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Updated about 8 years ago, 10/14/2016
Minneapolis Market
Hey guys, I'm currently looking for my first property, most likely a SFH in the NW minneapolis suburbs. I plan on house-hacking it, renting it to some buddies from college. My question to all of you is: what are your general thoughts on the housing market in Minneapolis area? Would you say the Minneapolis market is fairly hot right now? Having just started, I don't really have a good reference point to compare today's prices to.
Also, For those of you already investing in this market, what is a general "rule of thumb" I should be looking for in my properties? I know about the 2% rule, but I don't really see many properties that fulfill that rule. What percent do you all look for when analyzing deals in the minneapolis area? Any tips on the whole property analysis process would be awesome!
I really want to avoid the "paralysis by analysis" epidemic that many first time investors struggle with, but I also don't want to start off with a bad deal, potentially putting myself back for awhile.
Thanks! Any input would be very much appreciated!
1% deals are much more the norm around here. This is a rule of thumb so don't make any decisions based on 1% rule.
I would also recommend you buy a property that you would keep long term as a rental. Some day you will be tired of house hacking and will want to move out to a new place and you may want to have someone rent the whole place rather than renting bedrooms.
Selling a house has significant costs associated and if you got in with a low down payment now and pay market value, and decide you need to sell in 3-5 yrs you may find that you are underwater.
Instead, buy a place that would be a great rental and buy it as an owner occupant now, to house hack it.
Open up a spreadsheet and work up a full estimate of your costs vs rents.
- Estimate your rent using craigslist, rentometer, and Zillow rent zestimates
- Assume 1 month of vacancy out of 24
- Estimate your taxes for non-homestead
- Estimate insurance for a landlord policy
- Estimate your mortgage amount based on the rates and terms you can get today on a fixed rate loan.
- Based on the property you are considering, estimate when you will need new roof, HVAC, and other big ticket items
- Assume 5% maintenance costs
- Assume 10% for property management
- Estimate how much you will need to put down and need for closing costs.
If the property cash flows with the above assumptions...it might be a good investment. I look for about 8-10% cash on cash return on the money I invested in rehabbing and for the downpayment, and closing costs.
House hacking, you should be able to make even better cashflow as you will have homestead taxes and insurance and will not have vacancies and will not need property management.
But in 5 years when you are tired of renting out rooms, you will have yourself a good rental.
Wow, thanks! Lots of awesome info there.
Any more general thoughts on the market in Minneapolis as a whole, @Marc Jolicoeur? My worries reside in whether or not we are in the top of the cycle right now. Like you said, I don't want to buy now, then be underwater in 3 years. Although, my counter to that question would be this: if I am planning on renting it for several years, do the market cycles matter? Will rent, and thus cashflow, stay constant even if the market dips? If so, I could just wait out dips in the market cycle and sell when the market picks up again, assuming I want to sell.
Hey @Eli Sunderland,
There are a lot of indicators that indicate that we are towards the high end of what prices could allow in a lot of areas, some not quite. For example, I like to look at the long term trend of unemployment, median household income, and average home price. Of course, they are three very generic indicators, and vary wildly from neighborhood to neighborhood, and city to city in our metro area or anywhere. That said, there are some interesting trends over the last 10-15 years. I like to look at the gap between increases in average household income versus the average price of a single family home. The gap has been and is growing significantly in our area and most of the country I would argue over the past several years. Can the gap continue to grow forever? Of course not, simple math won't allow it to. Eventually, nobody can afford to live in a 3 bed, 2 bath rambler as their wages aren't allowing it to pay for the difference in purchase price.
If you look at the gap we have currently, it's similar to the mid-2000s. Does it mean we have a whole world market about to crash again? I have no idea. Hopefully not.
I enjoy looking at that type of data, and enjoy sharing it with people looking in a certain area if they are interested. That said, I don't ever like to play the speculator.
If you are thinking about buying a property in the North Loop area, Uptown, NE, etc. - yes, they are all very warm seller markets. Does it mean there aren't deals? Of course not, there are deals in any market, at any time. All just depends on your goals, your numbers, type of property, etc.
You and @Marc Jolicoeur make the perfect point. If your goal on a purchase is to buy right for the numbers now, and rent for a long period of time - what does it matter if the market shifts downward for a couple of years? Minneapolis/Saint Paul is a moderately cyclical market over the decades and years. We don't have the polarizing gains/losses in value of many markets along either coast, but we have more up and down than many other midwest towns in the middle of the country. If you are going to be a buy and hold guy - be that, and buy whenever you find a deal good enough to buy, regardless of market cycle. Just lock into financing that is more fixed, longer amortization and more stable to protect your investment should things dip.
