What Interest Rates Mean To Duplex Affordability

Over the last decade, the threat of rising interest rates has been like the boy in the Aesop’s fable who cried “Wolf!” to make the townspeople come running to his aid, even though there was no such beast threatening his sheep.

This era of low-interest rates, however, coupled with a shortage of inventory, has created a rapid rise in property values and the number of buyers willing and able to pay for them.

There will come a time, however, when interest rates rise. And if you’ve been thinking about selling your rental property or house, fair warning. A one percent increase in rates decreases affordability by 10 percent. Put succinctly, fewer buyers will be able to afford your property, which will result in declining values.

In 2019, the median price of a duplex in Minneapolis, St Paul, and the nine counties closest to each downtown, was $310,000.

For owner-occupant buyers, the most common form of financing a duplex is an FHA loan. Typically, these buyers are required to have a minimum downpayment of 3.5 percent and are also subject to mortgage insurance premiums.

For simplicity’s sake, however, let’s ignore that premium. A 3.5 percent down payment on a $310,000 purchase is $10,850. This leaves a loan amount of $299,150, amortized over 30 years. At an interest rate of 3.5 percent, the monthly payment of $1343.32.

With a simple one percent increase in interest rates, however, that payment jumps to $1515.75; a difference of $172.43 per month or $2,069.16 per year.

For many buyers, this represents the difference between being able to afford a duplex at that median price; and either having to buy elsewhere or pay less.

And that may be true of every buyer in the market.

Just something to bear in mind at a time when the power of the sales price so clearly belongs to duplex sellers.

At some time in the future, things will change.