My girlfriend and I are planning to move to the Saint Paul, MN area in about a year and we, like many others, are hoping to house hack a duplex. However I want to analyze properties as if I was buying them as a purely passive income property. After a few hours of scouring the forums and reading the county websites I came up with these numbers. I was hoping I could get some local input on how close I am to accurate numbers.
I went with a conservative $100 cashflow per door, mostly because my down payment will likely be less than 20% so I will have mortgage insurance. For rent I just poked around Zillow and other rental sites and looked specifically at small multifamily for comps. Maintenance, Cap Ex, Property Management and Vacancy loss I really just scoured the forums for what everyone else said they used in the region and this is sort of the conservative average I came up with for each. I did the same thing for water/Sewer. For Garbage I went to the Saint Paul city website and saw that fee was 102.44 per quarter per unit plus a 24.60 annual fee. That broke down to 70 per month. Honestly for snow and lawn care I kinda just read some forums and made my best guess. For the rental license fee I took the total cost of the Tier 2 rental licensee fee for a duplex ($305) and divided it by the term (60 months). This came out to 5.08 a month but I made it 10 for possible violations/fines. For mortgage, insurance, and property taxes I have simply been looking at what Zillow and Redfin estimate. I trust their mortgage numbers are pretty close (when adjusted) and I can double check the tax number through the county website but I am skeptical of the insurance numbers. Please tell me if Zillow and Redfin are way off on this.
I'm sure I have a long way to go and missed some things so any and all input is great!
St Paul, MN Duplexes
- 3/2: $1300-1600?
- 3/1: $1200-1400
- 2/1: $900-1150
- 1/1: $750-900
- 0/1: $550-700?
- Maintenance - 9%
- Cap Ex - 9%
- Vacancy loss - 6%
- Property Management - 8%
- Water & sewer - 80/month
- Garbage - 70/month
- Snow Removal & yard Service - 60/month
- Rental License fees/fine - 15/month
- Insurance - PITI
- Property taxes -PITI
- Mortgage -PITI
- Profit - 200 minimum
My tentative equation:
(Rent x .68) - 425 > PITI = Deal
Good luck with your move and finding something that works for you. I'll comment on the rent revenue side of your question. Initially, the answer depends on the neighborhood and varies significantly. Rents probably start at $0.80/square foot in neighborhoods or properties that are not all that desirable but I'd add that to find a studio below $700 is hard to do and in the neighborhoods where we operate they start at about $800 and go up to just under $1,000 plus electric and cooking gas. Studios in small low amenity buildings in good neighborhoods often can go over $2/SF
One bedrooms, again in nicer neighborhoods are in the $1.40 to $1.90/SF range. Two bedrooms vary a lot but I'd estimate from about $1 up to maybe $1.30 or $1.40. Again, in the neighborhoods that I am familiar with. I'm sure in the less desirable rents are less but the floor is still pretty high here.
Whenever I do market comps I always do it on a square foot basis as a studio can be a 300 SF apartment or a 600 square foot apartment (or in between). Ditto for the other categories. Note, that in general terms the smaller the unit size the more rent per square foot.
Hi Nathan. I like your approach to all this. Even with house hacking the number should still work without you living there. That is smart investing and I think that's how house hacking should be done. It sounds like you are on the right track and you've done the homework to understand the market numbers. I honestly think your expense numbers are fine. I would use those. The rent numbers can be a little tricky based on the area but you're right on with using Zillow and other sites for rent comps so I wouldn't worry too much on that either. Also, Ryan Schroeder pointed out some good per sq ft numbers. At this point I think you analyze more deals for practice with your numbers and don't over think it too much (analysis paralysis). The numbers don't lie.
@Ryan Schroeder I probably should have been more specific about what I was looking at. I’m hoping to buy for 180-260k so I assume I’ll probably be in Dayton’s Bluff, Phalen, North End, Frogtown or West 7th (if I’m lucky).
I definitely had trouble finding info on studios and 3/2 (that were not SFH). However it's unlikely this is the type of unit I will own anyway. I'd love to get a triplex and live in a studio unit but that seems like a needle in the haystack.
I’ll try looking at units from a per square foot perspective now. Do you find this to have a bigger impact on rents than unit quality?
