8 Reasons A Minneapolis Duplex Is Still A Good Investment

November 13th, 2009 categories: Multi-Family Property Investing

In 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.

Spoken by Kari Lundin | Discussion: No Comments »

Why That Foreclosed House May Not Be A Good Investment

October 26th, 2009 categories: Multi-Family Property Investing

With 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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Scream Queens Use Minneapolis Duplexes to Outsmart Wall Street’s Psychotic Killers

October 24th, 2008 categories: Multi-Family Property Investing

These days, it seems Wall Street might as well be the name of the latest Wes Craven horror movie. It’s been a financial bloodbath featuring screams in the night, followed each morning by another casualty and the utter inability of police or government to track down the villain.

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Housing Bill Changes Taxable Capital Gains on Twin Cities Duplexes

August 11th, 2008 categories: Multi-Family Property Investing

In the past, one of the most lucrative tax loopholes for real estate investors was the provision that allowed an owner to move into a rental or investment property, and after living there for two years, realize and capital gains tax free, up to the individual $250,000 or married couple $500,000 limits.

In Minnesota, this benefit was especially attractive to those eyeing retirement in warmer climates. Why? Well, let’s say you wanted to retire five years from now. Both the Florida and Arizona real estate markets are, perhaps, in even more dire circumstances than the market here. Theoretically anyway, it might be a great time to pick up that vacation condo on the beach in Santa Barbara.

If you found a bargain, you could rent it out until you were ready to retire. It’s reasonable to assume that over enough time, that property will increase in value. Well, that appreciation is taxable. However, if you moved into the home for at least two years, Congress said they would not tax you on that increase when you sold.

As of January 1, 2009, that is no longer the case. When the president signed the Housing Bill into law two weeks ago, the rules changed.

Now, any properties purchased after that date will be subject to an amended version of this law. Investors will now be asked to pay capital gains taxes for the years of appreciation when they did not live in the property.  So, if you owned a condo in Phoenix for five years, and lived in it for two, you would be taxed for the three it was tenant occupied.

If you’ve been thinking of purchasing a vacation property, or an investment property to ultimately move in to, a wise strategy may well be to act before year’s end. In all the doom and gloom of the coverage of today’s market, not one prognosticator has ever said the market housing prices will never increase again. When they do, it would be awfully nice to be able to shield those gains.

Spoken by Kari Lundin | Discussion: No Comments »