Pretend You’re A Buyer: What’s Your Minneapolis Duplex Worth?

I’ve recently started incorporating a pro forma when I give Minneapolis and St Paul duplex sellers a price opinion. While it’s a practice I’ve always used with duplex buyers, until now I haven’t found it to be a necessity.

So why am I using it now?

In a way, it’s the only way to make sense of things.

There are two different kinds of duplex buyers; investors who are looking for a rate of return on their equity, and owner occupants, who are hoping to reduce their own living expenses while simultaneously working toward securing their financial future. With each, the numbers matter, but in different ways.

For the investor, negative cash flow is most often an absolute no-no. An investment needs to promise a positive return in order to make sense. After all, even the most conservative of investments, like a bond, have a positive rate of return.

The owner-occupant on the other hand is most often looking to buy their first house. While the rent from a second unit in a duplex is rarely enough to cover the entire mortgage payment, it should offset the expenses enough to make the duplex owner’s portion of the payment comparable or less than they were paying in rent.

To make sure we put a property in the best possible position to sell,  would-be sellers and I are going through a spreadsheet considering the hoped-for list price of the property, down payment, interest rate, expenses, maintenance, and vacancy rates. Then we are asking ourselves whether we would either buy the property at the projected cash flow or, in the case of an owner occupant, be willing to pay the difference to ourselves almost as a form of rent.

Often, the answer is a resounding “no”.

So we start playing with the variables. Are we just a rent increase away from the property making sense? If we lower the price does it make a substantive difference? If so, how much? Can the seller contribute to helping buy down the interest rate so the numbers do work? Is there an improvement that could be made resulting in a positive return? If so, what is the turnaround time on it and does it make sense to do?

If you’re thinking about selling, or even if you’d like to evaluate your property’s performance for your own portfolio, do a pro forma or profit and loss statement to not only determine value but also whether the return is worthy of your investment.

As always, if you’d like assistance with either, give me a call. I’d be happy to help.