How to Analyze Duplex in Minneapolis
Minneapolis, MN · Member since 2008 · 50 posts · 12 votes
We are in the market to buy and hold and plan to put down 25%.We have a seasonal real estate agent working with us, who is also a friend. Rent in the areas we are interested in is about $1300 – $1550 for a 2 bds/1 ba.
We were thinking of a duplex priced at $440k, built in the early 1900s and has funny, damp smell in the basement. We asked for info on the property: details, incomes, expenses and have not received it yet. One unit is currently vacant. Now within one week, they received two offers!I was thinking that even at $390k, it still would not be a good buy, so why are these properties moving so fast? Are these buyers relying on future appreciation? Or am I off base in thinking that the price is too high?
Congratulations @Jackie Sladky, I also just had an offer accepted on a 4-Plex in Saint Paul. This will be my first proprty.
I was having the same issues as you, high prices that are not justified by the rents. I started networking like mad, going to REIA groups and telling everyone what I was looking for. I got some good leads on off-market deals but the one I am pursuing right now I found on Craigslist. If your current deal falls through I recommend forgetting about finding a deal on the MLS. Comb Craigslist FSBOs, go to REIAs, call property managers and ask if any of their clients' buildings are for sale, send mail to properties you like, call "for rent" posts on craigslist. You will probably get the best deals from the worst landlords (because they are bleeding money and are sick of the hassle) so call the ones with no pictures, or bad pictures, the ones that don't list the rent, have misspellings etc. If they have nice pictures and clear information about the property they probably have a good head on their shoulders, and they will probably not want to sell or want to sell for more money because the property makes money.
The areas where I see potential deals are Powderhorn/Phillips in South and some neighborhoods in North in MPLS, and Midway/Frogtown, W 7th, and the E and W side of Saint Paul. The housing stock tends to be older in these neighborhoods but there are always some newer builds. Personally, I think there is a significant drop in value when you get older than 1920. Some of these neighborhoods I listed can be a little rough, so I look for an independent coffee shop/cafe, coop grocery stores, and trendy bars moving in. If you see some of that activity there is a good chance the tenant pool will improve over time.
Its really competitive right now, so the good deals go to investors who dig deeper.
Happy Investing.
Also there is unprecedented demand right now for investment properties and a lot of competition so it is possible for investors to bid too high for listed properties. And, owner-occupants who want to live in one side of the duplex are also bidding up these properties.
Consider the following factors that can make a big difference in your ROI:
- What will non-homestead taxes cost you? Are taxes likely to rise?
- What common utilities will you be paying for? Water, Trash, common electrical?
- What is lawn care and snow clearing going to cost?
With an older building you may also want to assess risks of water intrusion in the basement, old wiring, old water mains, and old sewer lines.
Most 100 yr old duplex properties I look at just don't make any sense as an investment when I look at all of the above factors. Yet, still they are selling for top dollar.
Hi Jackie,
If they're selling anywhere close to asking price, I can't see how a straight up investor can make money on that deal. Even if they can get $1500/month per apt. which is really at the highest level for 2 bedrooms units, they can reasonably only make about $400/month after taxes, insurance, water, and CAPEX/repair. What I'm finding especially in Uptown is people are buying them to move into one unit and rent the other out. It's substantially cheaper than buying a comparable single family home. In an owner occupied situation, they can always pay more than you as they are less worried about the profit/ROI but rather getting a great place in a great location with a rental unit that essentially pays off their entire mortgage. I own 8 places in Uptown and get numerous unsolicited offers from people who are owner/occupied buyers but I'm primarily a buy/hold guy. House hacking is a really strong trend right now and I personally know 4 couples/families who are actively looking for places in South Minneapolis with the intention of living in one of the units. They are very selective in what properties they are interested in and are looking for places that are already in turn key condition. The fact that interest rates look like they are going up with few duplexes for sale adds to the high prices.
Hi Jackie,
I agree with Bruce and Marc... the biggest barrier you will find is that turn key duplexes are such a smart buy for owner/occupants. How do you feel about taking on a fixer though? There is often less competition for those ( as noted above). Also, you might want to take a look at St. Paul. I work with buyers and sellers over there and find that the price point is much lower but rents are not necessarily that much lower. The other option is to go out into the first ring suburbs. Lots of twin homes that might work for you too. Feel free to contact me if you'd like more info. Good luck!
Hi Kim,
I don't think there is any less competition (prices are just lower but they usually need a fairly major amount of work) for a fixer upper as I have lost out on 2 properties in multiple offer situations in the past month so evidently there's a lot of competition at the high and at the low prices-LOL
There isn't any cash flow in that deal so it's a no for me.
You were right in saying the prices are too high....especially your opportunity cost. You could essentially buy more property and almost double the cash-on-cash return (COCR) by investing at a lower price point.