I'd love to grab a coffee sometime @Eli Sunderland and chat about things! Always happy to chat and help any way I could.
@Eli Sunderland The current appreciation in most sub-markets in the twin cities is completely driven by inventory which is super low. Based on local and national inventory trends we will probably continue to appreciate at between 1% and 3% year over year for the next couple of years. If you want to understand where I get this prediction look at the recent webinar recording by Zillow economists on youtube and also look at the Minneapolis Association of Realtors video called The Skinny.
Basically, the growth will be slower than it has been over the last few years, but no significant drop.
An actual correction will only happen if we have significant growth in inventory or a very large drop in demand. Where is that inventory going to come from?
Here is the risk list:
- REOs. REOs are at about 9% of the listed market which is a very healthy and normal rate.
- Pre-Foreclosures. Are banks going to repossess lots of houses? Not really because all recent and new owners have very good credit scores and income. Look at short sale rates of listings for an indicator.
- SF construction. Virtually ALL new construction is big expensive housing over $400K. Those are not competition for you if you buy a rental worth under $250K
- Multi Family construction. Lots of new units coming online in uptown, SW suburbs, North Loop, North east Mpls, U of M, light rail lines, etc... If you buy rentals in these areas, your SF values are probably not affected too much unless you are buying a Duplex, Tri, Quad, or apartment. However, your ability to charge high rents in those areas could be affected by lots of new competition.
- Move up buyers listing their properties. I am not expecting this to jump too much because those move up buyers will need to pay a lot to get a bigger and better place.
- Accidental landlords selling inventory they converted into rentals in 2008.
- Professional investors and hedge funds selling inventory because they think we are at the top of the cycle. We are seeing some of this but I not very much. Many more people like you just getting started in RE investing.
- Major economic recession, causing massive layoffs like our last recession.
So in balance, watch inventory, preforeclosure, and job loss statistics in the metro. Right now, all indicators are bright GREEN.
Assuming you are keeping the property for 10 years, a softening market is not likely to bother you much at any rate. So, to mitigate that risk I would highly recommend the following
- Single Family or townhome worth under median price < $247,000
- Buy at a discount because of some distress or renovation needed to force some equity on the front end even if you are doing a low down payment.
- Caution in areas with lots of MF rental units coming online as this will put pressure on the rent you can charge
- Good areas with good schools - will keep your vacancies lower when the rents start getting pressure.
- Should cashflow as described in my last post.
Here's what you need to remember about the crash and the housing market before and after it ...
Leading up to the crash, virtually unlimited access to lending created an artificially high demand which drove prices skyward, even in the face of the highly speculative development and home building.
In the crash, some 80% of home builders went under. Demand for housing, however, rolled merrily onward. So, supply is well behind the demand right now. Some economists estimate we are some 5 million housing units behind the demand.
Home building recovery is just now gaining momentum, but is not expected to catch up to demand until something happens to dampen demand in a major way.
So, you need to examine housing valuation to see what is driving it: supply vs. demand or is demand being stimulated artificially by availability of lending like it was in the run up to the crash.
Hope this helps ...
Hi Eli,
I love that you started this great thread full of very relevant info in our Twin Cities market with your question. Something that ALL investors will agree upon ALL of the time in purchasing investment property is that you "make your $$$ when you purchase."
One of the best pieces of advice given in this thread is that you can't control the market 10 years from now, or even 6 mths from now, which makes purchasing correctly extremely important. You have probably heard Bigger Pockets users talk about this many times. I agree with this statement wholeheartedly! Buying right minimizes the pitfalls of market shifts that you can't control later.
Are you analyzing deals you see frequently? If not, I would advise you to be doing that regularly. I analyze deals 70% of my day to be prepared when something is a fit for my investor clients.
If you are analyzing deals where are you finding them? most of the properties in MSP area considered a steal for an investor are identified before they hit the market or appear on MLS. I work with wholesalers and other networks that alert me to pre-list opportunities. In our MSP market established investors have typically picked over the great deals, identifying a property before everyone else is really the best opportunity to make your $$$ when you buy.
If you aren't working with an agent right now I'd be happy to chat more about the specifics you are searching for, or pass along anything I come across that might be a fit.
Good Luck!
Eli Sunderland while I pay attention to market cycles for flips, etc I don't really think about it for my long term holds holds as long as it cash flows from day one. I'll give you an example of why:
I bought my first rental in 2003 in Champlin, MN. A SFH in a nice neighborhood with good schools among mostly owner occupied homes. I paid $186k (5% down) for it and after adding a bedroom (going from 2/2 to 3/2) I rented it for $1495. This was about a $400 monthly cash flow. For the past 13 1/2 years I have seen the value go up to $230k (2005)back down to $140k (2009)and now back up to $240k (2016) All this time my tenants have been paying down the mortgage and I have been enjoying a steady cash flow of about $400/mo all these years (do the math). I don't plan on selling for a long time if ever.
