Archive for the 'Multi-Family Property Investing' Category

Where’s The Best Place To Invest?

said on April 16th, 2014 categorized under: Multi-Family Property Investing

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return on investmentLate last month the real estate information company RealtyTrac published a report detailing the best and worst markets in the nation for rental returns.

Their measure of gross rental yields was determined using the median sales price for over 1500 counties in the nation, and the average fair market rent for a three bedroom home for 2014 as determined by the Department of Housing and Urban Development (HUD).

That fair market rent was multiplied by 12 months, then that total was divided by the media sales price in each county.

Wayne County, Michigan– home to Detroit, topped the nation for highest rental returns with an estimated yield of 30 percent.

Of course, the higher the risk, the higher the reward. And Detroit’s lingering economic doldrums may make it difficult to fill rental vacancies.

New York County, New York (home to New York city) had the worst rate of return in the nation at just three percent.

In the Twin Cities, the seven county metro area seemed to hover at yields of 7-8 percent.

That’s still a pretty good return compared to a savings account.

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Guess what? It’s still less expensive to buy a house or a duplex than rent one.

Last week, Trulia released their Summer 2013 Rent vs. Buy Report, which found that nationally, in spite of rising interest rates, owning is 35 percent cheaper than renting. Last year, that number was 45 percent.

If duplex and house prices stayed the same, interest rates would have to slip into double digits– about 10.5 percent- before it made more sense to rent.

Of course, numbers vary somewhat according to where you live. In Honolulu, for example, it is 10 percent cheaper to own than rent, and interest rates would have to rise to just 5.8 percent for that not to be true. In New York, that figure is 7 percent.

minneapolis vacancy ratesBuyers in Minneapolis find buying is 42 percent more affordable than renting, down from 52 percent one year ago. Interest rates would have to top 12.5 percent for it make more sense to be a tenant.

In cities like Detroit, on the other hand, it’s 65 percent less expensive to own than rent.  Interest rates would have to rise higher than credit cards– to a staggering 32.8 percent for it to make sense to rent in the Motor City.

Should lending standards relax, duplex owners and income property investors should be on the lookout for higher vacancy rates, as tenants look to not  only save money, but reap the rewards of home ownership as well.

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Laminated Card - Real Estate License for Agent ProfessionalSometimes new investors see obtaining their real estate license as the key to achieving success as a duplex and rental property investor.

Many think simply having a real estate license will not only allow them to pocket the commission an agent would have earned, but also, give them an inside track on all of the “good deals”.

The trouble is, most of those mysterious, best deals only agents allegedly have access to? They come from hours, days, weeks, months and years of networking, talking with prospective sellers, and in general, making real estate a full time career.

Realtors can’t buy every property we find. And for many of us in today’s difficult lending environment for self-employed people of all professions, financing isn’t even possible.

So what do we do when we stumble across a good deal we’d buy ourselves if we had the money? Pass it along to our best clients.

And for many of us, that’s our investors. In other words, it’s my loyal clients who get the first calls when I stumble upon a great deal; not investors who are part time agents looking to “save the commission” on my hard work.

If you’re thinking of getting started investing in real estate, it pays far more in opportunity to align yourself with a full time Realtor than you’ll ever save in commission.

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orange for rentIf you’re a Minneapolis or St Paul duplex owner or landlord, you might find Padmapper.com and its sister site, Padlister.comto be a great tool for getting your vacant units rented quickly.

Padmapper is a site geared toward tenants looking to rent in a specific area. It appears to gather rental listings for the area from places like Craigslist and Rent.com, as well as postings placed by investment property owners on Padlister, and highlight them on a map of the area.

Each rental address has a pin in it, which, when clicked on, gives the basics about the unit that’s for rent; like number of bedrooms, baths, and how much the rent is.

It also publishes a figure of how the amount of rent being charged compares to other properties in the area. For example, it may say the vacant unit is a certain percentage below market rent, or above.

This can be a useful tool if you have a vacancy and want a resource besides Craigslist to help you determine market rent.

One note of caution however; the site does make mistakes. Two neighborhoods can be separated by just six blocks, and have completely different values when it comes to rent.

Padlister provides landlords with a free advertising tool. It allows rental property owners to post their vacancies for free, provides a template to create better looking ads to post to places like Craigslist through Postlets, and even provides an online rental application form and credit check for prospective tenants.

The site is free, so it might be worth a try.

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duplex owner liability for tenants dogsI love dogs.

And I believe there’s no such thing as bad dogs. Just bad dog owners.

However, many insurance companies don’t share my point of view; especially when it comes to Pitbulls and Rottweilers.

According to Matt Peterson of Farmers Union Insurance, many companies won’t offer a policy to a duplex owner who has tenants with Akitas, Chow Chows, Pitbulls, Rottweilers or Wolf hyrbrids.

And if they do, they may exclude liability coverage for dog bites.

In other words, if a tenant’s dog bites a neighbor, the duplex owner could be sued. And that could cost that property owner everything.

So what if, when applying for insurance coverage, you simply answer “no” when the insurance agent asks if any of the afore-mentioned breeds are on the property?

In the event of a dog incident, you could be found guilty of insurance fraud.

I realize this doesn’t seem fair. I’ve known wonderful, trustworthy dogs of every breed.

And yet, is it fair for a property owner to be held liable for a tenant’s dangerous dog?

Probably not.

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minneapolis duplex for saleWe’ve all heard that it’s a duplex sellers market when there’s less than a five month supply of inventory for sale, right?