Based on the info you provided, it sounds like you have around $100k to put down while carrying $300k in debt service per property. Correct?
If that is the case, the initial numbers don't support a scalable investment strategy. You could essentially buy an extra duplex and double the COCR with the same $100k available cash you have by investing in 250k-300k duplexes.
My duplexes are in the western metro suburbs and rents are $1200-1500 for my 3br units. My Robbinsdale duplex rents for $1250/unit and I bought it for $195k.
As an agent & investor, I'm viewing duplexes in western suburbs (Hopkins, Crystal, Golden Valley, etc) going between $230-290k with rents in the range you listed for the 400k properties.
So...yeah...to me...you are right in saying it is too high. I would stop and think about what is an acceptable rate of return for the cash you invest and select price points that allow you to get that rate of return.
Thanks everyone for confirming that I am on the right track in thinking that the price was too high. What Marc wrote about expense risks with old buildings is exactly my concern, and since we will not move into one of the units, the uptown model will not be a fit for us. I better stop dreaming about buying and making money with a duplex there – at least not now. Our smart real estate agent showed us a property in Hopkins, and we thumped it down! But it’s okay. We are still learning and haven’t made major mistakes yet. Now we will include the suburbs in our search.
Huynh, we are not networking with anyone. It’s because we are still newbies. There are four of us, including my husband and my daughter and son-in-law. We want to be hands-on and DIY whenever possible, but we do know too that in many areas, it’s way cheaper to pay the experts.
Jackie, thanks for starting this topic. I just signed up for BP and this thread is addressing one of my biggest questions.
I'm seeing the same thing as the previous posters. My wife and I are looking for our first place and are interested in an owner occupied duplex in Minneapolis (currently renting in Lowry Hill and love the area). Have checked out a couple that are at or near 400k that were snapped up quickly despite some major issues due to deferred maintenance.
Despite having the advantage Bruce mentions of being owner occupied, the numbers are still disconcerting to me. Even though we plan to live there, we see this as our first step towards a real estate portfolio so we are certainly just as concerned with profit/ROI as any investor would be. We are planning to finance using an FHA loan + live at the property for a year. Tim's approach seems very sensible, so we may expand our search area.
Are there any rules on this forum about describing specific properties? Inventory is so low I can guarantee that if I specify neighborhood and duplex everyone on here knows which property I'm talking about already anyways. I'd be curious to see how folks would analyze a property to see if I'm even running the right numbers.
@Oscar Brooks Do the numbers assuming you will be moving out in two years but keeping the same mortgage long term. Even after moving out the cash flow should be positive enough from both units so that you can afford to handle all the long term maintenance and tax increases and still make a profit.
Betting on appreciation is risky as far as I am concerned. If you decided later it did not make enough cash flow to make up for your troubles, you would need to sell for 10% more than you purchased it since you have very little equity into it. If interest rates rise in two years, that could really halt appreciation.
I think the key for these is to find distressed properties that need renovations and because of the high competition you need to find properties off the MLS.
Unfortunately, finding these is really tough. Unfortunately I do not have the secret on how to get these.
I would recommend you expand your search zone and look at cheaper properties in North East, or Longfellow. Powderhorn may be ok too.
@Jackie Sladky as I don't live in the area anymore I'm not up to date on the market. I was a renter in Minneapolis for ~ 6 years, the biggest thing for me was location.
I would gamble on the Blue Line Light Rail expanions, as it will allow better transport in and out of downtown to those further out. The last infographic I saw the plan seems pretty laid out.
http://www.metrocouncil.org/Transportation/Project...
While it wouldn't be completed until 2021, it's not that far out to have a property that has low cash flow and then as the expansion makes it's way to an area you are targeting you can increase rent as the transport is a great value add. Live cheaper, outside the city but able to reach it without having to drive and pay huge amounts for parking.
If I were in the area still, that's the gamble I think I'd take as the likelihood of this expansion is pretty good with the success of the project as a whole
@Nate Burnett It would be interesting to see if the light rails actually improved property values. One assumes it would, but did the Blue line improve Hiawatha property values? Or the Green line approve the property values along University? Not sure on that one.
An older article but confirms home values go up in Minneapolis when located near a light rail line.
http://finance-commerce.com/2012/03/proximity-to-lrt-stations-raises-home-values-for-some/
I never consider appreciation in my numbers. if it happens great but that can't be the only possibility of value when investing. If you want cash flow, there isn't any in this deal. I don't have the intestinal fortitude to invest in anything but cash flow.
I wouldn't necessarily say I'd hinge on the property value but an increase in rent potential in the area. If a person renting in the city, works in the city can commute, pay what they're paying downtown for a nicer place on public transit, a lot will choose that option. The lightrail will continue to improve mobility and renter pools in areas that previously were limited due to traffic on the already congested highways around the metro.
