Why Waiting To Buy A Minneapolis Duplex May Cost You 14 Years

It seems like everyone’s waiting until interest rates drop to buy a Minneapolis or St Paul duplex.

After all, after years of interest rates in the 3’s and 4’s, 7 percent seems insanely high.

Would you believe me if I said it’s actually more expensive to wait? Probably not, so I’ll show you the math.

Let’s say because there isn’t quite as much buyer activity right now,  you manage to buy a duplex for $360,000. You put 20% ($60,000) down, and get a 30-year mortgage at 7% interest.

So, 7% x 300,000 = $21,000 a year in interest payments.

Now let’s say interest rates drop to 5%. Everybody who’s been waiting to buy jumps back into the market. Due to the increased buying power created by lower interest rates and resulting increased demand, prices go up. That $360,000 duplex now can be bought for $410,000 with a mortgage at 5% interest.

To compare apples to apples, let’s say the buyer still puts $60,000 down and finances $350,000.

So, 5% x 350,000 = $17,500.

Ah ha! You say. See? It is cheaper!

Hold on.

$21,000 – $17,500 = $3500 per year in interest.

But the price went up $50,000. Divide the price difference by the savings ($50,000/$3500) and you get 14.3 years. So to make up the gap in interest, it takes over 14 years to break even.

That isn’t the only place you lose money while waiting though.

Buyers don’t keep higher interest rate loans when rates drop. They refinance. So the $3500 difference won’t be for 30 years. If we’re lucky, it may only be a couple of years. So now it’s more than 14 years to bridge the price gap.

Of course, while waiting would-be buyers have also lost out on tax savings, principal reduction, and cash flow.

How long will it take to make that up?

If you’re thinking of buying or selling a Twin Cities area duplex, give me a call. I’m happy to go over the math with you.