@Bryan Tinajero I appreciate the encouragement, thankfully I’ve never been much of a victim of analysis paralysis. Working with the numbers tends to drive me forward rather than hold me back.
I think what I’m getting from both of you is that I should look more into the differences in rent between neighborhoods. I can’t be pricing rents the same in Dayton’s bluff and Summit Hill.
Thank you both for your advice! @Ryan Schroeder
@Nathan Christensen A data point for you - I have a duplex in payne/phalen that's 2BR/1BA each 870 ft up, 1000 ft down and they rent for $1100 & $1300 respectively.
Super awesome that you're coming to MN and best of luck on finding a property! There are a few meet up groups here you should check out when move to the area!
Nathan, regarding your question re square footage comparisons versus rental quality. I'm not sure I can state ANYTHING with absolute certainty. But here is what I do, which seems to work for me.
1. When I do rental comparisons (which I do regularly...so maybe 3-5 times/year) I go to both Zillow and Craigslist and search within about two miles of the property I'm trying to figure out a rental rate for. I list every parcel by address, square foot and rent that are similar to mine. In other words, if I'm comparing duplexes I do not include 200 unit buildings.
2. I also view amenities/listed amenities and I record those in my notes. I also make comments about neighborhood characteristics so I know if the property is in a better or lessor neighborhood. I also try to identify if rent includes utilities, laundry, storage and parking as those have real costs and I try to figure out the tenants total out of pocket
3. I then do the math and sort by rent/square foot so I know the cheapest, most expensive, median, mean and in some cases mode so I know where the sweet spot is. In our case I target rents at just below the sweet spot.
4. When I run ads on Zillow and Craigslist I record everything, meaning I spreadsheet it so that my debrief after it is rented can tell me if I was too high or too low. In a recent rental I received 70 requests to view the rental. My rent obviously was too low. I'll adjust next time.
5. By the way, I keep rental increases very modest. Over the past 6 years my average has been 1.7%/year for existing tenants. When an apartment turns over I jack the rent for the new ad.
@Nathan Christensen I like your approach and your numbers, except your property management %. 8% seems at least 2% too low from my experience. I do not know the Minneapolis market at all but I'd venture a guess that 10% is going to be the low point there too.
I'll take a stab at this based on West Seventh numbers. As Ryan mentioned, some of the estimates are a bit low (or high) for West Seventh. A fixed up duplex unit that is 2/1 can fetch in rent over $1,150 a month. I bought a fixer duplex in West Seventh and am able to fetch about $1,300 a unit for that property. It varies wildly, especially based on the finishes.
Also, in West Seventh, vacancy of 6% is a bit high. I agree to include some sort of vacancy in your calculations, however 6% is a bit aggressive for that neighborhood. For water sewer, I pay about $60/$65 a month in West Seventh.
Aaron, I pay about 6% per month in Property Management. In Minneapolis/Saint Paul, there are various Property Managers who charge a fixed rate of $100 or less per unit per month. With rents over $1,200 (generally), that would work out to 8% or so per month.
A combination of 9% for maintenance and 9% for cap ex seems extreme. I hate using %'s as the repair costs since my bigger triplexes actual costs don't vary that much compared to my standard duplexes and the numbers are based on rent/not value/how many items have already been replaced. I've been averaging about $300/month across 10 years for maintenance and cap ex so that's 9% in total but I renovate every property I buy as I keep them long term and knock out issues up front and include that in my acquisition price. My vacancy rate is under 1% across those 10 years and I self manage so no outside management costs. You might be building a cushion that will prevent you from buying something or covering everything known to mankind for contingencies. If you were competing with active investors like me on a duplex, I'd have 10% built in where you'd have a 33% loaded in so you're including an additional 23% expenses in your calculation. This is more of an FYI on how some investors aggressively go into purchases. I require a much higher ROI but thought it worthwhile to show you an alternative view.
I would say Maintenance is closer to 15% and management is much higher than 8% when you add in tenant placement fees. 6% vacancy is tight. You will be fine in this market, but most people forget traditional housing markets.
On the management fees side - I'm paying 8% plus new tenant fees which are one month's rent. So far I've had good luck with tenants going 2+ years. As far estimates and percentages go - I'll just share my newbie take - I like being conservative in that I am mostly searching for cash flow positive deals, not necessarily a return percentage threshold. If a deal looks ok with my conservative numbers - then so far they are panning out better than my conservative numbers which is good for me psychologically.
