Minneapolis Duplex - Deal or No Deal?

[James Miernicki]

BP Community – I would love to get your take on this deal. I have been reading the forums for several months, as well as listening to the podcast, but have not posted anything until now.

I am a somewhat new investor (started in 2011).

The property in question is in a low income area in South Minneapolis. This is the aspect of the deal I dislike most. I don’t see much appreciation potential on this property and of course the management headaches and maintenance costs will be there as well. Property is currently bank owned but is in good shape. Projected $6000-$10000 fix up costs focused on several new doors, appliances, and painting.

PROPERTY DETAILS

Side-by-side two-story duplex. 3-br 1-ba each side. 2700 total square feet. No carpeting. Floors are hardwood. Kitchen and bathroom floors are laminate. Built in 1973. It has additional square footage in the basement, which is divided so each unit has its own private area.

INITIAL INVESTMENT

Purchase Price $110,000

Fix-Up $10,000

Closing Costs $2,000

Future Cash-Out Refi Cost $2,000

Outstanding Tax Assessment $2,500

City Change of Ownership Fees $1,000

TOTAL = $127,500

INCOME

Total rents of $1800/mo: $21,600

Vacancy+Bad Debt (10%): ($2,160)

TOTAL = $19,440

EXPENSES

Maintenance ($2000)

Utilities ($1600)

City Fees ($140)

Credit Checks ($100)

Insurance ($1500)

Taxes ($2000)

TOTAL = ($7340)

RETURNS

NOI = $12,100

Monthly raw RV ratio = $1.8k/127.5k = 1.4%

CAP Rate = 9.5% against $127,500 initial cost

Total Return = Depends on leverage

I would plan on this being a long term hold with an eventual exit to another investor, owner occupant, or via a rent-to-own land contract.

I would be more comfortable with the deal if I could get the purchase price down and achieve a 10% cap rate. I do have an opportunity to go Section 8 and get rents about 20% higher than my current projection. I don’t have experience with Section 8 and it would be a learning experience. I would expect 50% or more of those higher rents would be eaten up in additional maintenance costs.

10 caps seem to be hard to come by around here these days, especially when the property is in decent shape. Even in 5+ unit apartment buildings it appears difficult to get a 10%+ cap.

My other options are waiting for a better deal to come along here or looking for something out of state. I have been using the MLS as my primary search tool, which would explain some of the difficulty in finding better deals.

Thanks for reading!

I look forward to reading your comments.

James