Duplex Chick

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The Minnesota Multi-Housing Association should hire Belinda Jensen.

I don’t think she knows a thing about renting or owning duplexes. But I think a storm’s a comin’, and somebody needs to forecast it.

So I will.

There’s a tornado on the horizon for Minneapolis/St Paul duplex owners and landlords.

It’s a great big, dark, ominous-looking vacancy rate resulting from the $8000 first time home buyer tax credit.

I can’t even tell you how many people I’ve spoken with in open houses and general conversations who a) are planning on taking advantage of the tax credit and b) are on month-to-month leases.

As the tax credit expires November 30, 2009, how many move-out notices do you think landlords will receive on October 30?

I’m guessing about 17 inches worth.

While it’s always wise to keep your tenant’s leases current, it is especially important to make sure you have them under contract now.

If you don’t, I’m predicting a long, cold winter.

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I keep wondering when people will notice summer’s almost over.

OK, so it’s not exactly over. But we’re a week a week and change away from the first day of August. Summer might as well be over then, as it’s when we all start thinking “time to get ready to go back to…”.

Summer’s end promises the onset of fall. And fall means the end of the $8000 first time home buyer tax credit.

Yes, the credit expires on November 30, 2009. But that doesn’t mean you have to have picked out a duplex by then. It means you actually have to have closed on it. In other words, the key and the mortgage need to be yours.

Sounds easy enough, right?

Well, there’s the fact that it usually takes anywhere from two weeks to a month for the bank to give you the mortgage you applied for to buy the place.

No worries. That means you have to have found your first home by November 1, right?

Guess again.

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It sounds presposterous, but a client actually had a computer glitch significantly delay his purchase of a duplex the other day.

As he was using FHA financing, the glitch involved a software problem in the computer system of the federal government. Basically, he had written an offer earlier in the year on a different property, which we were unable to successfully close on.  And somehow, the “case number” assigned to the loan he never got remained in the system.

When he went to get a loan for a different property, the government’s software prevented it. After all, you can only have one FHA loan at a time. And the computer said he was applying for a second one. The computer is always right (sarcasm intended).

So I went about looking for alternatives. After all, there are no limits to the number of conventional loans a buyer can have at one time. And I hoped there was a loan product out there with perhaps a down payment of just a little more than FHA’s mandatory 3.5 percent. Perhaps we could find him a conventional loan that required just 5 percent down.

And then I learned something.

While conventional loans on single family homes presently require the buyer to have a minimum of 10 percent down, duplexes are another matter entirely.

We all know investors are required to put 20 – 25 percent down in today’s market. So it should be something less if you’re buying the duplex to live in, right?

Nope. Owner occupants who use conventional financing for their multi-family properties are required to have a 20 percent down payment.

Sadly for my client, it looks like FHA is still the best game in town.

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While talking about rent increases in tough economic times might be like pining for summer in the midst of a Minnesota January, it is nevertheless important to remember the enormous impact on value that even the slightest increase in revenue can make.

There is no greater illustration than this than the gross rent multiplier. As I explained a while back, this figure is simply the price or value of the house, divided by the amount of money it takes in annually.

How do rent increases, or, for that matter, even more laundry revenue, impact the GRM?

Let’s pretend, on average, duplexes in your area are selling at an average GRM of 10.

Your duplex grosses $10,000 per year in rent and laundry income. Therefore, your property is most likely worth $10,000 x 10 GRM = $100,000. (Bear in mind that condition and location always contribute to value as well.)

The economy is bad, so you feel you can’t increase rent. But what would happen if you simply upped it by $10/month for each unit. That would result in an additional $20/month in income, for $220 per year.

What if you could generate $10 more a month in laundry income by increasing the charge for each was by 25 cents? This would result in $110 more for the year.

Combined, you would have increased your annual income by $330.

It doesn’t seem like much, I know. Until, of course, you use it to determine the market value of your property. Multiply the $330 by the GRM of 10 and those minor increases suddenly translate into your property increasing in value by $3300.

Times are tough for everyone, but there are still fair, compassionate ways to increase your bottom line.

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This morning I stumbled upon the worst real estate investment advice I’ve ever read.

Which was?

Not to use a Realtor in the early stages of looking for property.

The rationale?

You might get pressured into buying something.

I suppose smoking is really good for you too.

If I could make people buy property, would I still be working? Or would I be retired?

And if I were working just to “keep busy”, would it be here? Or in Malibu, where both the weather and the prices are sunnier?