So when is it a landlord’s market?

Five must be a magic number.

According to the National Association of Realtors (NAR), it’s a landlord’s market when vacancy rates dip below 5 percent. And it’s at that point that duplex owners can justify charging more in rent.

To put this in perspective, Minneapolis currently has a vacancy rate of 2.3 percent. Nationally, only Portland (2.1 percent) and New York City (2.2 percent) have lower vacancy rates.

With job creation forecast to be modest into 2013, many would-be home buyers are likely to continue to be tenants. This continued competition for places to live should help Minneapolis duplex owners increase rents in the coming year, which of course, will help cash flow.

At the risk of being redundant, I’m going to say it again. It’s a great time to invest in Minneapolis duplexes!

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Painting of an empty wall. Renovation home. 3D illustrationMany duplex owners and buyers believe the only way to make their property worth more is by swinging a hammer and grabbing a paintbrush.

They spend hundreds, sometimes thousands of dollars installing new windows, granite countertops and central air conditioning, while overlooking the most obvious and inexpensive improvement of all: raising the rent.

Increasing rent to at or just below market value can add tens of thousands of dollars in equity to a duplex, triplex, fourplex or even large apartment building.

And yet, owners often refuse to do it.

Why?

Simple. They are afraid of losing tenants.

This is ironic, because most tenants are aware they are not paying market rent. They will not be surprised by a rent increase and in fact, won’t move if that increase is such that it still keeps their rent at bargain rates, but puts more money in the landlord’s pocket.

For example, let’s say a tenant is paying $800 for a two bedroom unit in a neighborhood that usually commands $1100 for comparable properties. (Of course, each must be in good condition.)

Raising the rent $150 a month will result in the tenant still “getting a good deal”, while the landlord increases her revenue stream by $1800 a year.

If each unit in a duplex is similarly under-rented, and the duplex owner gives both tenants rent increases, that would result in $3600 more a year in her pocket.

While market gross rent multipliers and cap rates are highly market and neighborhood specific, even if we use a conservative GRM of 6, means an increase in property value of $21,600.

The same calculations can be applied when buying a duplex as well. If rents are below market rate, a simple letter notifying tenants of an increase when their lease is up immediately adds value and increases cash flow.

All without a single trip to Home Depot!

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duplex investment secretThe secret is out. Minneapolis and St Paul duplexes, triplexes and apartment buildings are great investments.

There are three reasons for this:

  1. Historically low interest rates
  2. Low property values
  3. Extremely low vacancy rates

It’s number three I want to talk about today.

According to a report this morning, Marquette Advisors, who are the folks who compile this data, Twin Cities vacancy rates were up slightly to 2.7 percent for the third quarter. This is .4 percent higher than the third quarter last year.

Of course, this figure is still ridiculously low; especially when you start breaking down those rates by city, and city sections, and their average rents:

Minneapolis- 1.6%, $995

Downtown Minneapolis – 1.7%, $1257

Southwest Mineapolis – 1.6%, $899

North Minneapolis – 1.1%, $872

South Minneapolis – 1.8%, $883

East Minneapolis – 1.5%, $884

St Paul – 2.8%, $910

Twin Cities – 2.7%, $951

On average, rents are up 2.8 percent this year over last; to $951 compared to $925 one year ago.

While things are good, it’s important to remember at some point the market will swing the other way. Vacancy rates will go up, and rents will likely go down.

Right now, however, life is awfully good for Minneapolis duplex investors.

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boiler roomAs we head toward winter, many Minneapolis duplex owners who own properties with a single furnace or boiler are likely praying for little snow and unseasonably warm temperatures.

After all, they’re the ones who pay for heat, and mild weather increases their cash flow.

But in the midst of all this dread comes a bit of good news for one boiler multi-family property owners.

While many Minneapolis landlords require tenants to carry Centrepoint Energy’s Service Plus program, which covers repairs to most of the units major appliances and furnace, coverage did not include a heat source that was shared. If it quit working, the duplex owner would have to pay for all repairs.

Turns out Centrepoint recognizes this, and offers a Service Plus plan for multi-family properties of two to six units. At $33.95 a month, it not only covers the furnace or boiler, but also, the water heaters, dryers and stoves for all units on the porperty. Additional appliances can be covered for $5.20 per month for each item.

While this additional expense also reduces cash flow, it may be worthwhile if you have a boiler or furnace nearing the end of its life expectancy.

If you call Centrepoint, know that not every service plus representative is familiar with the program, and you may need to ask them to dig a little deeper to find the police.

Doing so could save you thousands!

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coffee cupsHidden in the text of last year’s health care bill was a small section that had nothing to do with health care and everything to do with owning duplexes.

Starting in 2012, investment property and other small business owners will be required to 1099 for all payments made to vendors they spend more than $600 a year with.

That isn’t limited to those who perform services like property maintenance.

In fact, it includes major corporations like Home Depot,Lowes, Starbucks

OK, if you’re spending more than $600 a year at Starbucks and writing it off as a business expense, you might raise other issues with the IRS. But let’s say it’s legitimate.

Guess what? Starbucks stores are franchises. So you’ll have to 1099 the owner of each store you visited.

I don’t know which thought is more entertaining; having to keep track of that or calling Home Depot and asking them to share their tax ID number.

There’s one way to solve some of this. If you use a business credit card to pay for your purchases, the credit card company will issue the 1099 on your behalf.

I wonder how much lobbying MasterCard and Visa did to get this passed.