Twin Cities, MN Opportunities

[Shawn P Kontrec]

Hey BiggerPockets!

My name is Shawn and I cannot wait to start buying rentals. BP has provided a ton of great resources and what I would call a good distraction from pointless college classes while I was finishing up my degree last year. Something I have been impressed with, is that the REI community is such a solidarity-focused environment even though folks are all focused on maximizing their own returns. I think that's super amazing and generous of everyone!

I hope to buy a small multifamily property and house hack within the next two years (hopefully on the sooner side) using an FHA loan. My question is geared towards current younger house hackers - are you finding 10-12% CoC ROI; 7-8% cap rate duplexes and triplexes in B neighborhoods? If so, would you mind sharing how you found such deals in today's Twin Cities hot market and in what sub-markets? Did you use some creative financing, FHA debt or standard mortgage debt service? I'll be honest, most duplexes I have looked at and ran the numbers on have done terribly, but then again I have only ran numbers on MLS-listed places.

Last question: are there still newbie REI meetups going on or are they virtual now? Would you mind informing me on some of those going on?

Thank you ever so much!

Shawn

[Tim Swierczek]

@Shawn P Kontrec  I love your point that you don't see a point to invest in Real Estate if it doesn't produce the same return as another market investment.  It shows your looking at the numbers yet you have not yet got passed the first stage of analysis.  I don't mean to pick on you because it takes many investors a full cycle (buy & sale before they get it).   

When you add these up it's hard to come close to the REI returns in the stock market. Sure you can get lucky with a Google, or Apple stock but try getting the consistent returns that REI offers in the stock market for 20-30 years. If you are buying in a market like the Twin Cities you will profit from Cash flow, Appreciation, Depreciation, and Amortization.   Say you purchase a 300K duplex in Hennepin or Ramsey county this year.  If the sellers pay your closing costs which is possible but not guaranteed. your minimum cash would be the down payment of 10,500.   It's possible an even likely you will get some or most of your closing costs paid but have to bring 2-4K more.  

While you live in the house your cash flow will show up as reduced living expenses, but analyzing it as a full renal your Cash Flow would likely be 100-200 per month. Big deal right? This is is likely a 10% CoC depending on your exact cash into the deal. As @Bruce Runn pointed out this will improve over time. Now you need to look at the other profit centers.  In the first 2 years on in a house hack your Amortization, tenant paydown of your mortgage, on a 300K house with an FHA loan is more than 12K or your likely total investment. (See image) Your tax benefit of is trickly while owner occupying the property but once you move our your Depreciation would likely be 275K/27.5=10K/year.  Based on a combined 25% combined Federal & State tax rate you're looking at another 2,500/ year in tax savings.  And then you have Appreciation, I know everyone will tell you you can't count on it, and while I have no idea what Appreciation will be next year I do know what it has been over the last 24 years (see chart below).  In MN, you would be looking at a long term average of 4%, which in simple non-compounding math is 12K/year.

So how does this look in real-life terms?  Assuming you have moved out after year 2, and you receive zero benefits other than very low-cost living expenses for the first 2 years (no appreciation, deprecation, amortization or cash flow during this time)

In the next 5 years, you will get

Cash flow 3K average per year 15K
Appreciation 12K ave per year  60K

Depreciation 2.5K ave per year 12.5K

Amortization from chart rounded down years 2-7= 34K

These are your returns, not just CoC, which is all you get with most stock purchases. There are many differences between openly traded investments and real estate. For example, you can easily liquidate your stock, bond, or other portfolios in a day. This does not happen in Real Estate, but REI is much more stable. That being said, CoC is an early common metric because its easy to understand but it may be the single biggest cause of analysis paralysis. Look at the big picture and work only with a Realtor who specializes in working with rental properties and you will start to see opportunities in plain sight. CC @Christopher M.