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.