Duplex Chick

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One of the most important pieces of information any Minnepolis duplex buyer or seller should have is a good, basic idea of how much utilities either do or should run.

Sellers, of course, may be asked to produce this information when a prospective buyer has requested it. More importantly,  having a basic knowledge of the average cost helps duplex owners notice when a monthly charge is unusually high, allowing them to immediately investigate.

Buyers, or the Realtors representing them, on the other hand, should at least have a basic understanding of howmuch it costs to provide tenants with water and trash service, heat, and electricity (if the landlord is responsible for these services).

Not only will this help duplex buyer determine whether or not a property is a good investment, but also, possibly recognize when there’s a hidden opportunity with a property that’s for sale.

For example, last week I found a duplex on the MLS that’s been listed for a long time. It’s appears to be a nice property, in a sought-after location, at a very good price.

So why hasn’t it sold?

As I looked closely at the expenses for the building, it suddenly became apparent that either it has a massive plumbing leak, or, the MLS information was horribly wrong.

A quick call to the city of Minneapolis established the water bill reported on the listing was, in fact, high by $1700. When I plugged the accurate amount into my investment property analysis worksheet, the building immediately went from generating an OK cash flow to a great one.

If you’re new to investing or your Realtor isn’t familiar with duplex expenses, the utility companies like Xcel and CenterPoint Energy are happy to provide that information.

While they can’t disclose the exact amount of a heat bill, for example, they can provide you with a high amount, a low, and a monthly average. In the end, a simple phone call may make or even save you a fortune.

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For those hoping for more time to get around the track in order to take advantage of the $8000 first time home buyer tax credit , it looked like Congress was poised to keep their hands off the stop watch last week.

Both CNBC reporter Diana Olick and Realty Times columnist Kenneth Harney reported last week that sources indicate to them that the credit will be extended for several months past its November 30 deadline.

Chairman of the House Ways and Means committee, Congressman Charles Rangel (N.Y. -Dem.) also stated to Dow Jones Newswires, “There’s no question I think it should be extended. How long, I haven’t discussed.” When it comes to expansion to all home buyers, however, Rangel expressed his opposition.

Both the National Association of Realtors and the National Association of Home Builders have been advocating for a one year extension of the credit, expanding it to all home buyers and capping it at a maximum of $15,000.

Of course, Congress is rightly concerned about how to pay for it. The original tax credit was included as part of the governments stimulus package. To date, this component alone has cost the government an estimated $15 billion.

Having said that, it has repeatedly been credited as being responsible for the uptick in activity in the housing market, and, as a result, one of the most successful pieces of the stimulus package.

Some estimates for the cost of an extension range as high as an additional $15 billion. One solution for covering the additional cost has been offered by the Republican Senator from Georgia, Johnny Isakson, who suggests the extension be funded with some of the unspent money from the original $800 billion economic stimulus bill.

Of course, until legislation is passed, the deadline to qualify for the credit remains November 30. We’ll watch for news out of Washington in coming weeks for further evidence of change.

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I’m a good Realtor. I make sure that I never sell a property that has monsters hiding in the closets or under the beds.

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I read a Reurters article the other day about a gentleman in California who since the year 2000, purchased nine single family homes. All of them are now being foreclosed upon. The article blamed negative amortization loans for his demise. What the article doesn’t say is just exactly what this man’s investment strategy had been. Had he intended to simply ride the appreciation? Was he renting the homes out?

I’ve had my California real estate license. And I know, at least in the Los Angeles area, that investors use a little tool called the gross rent multiplier or GRM. In fact, it is so prevalent that it’s even calculated and displayed on the MLS.

What’s a GRM? Well, like its big sister the cap rate, it’s a way I use to quickly look at an investment property and decide whether or not it makes financial sense compared to the others on the market. Call it a quick and easy way of comparing apples and oranges.

To determine the GRM, simply take the purchase price of the property and divide it by the amount of rent it generates annually. So, if a property is listed for sale at $200,000, and it takes in $2000 a month in rent, or $24,000 a year, its GRM would be 8.33 (200,000/24,000= 8.33). Conversely, if it only generated $18,000 in rent a year, the GRM would be 11.11 (200,000/18,000 = 11.11)

A general rule of thumb is the lower the GRM, the greater the cash flow.

I’ve done too many of these to count. And after endless late nights doing entire spreadsheets on properties, I realized that in the Twin Cities market, anything that’s got a GRM higher than a 10 isn’t going to cash flow. There are exceptions, yes. But we’ll cover those some other time (hint: owner occupied & tax write offs).

If the property meets my criteria, I will stop and do an investment worksheet. I’ll consider all the costs involved in ownership, as well as the market’s current vacancy rate. If I see a negative cash flow, I don’t necessarily discard the property. I just know it’s probably overpriced, and deserves a lower offer.

In the boom years, I warned buyers they wouldn’t hear from me very often. Properties that paid their own way were few and far between. Most of my clients stayed on the sideline. None of those who bought, however, are in predicaments like the California gentleman. Why?

Nobody can predict how much appreciation any real estate market will experience in a coming year. Any agent who tells you otherwise is either the world’s best psychic (and should be sharing lottery numbers) or full of it.

At one point, the market in southern California was experiencing appreciation of as much as 20% a quarter. People bought simply on the hope the value would skyrocket. But they never stopped to do the math. The properties may well have had negative cash flows from the start, meaning the owner had to go into his own pocket to make up the difference. This guy may have been doomed from the moment he started.

Remember, when a property manages to pay for itself from the first day of ownership, it’s a great investment. Any amount it goes up in value is a bonus, not a guarantee.

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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.

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Over the years I’ve met countless first time home buyers. More often than not, they in a popular area (near a lake, river, shopping or great architecture) and understandably have decided they would like to put down roots there.

The trouble is, these popular neighborhoods aren’t exactly a real estate secret. Almost everybody wants to live there — which is where that stuff from that high school economics class kicks in — the law of supply and demand. There are only so many single family homes in these areas (supply), the demand for which is high, thereby forcing the price upwards.

In the Twin Cities market, most first time home buyers are uncomfortable spending more than $250,000. More often than not, the homes in the neighborhoods and with the features they like start at that price.

OK, yeah. What about a fixer? Well, fixer’s require cash. Lots of it. And most first time home buyers don’t have the thousands of dollars required for immediate repair.

It’s usually at this point that I ask whether the buyer has thought about a duplex. And I usually get a dumbfounded look as a reply.

Instead of looking at the whole price for a duplex, why not take the number and cut it in half? So if a duplex is listed at $400,000, the buyer would only pay for half, or $200,000. The tenants would pay for the other half (providing, of course, the rent was substantial enough). And, typically, properties can be found at or near those prices in these neighborhoods — in part because not as many people have thought of it!

“Yeah, but…,” buyers say. “I can’t afford that much”. Well, if the property has been a rental for more than two years, 75 percent of the rent can be counted toward the buyers income to qualify.

There’s more. The buyer can depreciate and write off the half he or she doesn’t live in on his taxes. Not to mention the ability to get a higher deduction for the amount of interest paid on the home loan (because the property cost more than a $300,000 single family home).

Finally, in coming years, if the buyer chooses to sell the property, the income he earned from tenants can be counted as income to help qualify for the loan for a new property.

Then again, it’s always nice to own a piece of property in a neighborhood everybody loves. Better still when it pays for itself!