If I had know the value would drop to $140k several years after I bought I never in a million years would have bought this deal. I have had many investments turn out this way only because I didn't panic during a downturn. I know this is oversimplified but I am not "analyze the numbers to death" kind of guy.
My advice is focus on cash flow today and if you have a long term horizon you should be fine. I've bought my share of bad deals but looking back on them, there was little to no cash flow so I never should have bought them.
I wanted to echo Jason's comments about cash flow. Appreciation is the icing on the cake and luckily rent doesn't fluctuate like housing values. Acquisition prices are higher than they have been right now, but that also means comps are great. Can you buy something that needs work and fix it up(BRRRR)? If so you have a great opportunity to build instant equity in a home. That equity can be used to get rid of mortgage insurance, refinance out of an FHA loan, do a cash out refinance, or even get a line of credit.
As an owner occupant you would also qualify for construction loans and other programs that other investors don't.
My experience as a relatively new investor: I bought a fourplex in 2013 that needed some upgrades on an FHA loan(12k down). It didn't cash flow while I lived there but I didn't have a rent payment anymore either. After I moved out it cash flowed about $750 a month. Three years later the comps/market is high so I used it to my advantage. I booted the old tenants, redid the bathrooms, and re-rented at a higher rent than before. The main reason for doing this though was to refinance out of the FHA loan I had which had Mortgage Insurance for the life of the loan. My mortgage insurance was something like $250 a month.
I knew the market would support a higher valuation with the upgrades and I also knew I could attract better tenants for higher rent. So after upgrades my cash flow position improved by $750 a month. On top of that I was able to secure a HELOC for the remaining equity above 25% LTV which I can now use for future acquisitions.
I used the market to my advantage is my point of all of that story. If the market had dropped instead of improving I would have still had an asset cash flowing $750 a month.
I agree with Kevin Powell. I rarely buy a property turn key regardless of the price. I typically buy some level of distressed property at a discount and fix it up before renting. Not only does this help by creating more cash flowing opportunities but this "forced appreciation" or value add will provide a cushion and also the opportunity to borrow (Heloc) or refinance to pull cash out. I'd advise making sure it still cash flows when borrowing equity.
For the past few years I've been using commercial Helocs on properties that are either paid off or have significant equity. This allows me to essentially pay cash to buy new properties. I fix them up, pull a line on the new property and pay off the old line and repeat. If anyone is interested I use a small community bank in Albertville. They will do a Heloc 70-75% ltv at 4.5% int only...renewable every two years.
@Shane Hedeen, @Marc Jolicoeur, @David Dachtera, @Jason M.,@Paula Nicholson,@Kevin Powell
wow, i never expected such an incredible number of responses! You guys are awesome!
Shane - thanks! I think the buy and hold strategy is for me, so it's good to know that it is somewhat recession proof!
Marc - Again, thanks for the reply! Can I ask how you got that $247,000 median figure?
David - Interesting note about home builders! I haven't heard about that before. thanks!
Paula - totally agreed that $$ is made at purchase! I do have agent already, unfortunately, but if you're willing, I'd love to hear about ways you are able to find deals pre-MLS!
Jason - Thanks for the advice! Very interesting to see some specific examples of sticking to a property for the long-term! I also am very interested in buying slightly distressed properties at a discount that could use some TLC in order to build instant equity. If you're willing, I'd love to talk more about some of your experiences in this market!
David - I'm also very interested in the BRRRR strategy! Thanks! My question is, how do I find those kinds of properties to rehab, and how can I finance them if i have limited cash?
@Eli Sunderland Watch the Minneapolis Association of realtors monthly "Skinny" video on you tube. It shows the median price every month and compares to previous years. for SF homes normally better to focus on the bottom or middle tier of house values for best liquidity and highest demand currently so I always watch where the median is.
BRRRR is what I do too. For BRRRR to work the best to get all of your invested cash out, you need to buy at 70% ARV minus repairs. That is a tough order this year. I think 80% ARV is more like our current market.
thanks for the heads up on the video! I'll definitely check it out!
My next question regarding BRRRR, is what kinds of properties are you looking at/where can you find them? don't see a lot of great options on Zillow. Do you ever dabble into REO's for the BRRRR strategy?
