, owning a house is more affordable. At the end of the second quarter, home buyers were paying an average of 15.3 percent of their income toward their house payment.

So why don’t tenants just buy a house? Simply put, rents are so high, they can’t afford to save a down payment. And for many, especially the millennial generation, they are still facing a tenuous job market and are carrying enormous student debt.

Going forward, these numbers will be especially important for duplex owners and landlords to watch. If interest rates go up, housing will become less affordable. This will also reduce cash flow to any new buyer if you’re considering selling your duplex.

If rents go up, however, we may see a migration toward home ownership. This will result in greater vacancy rates, which may ultimately result in lower rent, which will once again, impact cash flow.

For now, however, it continues to look like a great time to be a landlord.



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return on investmentLate last month the real estate information company RealtyTrac published a report detailing the best and worst markets in the nation for rental returns.

Their measure of gross rental yields was determined using the median sales price for over 1500 counties in the nation, and the average fair market rent for a three bedroom home for 2014 as determined by the Department of Housing and Urban Development (HUD).

That fair market rent was multiplied by 12 months, then that total was divided by the media sales price in each county.

Wayne County, Michigan– home to Detroit, topped the nation for highest rental returns with an estimated yield of 30 percent.

Of course, the higher the risk, the higher the reward. And Detroit’s lingering economic doldrums may make it difficult to fill rental vacancies.

New York County, New York (home to New York city) had the worst rate of return in the nation at just three percent.

In the Twin Cities, the seven county metro area seemed to hover at yields of 7-8 percent.

That’s still a pretty good return compared to a savings account.

Sellers Trade Duplexes For Malls

said on April 7th, 2014 categorized under: Multi-Family Property Investing

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duplex equity exchangeOne of the many reasons there aren’t many duplexes, triplexes or apartment buildings for buyers to purchase is a lack of places for would-be sellers to move their money.

Thanks to so many investment property owners being upside down for so many years on their properties, it’s been a long time since we’ve talked about what’s known as a “like kind”, 1031 or Starker Exchange.

Simply put, a 1031 Exchange is a way for property owners to defer capital gains tax by adhering to a set of relatively easy IRS rules and reinvesting in another property.

Many duplex sellers have misconceptions about this process. Some believe they must buy a building with an equal number of units to the one they’re selling. Other think if they’re selling a multifamily property, they must replace it with a multifamily property.

Seeing what they believe are few opportunities to purchase property, these people simply choose not to sell.

The facts are, however, there are plenty of great properties to invest in; if they just know the rules.

First, “like kind” does not mean multifamily housing must be exchanged for multifamily housing. A duplex seller, for example, can reinvest her profits in a retail center, a mixed-use building, an office building, industrial warehouse or, even land.

And since this exchange is possible, the number of units one exchanges for is also irrelevant.

While the economy is still in recovery mode, it’s important to remember it isn’t just the housing rental market that’s improving.  Other sectors are starting to get on their feet as well, and the return on your investment may be greater, thanks to less competition for the “good deals”.

If you need a referral to a Realtor to help you explore other investment opportunities, I’d be glad to guide you to a competent professional.