Duplex Chick

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We’re living in economically challenging times.

As a result, most of us are cutting back on “extras”.  For some, that means opting to stay home and watch cable rather than going out.  To others, that may mean choosing to make a peanut buttersandwich  rather than bologna.

Unfortunately, for some tenants, that also means going without renter’s insurance.

First, if you’re a landlord and your lease doesn’t include language clearly stating that it’s your tenant’s responsibility to get insurance for her belongings, it should.

The reason is your owner’s insurance policy doesn’t cover the contents of your duplex.

In other words, if a fire, tornado, hurricane or earthquake topples your property, your losses may be covered, but your tenants belongings.

Most major insurance companies, like Allstate, Geico and State Farm offer some form of renter’s insurance.

While you must tell your tenant of their obligation to buy coverage, it’s a good idea to require them to provide you with proof they’ve done so.

After all, times may be hard but they’d be tougher still if you lost absolutely everything and didn’t have insurance.

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As a Realtor, I get asked a lot of questions.

They range from, “What were they thinking when they installed the bathroom here?” to “Won’t people just make us an offer, even if we list our duplex at a higher price?”

I don’t know the answer to the first question. And the answer to the second is usally no.

But these days, the question I get asked most often is “Does a duplex qualify for the $8000 first time home buyer tax credit?”

And while I’ve discussed it here before, then answer was and is yes.

For the record, multifamily homes like triplexes, four-plexes and apartment buildings qualify too. However, the property must be used as your principal residence. It’s also important to note you can only get credit for the part you live in.

The credit has been structured so that any first time home buyer who has a binding purchase agreement in place by April 30, 2010, can receive up to 10 percent of the property’s purchase price, not to exceed a total of $8000 in the form of a tax credit.

Since only one half of the duplex would be used as your principal residence, you can only use the value of one half of the property to qualify.

For example, if you pay $160,000, your half would be worth $80,000.  If you buy a duplex for $100,000, however, your half is worth $50,000. Your tax credit would then be 10 percent of your half , or $5000.

The same would be true if you bought a four-plex for $200,000 and lived in one of the units. The value would again be $50,000, giving you a credit of $5000.

Of course, to receive this credit, you must not have owned a home in the past three years. If you’re single, you can’t earn more than $125,000 a year and if you’re married, the two of you can’t earn more than $225,000.

Purchase agreements must be signed no later than April 30, and the transaction must close no later than 60 days after that.

Call me if you want to beat the deadline.

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With the change in the current housing market, many would-be sellers are turning to renting their homes in lieu of a sale. And, they often forget one thing that many first-time landlords do: the government.

No, I don’t mean the IRS. Rather, the city government; places like Minneapolis and St Paul. Both require landlords to have either a valid rental license or a certificate of occupancy before a property can be leased.

In Minneapolis, whenever a property is converted to rental usage, it must be inspected for compliance with the city’s minimum housing standards. Of course, this is not free. The city charges property owners $1000 for the initial inspection. This is in addition to the annual license fee, which is $61 for the first unit and $19 for each unit under the same ownership in the same building.

St Paul does things differently. They require a certificate of occupancy, which is issued after an inspection by the fire marshall. Every rental property, from single family homes to large apartment complexes that are not owner occupied are required to comply. The fee for this is $50 per unit.

So, who’s going to notice? Well, if you get caught, Minneapolis is going to charge you an additional $250 for the first unit, and $20 more for each additional unit. Failing an inspection in St Paul, on the other hand, results in bigger fees for each additional time the inspector has to visit until non-compliant problems are solved.

Still think you can get away with it? Tenants often know this rule. Experience says, the minute you have to enforce a noise rule, or ask for delinquent rent, they’ll call city. So much for that idea…

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Over the last several years, it seems as if almost everyone I meet is, on some level, addicted to HG-TV. We’ve all watched those shows and now dream of finding a fixer upper at a steal of a price. We think, “with just some paint, carpet and of course, stainless appliances…I could turn a $20,000 profit for just a weekend of sweat equity.”

OK, here are the facts. In the peak of the housing market I saw that happen…once in a while. Most of the successful rehabbers, however, were professional contractors; with crews. It was the only thing they did for a living.

So many of the foreclosures on the market are half-finished rehabs. And it doesn’t take a novelist to imagine the story behind each one. Someone bought it to flip it, and it took more money and time than they ever imagined.

In spite of this, everyone still has the “Flip This House” mentality. Even with duplexes.

The other day I showed four duplexes. All were either short sales or foreclosures, with some level of deferred maintenance. They ranged in price from $114,000 to slightly less than $260,000. All were in different, but equally terrific locations.

The least expensive was a converted single family home with some decent turn-of-the-century woodwork. As with most of these properties, the upstairs unit lacked a true living room. That unit also featured a makeshift kitchen and the most unconventional, skinny bathroom I’ve ever seen. The basement had one enormous octopus gravity furnace. And the soffits on the exterior of the home had clearly been converted to squirrel condos.

Read the rest of this entry »

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Whenever I first sit down with someone thinking about buying an income property (either to live in or as an investment), I ask them a question:

What, besides mortgage and taxes, do you think is the most expensive thing for a landlord to pay for?