We've landed! We've made an offer to a fourplex in Minneapolis and had just received the verbal acceptance. Now we are shopping for a good inspector. My agent knows of two, but I don't know if having an inspector with knowledge of multifamily properties makes any difference. If you know of someone, please, please refer that person to me.
I've found that the numbers are high and that it takes a lot of patience. If we were not to get this building, I believe it would be months and months before we can find one that meets our need. I saw a property that was in pending one day after listing. I was told that there were two other offers that came in at $20k and $25k higher, but ours was more solid.
My husband also thought that extension of the light rail should improve property values, but we did not do any research. Any new development or technology or market condition can change everything so rapidly now-a-day. My friend told me that the number of 16 year olds wanting to learn how to drive is less now compared with say, 10 years ago.
congrats. Wish I would have seen this sooner. Have a rehabbed duplex I'm willing to part with for 210k that makes 2150/month gross rent.
Brock-I would be interested in hearing more about your duplex. Can you please contact me privately about it?
James Anthony from key point appraisal keypointappraisal.com. He works with a lot of hard money lenders in Minnesota so the appraisals are pretty accurate.
Congrats @Jackie Sladky! That's pretty quick, less than 2 weeks ago you started this thread and it looks like you now own a 4-plex!
What made your offer more 'solid'?
Congratulations @Jackie Sladky, I also just had an offer accepted on a 4-Plex in Saint Paul. This will be my first proprty.
I was having the same issues as you, high prices that are not justified by the rents. I started networking like mad, going to REIA groups and telling everyone what I was looking for. I got some good leads on off-market deals but the one I am pursuing right now I found on Craigslist. If your current deal falls through I recommend forgetting about finding a deal on the MLS. Comb Craigslist FSBOs, go to REIAs, call property managers and ask if any of their clients' buildings are for sale, send mail to properties you like, call "for rent" posts on craigslist. You will probably get the best deals from the worst landlords (because they are bleeding money and are sick of the hassle) so call the ones with no pictures, or bad pictures, the ones that don't list the rent, have misspellings etc. If they have nice pictures and clear information about the property they probably have a good head on their shoulders, and they will probably not want to sell or want to sell for more money because the property makes money.
The areas where I see potential deals are Powderhorn/Phillips in South and some neighborhoods in North in MPLS, and Midway/Frogtown, W 7th, and the E and W side of Saint Paul. The housing stock tends to be older in these neighborhoods but there are always some newer builds. Personally, I think there is a significant drop in value when you get older than 1920. Some of these neighborhoods I listed can be a little rough, so I look for an independent coffee shop/cafe, coop grocery stores, and trendy bars moving in. If you see some of that activity there is a good chance the tenant pool will improve over time.
Its really competitive right now, so the good deals go to investors who dig deeper.
Happy Investing.
Thanks everyone for confirming that I am on the right track in thinking that the price was too high. What Marc wrote about expense risks with old buildings is exactly my concern, and since we will not move into one of the units, the uptown model will not be a fit for us. I better stop dreaming about buying and making money with a duplex there – at least not now. Our smart real estate agent showed us a property in Hopkins, and we thumped it down! But it’s okay. We are still learning and haven’t made major mistakes yet. Now we will include the suburbs in our search.
Huynh, we are not networking with anyone. It’s because we are still newbies. There are four of us, including my husband and my daughter and son-in-law. We want to be hands-on and DIY whenever possible, but we do know too that in many areas, it’s way cheaper to pay the experts.
How come you didn't like the Hopkins Duplex? Hopkins is a great little community with good rental demand. If the building was bad I understand. Don't write it off because you don't like Hopkins. It doesn't have the appeal that Mpls does, but the prices are much better.
I bought a duplex in SLP for $300,00 and get $2600 in rent (good building middling investment). 2 years ago I bought a short sale duplex in Robbinsdale for under $190,000 and get $2550 in rents. You do want to be in a great rental market but you need to make money too. Consider places like Richfield, SLP, Hopkins and Robbinsdale. Real Estate prices are much more favorable and you will get only slightly lower rents. I will get better appreciation in SLP, but I love the cash flow I get from Robbinsdale.
A lot of good points made previously. Duplexes appeal to owner occupied so the prices are more reflective of houses as a whole. Perhaps you should consider a small multi-family (4 to 12?). Prices should be more reflective of cash flow. There are a lot of strategies on BP as to how you could get a lot of property with $100k.
Good luck.
@Jackie Sladky, I emailed you a spreadsheet I use for analysis of rental properties. It factors in cash flow, loan reduction, tax impact and appreciation to help you decide short and long-term ROI. Good luck with the property!
David
@David K.Would you mind sharing that with me as well? I put together one of my own, but it is not as comprehensive as the one you describe.