Need help evaluating 4-plexes in Uptown, Minneapolis

17 Replies | Minneapolis, Minnesota

I'm working on my first multi-family investment deal since moving back to Minnesota from Wisconsin in order to start growing a portfolio locally. I found two separate unlisted 4-plexes in Uptown. Ideally, I would house-hack one of the 4-plexes, use the Home Possible Program to put 5% down and potentially purchase the second one conventional if each of the deals worked out (using the backing of a seasoned family-friend investor to assist w/ financing). Both do not have asking prices and both owners want to "cash-out" but are also worried about cap gains tax, more questions on that below. 

Here are some assumed numbers: 

Fourplex #1: 

2BR - $1750

2BR - $1400

Studio - $800

Studio $750

Rental Income = $4,700

Vacancy 5% (assumed)

Net Rent: $4,460

Parking income = $300/mo

Washer/Dryer revenue = $1,000/yr or $84/mo

Utilities: $13k/yr 

Insurance: $2,100/yr 

Taxes: $8,300/yr 

CapEx & Repairs: $250/mo

4 year old roof and boiler 

Financing: Assume 5% down, i = 4.5%, 30yr, closing costs of 2% w/ PMI of 1%

No commissions

Fourplex #2: 

1BR - $800

1BR - $850

1BR - $850 

1BR - $925

Rental Income: $3,425/mo

Vacancy 5% assumed

Net Rent: $3,254

Parking income: $270

Washer/Dryer: $500/yr or $42/mo

Utilities: $7,700/yr

Insurance: $1,500/yr 

Taxes: $6,300/yr

CapEx & Repairs: $250/mo

4-year old roof, windows, siding

Financing: assume 5% down, i = 4.5%, 30yr, 2% closing costs, 1% PMI

No commissions 

My questions are as follows: 

- What should my offer price be on each property and what is the highest price I should be willing to pay for the properties? My threshold is 10% COC and $100/mo/unit cashflow but understand there is more potential home-hacking here and I can't low-ball in this market.

- How do my assumptions look above based on the market? 

- How should I finance the properties if I wanted to buy both? (House-hack one and conventional for the other? Can you bundle your loan in that case?) 

- The sellers want to "cash-out" but are worried about Cap Gains Tax (no 1031 either). Should I ask for seller financing to defer this? Any other creative options? 

Thanks in advance for any help/suggestions. 

Look at some comps to determine the going rate. For example in my area multifamily properties don't come close to the 2% rule. They are around the 1% rule. I'd also ask for seller financing if they are worried about having a lump sum of cash. Good luck and congrats on getting to this point.

In addition to comps, why not plug the numbers into the BP rental property calculator and see what comes out?

I'm sure you are already aware, but Uptown is arguably the most desireable multifamily rental neighborhood in the Twin Cities, so don't be surprised if you have to pay a premium over other Minneapolis neighborhoods to get a bid accepted.

Nice job landing these two deals.  Mind if I ask how you found them?  You said they were off market.  Did you use yellow letters or some other type of marketing?  I'm looking for my first deal and would appreciate any feedback.

If the seller is worried about reporting all the gains right away, a great possible option is a contract for deed for him using IRS-6252 installment sale and reports the capital gains yearly based on how the sale is structured so he can spread the capital gains over numerous years if that is what he wants. (consult tax professionals).

 Are those actual rents or assumed?  That's where part of the value add sometimes comes in.  I've paid premiums and have gotten deals based on knowing what the "real numbers" for rent and expenses should be.  Know/learn what rents are at 4 plexes nearby.   Become an expert or talk to people who have them.  Are there opportunities to add bedrooms?  

On your numbers, insurance is low for 4 plex- those are more appropriate for duplexes- it should be higher but is really based on value- even knowing assessed value helps.

CAPEX/repairs- good number for duplex, a little low for 2 more units- 4 kitchens/4 baths, means possible more maintenance.- 1 boiler or 4 boilers- makes a big difference- Utility numbers are very high so I assume owner pays for heat or electricity?

Good luck

@Account Closed I will look into the IRS-6252, I think that's the best bet. The seller only receive the down-payment of the agreement upon the sale at the time of closing, not the lump-sum, correct? 

