Investment Info:

Buy and hold duplex in Minneapolis, MN

Purchase price: $275,000
Cash invested: $85,000 (~73k for 25% down payment and closing costs, the rest for renovations).
Monthly cash flow: $520 (will be $750 once HELOC is paid down)

What made you interested in investing in this type of deal?

I wanted to keep the momentum going from my first deal and knew that tapping into the HELOC from my first property would allow me to generate a return on that equity. I also wanted a house near my first househack and current primary residence that wouldn't require a ton of work, that way it would be fully stabilized before my next househack was available this fall.

How did you find this deal and how did you negotiate it?

MLS! This deal had been sitting on the market since September of 2020 with a couple price reductions, and my offer was accepted in Feb 2021. Due to the MN winter market and since it sat for so long, I was able to get an offer accepted for 20k below asking price. It was listed for 295k, I offered 280k with 5k of my closing costs covered to reduce my cash to close. This gets stated a lot but as an investor I would always try for this, especially an owner occupant loan where you can get more covered but this was strictly an investment property. One other incentive to get the deal accepted was we put in our offer that the inspection was a pass/fail, aka I wasn't going to nickel and dime them to get the price down for minor issues. Also added that I'd cover an appraisal gap up to 5k.

How did you finance this deal?

25% down payment - fixed 3.375% 30 year investment loan. Down payment was 100% funded from the HELOC I took on my first property. At 3.99% interest only on 70k this comes to ~$233/month as the minimum payment, but I'm also paying back a renovation loan with it and paying above the minimum to reduce my short term debt. Plus it's essentially a reloadable gun so paying it down gives me more cash available for future projects.

How did you add value to the deal?

Mostly a cosmetic remodel. Both units were vacant so I repainted the whole interior. Repainted cabinets and stainless steel appliances in one kitchen. I replaced the toilets, vanities, medicine cabinets, vanity light in the bathroom. Light fixtures throughout a lot of the house. Made custom storage for bedroom with no closet. Had utility company add a gas meter then had my plumber add in a water heater so I could split gas and bill to tenant. Lots of pest proofing on the exterior.

The biggest project was all the ceiling and wall repair required - had to demo one ceiling where the joists were split - only 2x4s plus water damage caused a major sag. Many others had small sags or just looks gross, so there was a mix of installing new drywall or sanding them down and all ended up with a knockdown finish. This is my least favorite type of work so hired this out to a handyman... more on that later.

What was the outcome?

All in all took ~10-12 weeks to remodel and get rented out, 1350 for each 2 bedroom unit plus a $25 pet fee for one. With PITI a little over 1400, 15% expense ratio for vacancy/capex/maintenance, $150/month allotted for water & garbage, and a $233/month minimum HELOC payment this deal cash flows about 520/month. Note: I do self manage and one tenant is taking care of lawn/snow removal in exchange for parking (very small yard and area to shovel). The margins aren't great, I consider this a base hit but allowed me to keep learning lessons for the next deal and gain some cash flow in the meantime.

Equity-wise I am all in for a little under ~290k (PP+rehab) and I think this property is conservatively worth at least 325k. I know Zillow and Redfin estimates don't mean **** but they are at 340k and 334k respectively now. This property is a little hard to comp but most of the duplexes with the same bed/bath count in the area (near Powderhorn Park, if curious) are selling for 400k+ with a couple over 500k, which is all kind of ridiculous to me. Granted a lot those properties are ~1200 sq ft/unit while mine are smaller at 800-900 and not quite as nice, but rental wise they can probably cap out at maybe $100/month than I am renting mine for.

Lessons learned? Challenges?

1. I need to be more thorough when going through properties during showings. I think I was excited for my second deal and overlooked some issues that I spent a lot of time addressing during the remodel. I have a checklist now and plan to take more pictures and document in the future, mostly for vacant spaces which this building was.

2. Setting expectations with contractors is vital, or any working relationship. I had worked with my handyman once before with mixed but overall positive results, and right after closing I was so pumped to get started I agreed to work with him even though he was working on another large project (and doing a poor job, at that). I waited a couple weeks when I could have been doing a lot of prep work myself, and ended up paying a fair amount over what he bid initially. I should have set more of a timeline and payment structure up front, but I will not be working with him again so not the end of the world. It's also important to have multiple contractors in a trade for situations like this (or people being busy). 

3. Keeping up with the market is also important even when you aren't in a position to buy. I had seen a few properties sell abnormally low in this area so I figured that I could get some cash flow near here, or use those sales to negotiate a lower purchase price if necessary. These properties sold during winter which I think played a role... as mentioned before sub 350k is tough to get now so knowing what areas should be priced at and trying to scoop properties below that is a very obvious, but tried and true method to build equity, particularly if you're okay with buying properties that need a facelift.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

Same agent/lender as my first deal!!

Agent: Kent Hranicka with the Duplex Doctors

Lender: Conor Hesch with Bell Bank

Title: Sarah Weaver with Chicago Title

Contractors: Would not recommend my handyman and I DIYed a fair amount, but I do have an electrician for small jobs and also Dennis with Arrow Pest Control was very knowledgeable/helpful for this situation.