@Aaron Montague @Todd Dexheimer I purposefully estimated my property management low because I plan to manage my own properties as long as I can. I don't want to miss out on a deal because of this metric but I do hear what you're saying. 10% is the traditional estimate and that would probably be more accurate, I was just trying to hedge a bit.
@Tim Swierczek @Bruce Runn I totally agree about percentages being inaccurate when it comes to maintenance and cap ex. I would much prefer to use age, condition, number of units and square footage as a basis for those estimates. Without any experience I'm not quite sure where to start building out that formula. Every time I try to search for more concrete numbers I just get people throwing out percentages. Which I think is probably about as accurate as any rule of thumb but that's all it is; a rule of thumb. As much as I'm like any newbie afraid of buying a bad deal I think it is far more likely I'll be sidelining myself with conservative numbers. How would you suggest I start building a better estimate system for cap ex and maintenance? My first thought is spread sheet every possible expense and divide each upgrade by lifespan but that hardly seems repeatable.
@Bruce Runn How extensively to you renovate each property? Are you gutting each property or do you just look for future problems and try to fix whats needed on a deal by deal basis?
@Ryan Schroeder Thank you so much for sharing your rent analysis model. It seems like rent is highly influential and dependent on so many things like size, finish and neighborhood. Which as I write it seems like a pretty "duh" statement but it makes it much harder to predict.
Thank you all for your input. I want to keep whittling away at the numbers until I have some formulas where I can be competitive in this hot market while minimizing risk of buying a bad deal due to negligence. I will definitely start looking into replacing my maintenance and cap ex with hard numbers. I will start tracking rents by neighborhood as well and start taking note of size, finish and amenities.
Thank you all so much, every piece of information goes a long way for me!
Nathan, I looked at a duplex we own in St. Paul to get some actual #'s that you can manipulate however you wish. These are from 2018
P Tax/assmts: $3351
Garbage: $487 (this is a 2019 # as it has doubled since 2018 due to a change in City requirements)
Gas /Electric $2800 (tenants actually pay but this is about the total annual cost for both)
We self manage and same as Bruce, we upgrade on the front end so maintenance is low but a $200/month budget on a solid building would be a reasonable number. On the other hand we just lined/dug a sewer at another property yesterday at a $16,000 cost so you will be wrong no matter the number.
We self manage including lawn care and snow removal so we do not have those contracted expenses
I improve each project based on needs. I always change out fuses to circuit panels, and upgrade the plumbing and electrical to insure there won't be issues where it makes sense. I usually update kitchens/bath and handle any delayed maintenance. All of my buys need work to maximize the rent potential
Originally posted by @Nathan Christensen :
@Aaron Montague I purposefully estimated my property management low because I plan to manage my own properties as long as I can. I don't want to miss out on a deal because of this metric but I do hear what you're saying. 10% is the traditional estimate and that would probably be more accurate, I was just trying to hedge a bit.
The main reason I recommend that people use the local number is that they may want to move in the future. If folks are getting 10% in your area use 10%. Even if you plan on managing all your properties yourself, get the business used to paying out that 10% on the books.
You won't miss out on any deals using the 10% number because you are the person that decides if the deal works for you at the end of the day :) Accounting doesn't care where you put the numbers, the profit/loss at the bottom of the sheet remains the same. You can use your 8% number if you know that you will manage the properties for the KNOWN duration of the investment.
Building 1: Rent is $1000, Profit (other than PM) is $400. You intend to buy and hold for the long term. Use 10% here and have Nathan's Building 1 Inc pay Nathan's PMing, LLC $100/month. This means that your overall business, Nathan's Long Term Retirement Inc still makes $400/month. Here you might move a long distance away and not be able to manage the property. Now that 10% needs to go to Someone Else's PMing, LLC. Here your overall profit takes a bit but Building 1 Inc easily deals with the change.
Building 2: Buy, fix, and hold for 24 months. In the booming market in your city/neighborhood you have a lock on something you know is going to go up in value. You plan on selling the place in 24 months. So use your 8% here because you are 99% sure you will be staying put for the time it takes to sell the building.