Just as in every other profession, there are good agents and well, stereotypes. By en large, most of the agents left in the business are the former.

A good Realtor is your advocate. The state says she has a fiduciary duty to look out for her clients best interests at all times. If she’s a member of the National Association of Realtors, she also has an ethical duty to do so. And, in light of all of the present suffering in the real estate market, most agents believe they also have a moral responsibility to protect their clients.

A good Realtor, competent in the multi-family field, will be your teacher. She will show you how to calculate the numbers, guide you in evaluating opportunities, and continue to be a resource long after you’ve been given the keys to your first building.

A good Realtor will develop an understanding of what your ideal property looks like. When she sees one; either on the MLS or while speaking with potential sellers, you will be her first phone call.

Even in this “buyer’s market”, the great deals go from “just listed” to “sold” in a single day.  By the time buyers not working with agents see these listings on Trulia.com or Realtor.com, it’s too late;  they’re usually already sold.

Most importantly, an experienced agent will keep you from making a bad deal. And to me, there’s nothing more important than that.

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If 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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While the media continues to report disheartening news for the national housing market, the most recent data for the Minneapolis/St Paul real estate market again suggests there may be reasons for cautious optimism locally.

With their release of the Weekly Activity Report for the week ending June 27, MAAR reports that new listings for the week were down 18.9 percent from the same period last year. In fact, the total supply of listings is down 21.3 percent from 2008.

The number of pending sales for the week were also encouraging. The 1,121 propererties that received purchase agreements was a leap of 31 percent over last year.

On a broader scale, there are now just 4.9 homes available for sale for every buyer. That’s 32.6 percent lower than last year, and a number that hasn’t been seen since 2005.

In the multi-family market, pending duplex sales were up 25.7 percent from the comparable week in 2008. Of the properties that received purchase agreements, 91 percent were lender owned or mediated, with an average off market price of $109,742.

This figure once again represents an increase in the number of short and foreclosure sales from the 2008 mark. The duplexes that pended for the same week in 2008, meanwhile, averaged a sale price of $122,389.

The number of new listings for the last week in June, however, was down an incredible 34.9 percent from last year. As supply continues to decline, we may see price improvements in the near future.

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One of the most common questions I get is, “What’s the interest rate on a duplex?”

And as I do with so many of my answers, I always begin with, “It depends”.

If you plan to live in the duplex, your interest rate will be exactly the same as it would be if you were buying a single family home to live in.

However, if you’re purchasing the property strictly as an investment, your interest rate will be anywhere from one to three percent higher.

If, for example, the going rate is five percent on single family homes, expect to pay anywhere from six to nine percent interest on an investment property.

Of course, the interest rate each person qualifies for is determined by a number of factors, not the least of which is credit scores.

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Someone asked the other day what the average heat bill on a duplex was.  I couldn’t answer.

See, utility bills like heat, electric, water and sewer are as unique to a property as they are to a single family home. The cost of each is dependent upon the number of people who live there, the square footage of the unit, the type of heat, which utilities are tenant paid and which the landlord takes care of.

If you’re buying a duplex, however, there are a couple of  ways to find out what the utility bills are.

As a contingency in your purchase agreement, you can always ask the seller to share copies of utility bills with you prior to closing.

Or, in the Twin Cities, you can simply call the utility companies and ask to tell you. Many of the power companies will give you a number that represents a monthly average. The water department, on the other hand, may offer precise figures.

In either case, it’s always wise to be fully informed of the costs involved in owning any income property before the seller gives you the keys.

Have a happy and safe holiday weekend!

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One of the challenges facing many duplex and single family home buyers in today’s foreclosure-laden real estate market is that many of these properties havea significant amount of deferred maintenance.

And it’s tempting, regardless of the type of property purchased, to “Pimp My Ride” with every conceivable improvement featured on HGTV or in the aisles of Home Depot.

Before you max out your credit cards, spend all of your $8000 first time home buyer tax credit or burn through your 203(k) construction loan, it’s important to stop and think who you’re improving the property for, and just what your return on those expenditures will be.

Just as improving a kitchen or adding landscaping increases the value of  a single family home, upgrades to duplexes do as well.  Before you start putting granite countertops in your rental units, however, it’s important to ask yourself a couple of questions.

First, if your intention is to ultimately sell the property, think about who your eventual buyer might be. Is your property one that lends itself to an owner occupant? To answer this, simply ask yourself whether you would live there.

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