Is Your Minneapolis Duplex Really A Good Investment?
If you’ve owned your Minneapolis duplex or St Paul duplex for a long time, chances are the cash flow seems pretty good. And if you’ve got the property paid off, it may seem better yet.
So it may be hard to swallow when I say even though that may have been your original goal, that doesn’t necessarily mean it’s a good investment.
How so?
Let’s say after you pay taxes, insurance, and the water bill and allow for maintenance, you manage to put $2000 a month, or $24,000 a year in your pocket.
That’s not too bad.
But given increased property values, let’s say your duplex is now worth $450,000 if you were to sell it. For all intents and purposes, you have that amount of equity.
If we calculate your rate of return on that equity as a percentage ($24,000/$450,000) we get a rate of return of 5.3%. That seems pretty good. However, this morning my credit union is advertising a return of 5.25% on a 15-month certificate of deposit.
What about appreciation? Doesn’t that count? Of course. If your property goes up 5% in value, next year, it will be worth $472,500. And if you don’t raise rent, now your rate of return is 5.1%. ($24,000/472,500).
Here’s what makes matters worse. If you’ve owned your duplex a long time, then it’s likely you’ve exhausted or greatly diminished the amount of depreciation and mortgage interest deductions you can take on your taxes.
So now that annual income is $24,000 minus your federal and state taxes.
How do you solve this?
Of course, you can always sell it. However, unless you exchange into another property or a Delaware Statutory Trust, you’ll be hit with capital gains tax and depreciation recapture.
A better way may be to do a cash-out refinance. This would allow you to restart your depreciation schedule and mortgage interest deduction, as well as reap the benefit of appreciation on not just one, but two properties.
It’s a good practice to review your return on equity annually, to make sure your money is working as hard as it can for you.