I just confirmed the actual rents and the gross rents come out the same. With that info and all else equal to my assumptions (including the utilities above paid by owner), what would you value a property like this, Bruce? I know you know Uptown well. 

Thanks all! 

Have you been inside these places yet? As I've mentioned, you can't determine real values from buying off the MLS or off someone else's pro formas's. No way to estimate what the actual rent/value equation is without being inside along with looking at the condition of the entire property. any guess wo0uld just be that- a guess.

@Kevin Anderson

How you finance both properties will depend on how much savings you have available in bank and retirement accounts.

Home possible is an excellent way to get into to the 4 flat with 5% as long as your fico score is above 720. If it's less than 720, then FHA may be better since the monthly mortgage insurance factor would be .8 vs conventional would be slightly higher. Also fha allows just 3.5% down.

25% is minimum down for 4 unit investment since you can't use home possible twice. We had to be very careful and strategic within the guidelines when sourcing "gift funds" since gift funds are not allowed for investment properties.

Would love to talk more. Ask anything.

Jim Blackburn

Be careful only using $250 for repairs and reserve. I would be using $250/month for repairs and $300/month for reserves. Also, account for minneapolis licensing requirements and understand your taxes will increase upon sale if you're paying more than the assessed value. For these properties in Uptown, I would expect them to trade around $550k-$600k and $450k-$500k

A lot of great advice on here.  I would say that your rental income estimates are on the low side (which is probably smart).  Not sure exactly what part of uptown these properties are located but there can be some variation when it comes to "uptown".  Your going to see a few hundred dollars difference between lets say Blaisdell in comparison to Colfax.  I think you should be seeing minimum $900 on studios in uptown (this is what my studios in NE rent for) and $1000 for 1 bedrooms (also based off NE rents).  Uptown is a very desirable location and properties there have preformed very well for those I know with properties in the area.

@Bruce Runn gave some great advice with the contract for deed.  I would further research that and have discussion with the sellers on whether that is an option for them.

If the properties are in a decent part of uptown and were to hit MLS, my bet is that they would be listed in the high 600's. Right now I am seeing 4 different duplexes on MLS between 475-560 (2 have contingencies already) just as a reference. They would also probably see multiple offers. As I mentioned, uptown is still steaming hot and that is reflected in the prices seen in the area.

I personally think that at MLS prices that area has become tough to justify investing in. It's smart of you to find stuff off the market and hopefully you can get yourself a good deal!!

@Account Closed

I think your estimate of value on the two 4-plexes is high.  I have a four plex in Uptown I'd put up for sale in a minute if I thought I could get mid to high $600's-LOL

@Bruce Runn you may be right.  2 duplexes in Uptown have active contingencies with a listing price in the mid-500's right now. One with 6 bedrooms and the other with 5.  I haven't seen 4-plex come on the make in some time now.  Have you?  If so, I would love to know what they are going for for future endeavors. 

@Account Closed

The property at 2442 Grand is a 4 plex and is listed at $575.0 but has been on the market for over 3 weeks but owner pays all utilities(elect/gas/water ect)  so that has to be factored in since it added expenses/reduced profits as compared to most multi family properties.  

Originally posted by @Account Closed :

@Bruce Runn you may be right.  2 duplexes in Uptown have active contingencies with a listing price in the mid-500's right now. One with 6 bedrooms and the other with 5.  I haven't seen 4-plex come on the make in some time now.  Have you?  If so, I would love to know what they are going for for future endeavors. 

I bought one of them ;)

@Kevin Anderson , without divulging any secrets, how did you manage to find out about a deal that was unlisted?  Do you just call around, or was it just through networking?  I have been trying to buy a multi-family unit for the last year, and as we are only looking at what is listed, we keep losing out to investors with 100% cash.  Thanks.

@David Wierzba It's all about networking. I have a lot of close colleagues and friends who are in the business and you never know when someone wants to cash-out to buy other properties or are just getting too old/tired to manage them. I've been told many times there are plenty of opportunities on the MLS (@Bruce Runn  will confirm that), but I prefer unlisted opportunities so it's only between me and the seller. Easier said than done, but talk to anyone and everyone!