Why The Minneapolis Duplex Market Defies The Rent vs Buy Conversation

Late last week The New York Times featured a story posing the question whether it made more sense to rent or buy a home right now. It made a lot of headlines and even more social media feeds.

David Leonhardt reported the story with the headline Rent or Buy? We Explain the State of the Housing Market.  After interviewing economist Mark Zandi from Moody’s Analytics, Leonhardt came down on the side that it’s better to rent right now. That is, unless you find the exact right house you intend to live in forever.

His reasons were pretty simple. He cited the interest rate. Over-inflated values that haven’t come back in line with those higher interest rates, resulting in bigger house payments.  Of course, in addition to the cost of the mortgage, homeowners incur for repairs.

And he cited Realtor’s fees – which I found strange. When he bought his own home his Realtor must not have brought much value to the table.

Here’s where his story got strange. He said home prices could crash like they did in 2008. There isn’t a single economist I’ve read or listened to who believes that’s going to happen. We simply don’t have enough housing inventory for the population of the country. Until we do, pricesWhat he failed to mention was a real estate crash like that of the Great Recession came 79 years after the last crash, which happened in 1929.

The author also cited the opportunity cost of a homeowner’s down payment – suggesting a buyer put that money in another investment like the stock market. He failed to mention the stock market has crashed far more often than real estate values.

However, Zandi gave Leonhardt a rule of thumb to decide whether to rent or buy. He suggested someone should lean toward renting unless the rent ratio – which is the purchase price divided by the annual cost of renting a similar house. In other words, use the gross rent multiplier! Zandi suggested if that number was below 18, someone should buy.

Here’s why that matters in the duplex world. Duplexes, triplexes and fourplexes with gross rent multipliers (the price divided by the annual rent) of 18 and over are exceedingly rare. In fact, they likely have a view of some body of water or were built recently and feature all the latest design elements.

Buying a duplex, triplex or fourplex also gives an owner-occupant a chance to actually reduce monthly housing expenses. Many duplexes can be owner-occupied with the owner paying themselves less “rent” than they would to an outside housing provider.

Small multi-family unit properties also provide owners with an opportunity to take depreciation for the unit(s) they don’t live in, which helps reduce taxes. Of course, there’s the benefit of the tenants helping to pay off the mortgage as well, not to mention the opportunity to realize appreciation on the property’s overall value.

The national headline this story garnered didn’t tell the whole story. The author lives in New York. Maybe it’s true there.

And it certainly isn’t true if you intend to house-hack a Twin Cities duplex.