Why Below-Market Rent Is Killing Your Minneapolis Duplex’s Resale Value (And How to Fix It Before You List)

A buyer recently called me about a duplex I had listed for sale. What made the call unusual was his desire to berate me about the price.

He lectured me about his neighborhood’s superiority, saying the price per square foot was too high. He argued the duplex should not be listed higher than comparable listings in his area (it actually wasn’t). Finally, he let me speak.

The first thing I explained to him was that price per square foot is not an accurate determinant of value. In the duplex market, other factors matter more. While price per square foot may show up on an appraisal, the far more accurate methods involve rent.

Of course, then he wanted to argue CAP rate, a commercial property measure largely irrelevant in the duplex market because of the property’s comparatively low revenue stream. After all, two residential units generate far less gross revenue, which usually results in comparatively low CAP rates.

What, then, did I use to come up with the price?

Rent.

That’s when he asked what the property was currently generating in rent. I told him the sellers had owned the property for decades. And there’s nothing a seasoned landlord hates more than turnovers. In fact, it was not uncommon at all for long-term owners whose market rents were $300, $500, or even in this case, $1000 below market rent; in each unit.

I said that once we raise the rent, annual revenue would increase by 58%.  That is, if an owner-occupant didn’t buy it first.

He suddenly realized this “overpriced” property was actually a good deal.

This call reminded me that as the Twin Cities duplex market softens, duplex buyers will look at properties more critically than they may have in the halcyon days of 3% mortgage interest. Then, they may have been willing to take on below-market rents with leases ending months after closing.

Now, they won’t. As interest rates rise, properties become more difficult to cash flow. And if you’re a duplex owner thinking of selling in the not-too-distant future, it’s critical that you plan ahead.

The number one improvement duplex owners can make is to keep rent at or just below market rate. If a fear of losing long-term tenants, a month-to-month lease gives a buyer the option to raise rent after closing.

For resale value, it’s important that a buyer isn’t forced to take a longer-term financial hit simply because the seller didn’t want to have to clean the refrigerator.

The return on that seemingly insignificant adjustment can literally be tens of thousands of dollars, so why wouldn’t you make it?