Eli Sunderland I can't speak for others but all of my Brrrrr properties in the past few years have been REO's. I buy off MLS, Hudhomestore.com, homesearch.com, and Auction.com. I agree with Marc Jolicoeur that getting all your cash back is ideal, however, with deals harder to come by I will not lose a good cash flowing property because I refuse to buy over 80% arv. I just finished one that was purchased about 85% arv that cash flows just fine. Luckily it was a cosmetic rehab and it was rented quickly. I will have to leave some cash tied up in it for awhile but I'm ok with that if my cash flow is rising
@Eli Sunderland for BRRRR to work you need to "rehab" something. That means you need to find properties that are in some sort of distress or ugliness. After rehabbing you need to be able to get an appraisal at significantly higher value than what you bought it for.
Eg. You purchase a place for 112K that would be worth 165K after being fixed up, and it needs 20K to fix up. After fixing it up, you can get an appraisal for 165K and on a refi investor loan, you can have 75% Loan to Value. 75% loan is 124K. Pay off the original loan, and get back the downpayment you put on that first place. You get about 12K more cash back that offsets your 20K rehab. After all is done, you have only left 8K of your own money in the deal.
Appraisals on refis are very conservative. An appraiser will always estimate averages of all sorts of comparable properties in different conditions, which could be very different than if you were trying to get a property sold for top dollar in a bidding war. So - an ARV for refi purposes is lower than an ARV for resale purposes.
For BRRRR to work, your cashout refi based on a conservative appraisal needs to be significant enough to pay you back for all your rehab and most of your original downpayment. If a cashout only returns 10K back to you, its not worth doing the refi at all.
How I shop for BRRRR houses is to look at a lot of REOs and other houses advertised at handyman specials or needs TLC. You can tell by the pictures. If it has nice carpets, all appliances, and nice paint, its NOT a BRRRR deal. Those normally are yucky enough that a rehab will significantly increase the value of appraisal.
Thanks guys! That makes sense. My next question pertains to estimating rehab costs and ARV.
Estimating Rehab:
Do you just learn this through experience, using contractors and what not? Or do you show a house to a contractor and get a quote for all of the needed repairs before submitting an offer? I would think understanding those costs would be necessary to find a deal.
Estimating ARV:
I get how you can estimate the increased value of the property by looking at comps. for example, I could check listings for 3/2's with x,xxx square feet in the area to estimate ARV, but I'm struggling how I would estimate the value of things like doing some landscaping, fixing up bathrooms, or putting in new counter tops to determine whether or not a deal is a good deal.
Do my questions make sense? Thanks again for all of your willingness to help!
If you are trying to estimate the ARV to resell, look at comparable NICE properties. Look at others with nice landscaping, staging, great pictures, stainless appliances, nice bathrooms. When you rehab to resell you have to really make them shine. Your comps are often other flippers projects.
If you are trying to estimate ARV for a refi, its different. You should pick comps based on the numbers (sq footage, beds, baths, #fireplaces, deck, #garage stalls)
Stay within +/- 800 sf. and then adjust for $25 per sq ft difference for any above ground sf.
Basement sf does not actually count in the comparable so only compare above ground Sf.
Stay within the same house style. If its a split entry, compare to sold split entries. 1.5 story should be compared to 1.5 story.
Bathrooms are worth about $5000 if your comp has one more or fewer. Below grade bathrooms DO count.
I also adjust +/- $10K for unique features like screened porch, great back yard, nice basement, oversized garage, etc.
Upgrading countertops and bathrooms does not increase the home's value from an appraiser's perspective but they will adjust the entire home's estimated value based on the overall condition and age of renovation. So you need to upgrade everything in order to get credit from the appraiser that the house is nearly like a new home. Small updates here and there will not move the needle.
Wow, @Marc Jolicoeur, that was a very informative response. Thanks! That's pretty much exactly what I was wondering.
How do you go about estimating Rehab costs?
@Eli Sunderland Ah, that is tougher and I don't have quite enough experience to be an expert on this yet. Its a lot of trial and error but over time I have come up with my own way of doing it. $350 per kitchen cabinet with DIY install, $5000 per bathroom, $250 per window pane, etc.... $3700 for six stainless appliances.
Its not very accurate but it helps me get pretty close and set an initial budget. I also review and fine tune my formulas every time I get a new project done with actual costs.
Foundations and exteriors can be a real crap shoot so I would get a contractor in to give a bid.
For interiors start asking subs, window guys, flooring guys, painters, and tile guys to bid projects on some of your properties. This will give you your starting point to refine over time. If you are moving walls, reconfiguring plumbing or HVAC runs, those costs are a bit of a wild card.
Also, if you hire a GC, add 25% for project management.
Marc
@Eli Sunderland i like the BP book on estimating rehab costs as a pretty good primer and to get confidence. Eventually experience will become your guide.