Minneapolis Property Analysis - What Am I Doing Wrong?

Question

Hi All,

New investor here.  I live in NYC and have decided to begin my real estate investment career in the Twin Cities.  Having gone to school there, I’m fairly familiar with the area and believe there is great opportunities to be had.  I have been running property analysis on single and multi-family homes but my cash on cash returns seem to come out really high.  I feel like there must be something I’m missing and am hoping more experienced investors could point out what it is:

Property Location - Minneapolis, MN

-Purchase price/asking - $130,000

-Down payment - $26,000

-Loan amount - $104,000

-Closing costs - $2,250

-Holding cost (2 months mortgage, taxes, repairs, cap ex) - $1,654

-Repairs - $10,000 (estimate)

-Total cost - $143,904

-Cash needed - $39,904

-Mortgage (4.5% - assumed) - $526.95

-Taxes (estimate) - $150

-Rent (estimate) - $1,500

-Insurance - $37.92

-Vacancy (5%) - $75

-Repairs & cap ex (10%) - $150

-Management (10%) - $150

-Total expense - $1,089.87

-Net - $410.13

-Annualized cash flow - $4,921.60

-Cash on cash return – 12.33%

The above is just one of 50 I have done but they all somewhat paint the same picture.  Any help/guidance would be greatly appreciated!

Todd Dexheimer · Answer

For taxes look them up. That number is light for Minneapolis. Insurance will cost around $100/month. Repairs should be around $150/month and Cap Ex another $150/month.  Vacancy is ok for todays market, but with a little shift you will be hurting. On a SF you could go w/10%

Here are my numbers:

Rent: $1500

Mortgage - $526.95

Taxes - $225

Insurance - $100

Vacancy - $150

Repairs - $150

Management - $150

city licensing and inspections - $10

Replacement reserve - $150

Vacancy utilities - $10

Expenses: $1471.95

Profit: $28.05 x 12 = $336.60

Bruce Runn · Answer

Account Closed

I Just sold a duplex that delivers over $900/month cash flow so don't set your expectations too low.   I  have a friend that is  putting a duplex on the market pretty soon that is priced to cash flow  $800/month with 25% down.  There are deals out there if you are realistic with your formula's.  If you are doing FHA with the minimum down, you obviously can't achieve those results since your mortgage amount is max'd out.  I've met with a couple newer investors that put in every contingency known to man and can't get a realistic cash flow projection using calculators-IMHO.  I tell them, you have to use real numbers, not generic formulas.

Tim Swierczek · Answer

@Jordan Moorhead I agree FHA 3.5 down it's awesome and should be done first.  My point was instead of buying a SFRv with 5% down you may be able to buy a multifamily with only 5% down instead.

Tim Swierczek · Answer

@Jordan Moorhead most people do not know this but you can get a 2-4 unit with only 5% down provided its owner occupied and you meet the income guidelines.  PM me if you would like more info.

Eric Bate · Answer

In your analyses, are you factoring in utilities?  Or are you only looking at SFR where the tenants pay?  Where are you getting your rent estimates?  Also, what neighborhoods are you looking at?  North Minneapolis can look pretty tasty if you're only seeing the numbers, but crime rates there are (I think) the highest in the region.  Trulia.com has a crime map that will give you an idea.

Todd Dexheimer · Answer

Account Closed when I was buying 1-4 unit deals, I had a $250/mo minimum for a SF, $300/mo for a duplex and $400 for a 3 or 4 unit. I was not worrying about cash on cash at the time, because I was buying, fixing them up, renting them and then would refinance them. I think on BP they call it the BRRR (Maybe more or less R's, I didn't have a fancy name, just a sound strategy).

Don't discount north Minneapolis and east side of st. Paul. They have a bad name, but there are areas that are solid and areas I believe have really good potential to gentrify.

Todd Dexheimer · Answer

Account Closed this deal looks like it will make under $100/month. I would say the only way it works if you self manage. If the deal is in excellent condition you could drop your repair number to $100/month, but I would not go less than that.

Account Closed · Answer

@ Todd Dexheimer

That is exactly the method I plan on using.  I would love to get the 3.5% or even 5% down but now have a family (wife and 4 kids) so the owner occupy option isn't viable.  I'm in the process of refinancing my primary home for seed money. Granted, it's less than 20k but it's more than I have now.  When the refi goes through I'll have about 22k to start with.  Unless I wait until after tax season.   If I do that, I could add on another 5k potentially.  While that option gives me more money to work with, I'm sure I can find a deal before then with the 22k and make something work.  Thoughts?

Account Closed · Answer

@Bruce Runn. My plan is to use a HML to get into a property.  That helps spread out the little capital I have for unforseen expenses and allows me more purchasing room.  Then refi into something with a longer term and better rate.  I'm looking for something I can value add to force appreciation so the refi will look more appealing to a lender.  It's that or I get a conventional loan with 25% dp and roll the dice on an inexpensive property.

Account Closed · Answer

@Todd Dexheimer.  Thanks for the clarification.  Can I ask what your criteria is when looking at a potential deal?  I haven't bought a property yet so the only numbers I have to go off of are the BP numbers from @Brandon Turner (ie: $200/mo cash flow for SF, $100/door/mo for multi).  What do you look for COC?  I'm sure your deals a bit larger than a 4 plex but any advice for this newbie would be greatly appreciated.

Minneapolis Property Analysis - What Am I Doing Wrong?

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