I get all kinds of interesting answers…things like water, mowing the lawn, painting. All of which are wrong.

Come on, confess. There was a point at some time in your life (probably college) when you lived on the top floor of an old building, it got hot in your apartment and you opened the windows. In January.

You weren’t doing it to punish your landlord. Well…maybe. More likely, you were young and simply didn’t understand the relationship between the open windows and the amount of your rent.

Of course, as soon as you bought your first home, you set the thermostat at “arctic” and decided that old, warm Norwegian sweater in the cedar closet was actually timeless and never out of style.

When evaluating a property to buy, it’s important to keep those little life lessons in mind. Given two equal properties, it’s always preferable to buy the one where there are separate furnaces.

That doesn’t mean a shared heating system is necessarily a bad investment. It just means that since the property is going to cost you more to own, it’s wise to purchase it at a lower price.

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We’ve all heard the reasons for the rash of foreclosures on the real estate market; bad loans, fraud, unethical loan officers– on and on. But I never hear anyone in the media mention the fact that some people just made really bad real estate investments.

Nowhere is this more true than in the small multi-family market (duplexes, triplexes and fourplexes). In the halcyon days of 2005-2006, I ran into countless buyers who wanted to leverage some of the equity in their homes to buy an investment property. After all, we all had been told real estate was a great investment, right?

I don’t know the statistics, but I’m sure hundreds of thousands of people across the country simply went out and bought an investment property. They used the same Realtor who sold them their house, and waited for the cash to simply pour into their pockets.

The people who ran into me didn’t do that. See, it’s absolutely imperative when you buy a property for an investment that it pay its own way (unless, of course, you’re looking for a tax write off or have some other goal). And it’s critical that you make that determination before you buy the property.

We’ve all read ads touting that a property “cash flows”. What most of those advertisers don’t say is that yes, it does cash flow — if you a) put enough down; b) own it free and clear or c) are 100% occupied all the time.

In the heyday of the Twin Cities real estate market, very few small multi-family properties sold at a price where they could cash flow. And those who bought then are losing those properties now.

I just showed a duplex in the Nokomis neighborhood that sold two years ago for just over $400,000. It came on the market yesterday for just under $200,000. It’s dated, with a lot of deferred maintenance, and even though it has two bedroom units and all the utilities are separate, it will still barely cash flow. No wonder it was foreclosed on!

The good news is I am now seeing properties on the market in highly desirable locations that do cash flow, or at least break even.

If you can, now’s the time to buy that investment duplex.

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Most home buyers are familiar with FHA loans, which historically have been one of the best ways to purchase a home with as little as a three percent down payment. With these loans, the seller typically contributes up to three percent of the sales price toward the buyer’s closing costs and prepaids (such as insurance reserves), saving the buyer these costs. These contributions are capped by the lenders at three percent.

What most buyers don’t know, however, is that through what are called FHA Preferred Programs, the seller may gift an additional three percent to a non-profit agency that assists buyers in obtaining the necessary three percent down payment for an FHA loan. The most familiar of these agencies are Genesis, Ameridream, and Nehemiah.

Confused? Let me try to clear it up. Say you pick out a house you like that’s $100,000. Instead of offering a lower price, you could ask the seller to apply three percent of that price toward your closing costs; money that would come out of his pocket, leaving him with a net of $97,000.

You could also ask that he participate in one of the FHA Preferred Programs and donate an additional three percent to one of these non-profit agencies, as well as pay a required administrative fee(usually a few hundred dollars) . This agency would then make a gift to you of the three percent down payment.

By asking the seller for these two contributions, you are in effect, really offering the seller $94,000, as that’s what he’ll net after making these concessions.

Sometimes the seller will agree to pay one and not the other. If this is the case, it is often possible to raise the price slightly so the that the seller nets a higher amount. For example, the offer could name a price of $103,000, with the seller making the down payment and closing cost contributions. This would leave him with a net of $97,000. Of course, the transaction would be contingent on the property appraising for the higher amount.

Agents have been helping first time home buyers take advantage of these Preferred Programs for years. What very few Realtors realize, however, is that these opportunities are available to any property that qualifies for an FHA loan.

In other words, you can still buy a duplex, triplex or fourplex to owner occupy with nothing down!

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I showed a gorgeous duplex in southwest Minneapolis to some first time home buyers last weekend. It was one of those big, sweeping properties many of us have often driven by and wondered whether the inside was beautiful as the outside.

The people I showed the house to were surprised to learn they could actually get an FHA loan for a duplex. Or a triplex. Or even a fourplex. But they’re not alone. Most people don’t realize that small, multi-family properties are viewed by the banking industry much the same as single family homes. And FHA insures the financing. Of course, this benefits only those who want to owner occupy a multi-family property.

As with single family homes, FHA has temporarily raised loan limits on multi-family properties. In the Twin Cities metro area, current loan limits are:

Duplex (Two Unit) – $467,250

Triplex (Three Unit) – $564, 800

Four Unit – $701,900

In other words, a buyer could purchase a $481,000 duplex with just the required FHA 3 percent down. Or less. But I’ll talk about that tomorrow.