Duluth Minnesota - Would you buy a new construction duplex?

Question

This is an idea I've had for a while that I'd like to bounce off the northern Minnesota Duluth, MN / Superior, WI investors!

I've been working on a hyper-efficient new construction duplex plan. Last year the city of Duluth relaxed its zoning setbacks to encourage in-fill housing on existing street/utility infrastructure. You can effectively build a duplex on any 25' wide lot in town - and lots like this are everywhere.  My concept is a 2 bedroom up, 2 bedroom down, slab on grade duplex. Each unit would be an efficient 750 sqft with in-unit laundry.  All utilities separated, no garage just off-street parking in the rear. Each unit would have a modest deck.

I feel like these would rent for 1300 each as new construction units.  I think they could be built for 300k.

In a time where there is little available and financing is affordable - is this a good deal?  How do you feel this pencils out?  There would be a savings on maintenance with the new construction aspect for at least 10 years.

Is it worth it?

James Hamling · Answer

@Michael Schraepfer it's brilliant, but I believe you already knew that in your gut.

Given nature of BP there's gonna be all kind's chiming in saying how they buy places for $10k and get $1k mnth in rents so your a fool, blah blah blah. We know how strong Duluth area market is, the expansion and growth rate it's been in for how long now.

My 1 note of advice is while it's an efficiency unit for affordable housing, don't neglect the appeal factor. Put in some extra effort and finances to ensure it has a really nice visual appeal because that tenant demographic, they expect a Ferrari for a Ford price, and if it looks the part they don't care if it's a Fiat.

Joe Schmitt · Answer

By my numbers (accounting for vacancy, capex, and repairs), that's a  7-8CAP if the rents work. There are indeed tons of lots and the city was basically giving them away the last two years. I'm not sure if that program is active anymore. Regardless, I would be hesitant to buy the nicest house on a crappy street. My recently renovated quad in east hillside gets me $775 for a 670 square foot 1 bedroom. Granted, it's a 1 bedroom, and I do not have amenities like in-unit laundry or a dishwasher. But I have a mother of a time getting great tenants in this neighborhood. But I'm just a sample of 1, and you know the rental market better than me @Michael Schraepfer.

One thing to consider is that you will be competing with the premium units coming onto the market with the high rise in the old Voyageur Lakewalk spot. Nobody has a crystal ball, least of all me, but my sense is that rates are going to rise and housing prices are going to compress. So if there is a correction, it certainly takes a bite out of the numbers.

Matt J. · Answer

@Michael Schraepfer exciting to see you pursuing this further! So $2600 total for a $300,000 property, not quite 1% but like @Tim Swierczek mentioned, the housing stock is SO old in Duluth that these places would end up appreciating faster, and rents would go up faster too. If you're looking for someone to partner on one of these, I'd be open to collaborating!

Tim Swierczek · Answer

@Michael Schraepfer at those numbers I do think it's interesting.  I agree the lack of maintenance is a big plus and Duluth's rental housing stock is generally old so you might see very high demand that could push premium on these units.  What do you think the going rate for the lots would be?

Matt Groth · Answer

@James Hamling I agree with James. We are doing new construction up the shore. We did make them very nice. In floor heat, stainless appliances,  wifi stats, etc. No maintenance,  and renters like to be there.

Kevin Kalligher · Answer

..and seeing the prices what those old home prices go for all along the hillside....I think you've nailed it with that idea. I've thought about this for awhile too. My next thought would be why not scale and go 4plex or 6plex if you have can utilize the efficient infrastructure?

Robert Espenson · Answer

LISC of Duluth is trying very hard to encourage new housing.   They may even help with some of the up front needed funds to help pull this into reality.  You may want to contact Lars Kuehnow at LISC to check this out.   I used to be on their board for many years.

Joseph Lee · Answer

@Michael Schraepfer- do you think the $300k build price is realistic? I have no idea on your background, so that's not meant to be offensive. I realize that'd be $200/sq ft, which seems like a fair number, but shoot...if you're able to make that work for $300k, I think you'd be able to make yourself plenty of money building and holding or building and selling to others.

I'd love to hear your updates if you proceed with this. Sounds like a super interesting proposition if you can make the construction costs work.

Jerad Sikkink · Answer

Hello Michael,

I live in Duluth and I personally think that efficient duplexes like you described would rent quickly. There is a need for reasonably priced homes up here. Do you have an idea of what location you would concentrate in? I'm new to investing in Duluth so I am not sure on vacancy rate, available financing, and whatnot so I haven't looked at Income/Expenses, but I feel like that could be a pretty good cash flowing investment.

Dan Vleck · Answer

I bought houses for 60,000 that rent for $1300, so I would not buy/build a rental property for $150,000. I guess I prefer cashflow.

Duluth Minnesota - Would you buy a new construction duplex?

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