Minnesota Real Estate Investment

Current Twin Cities Real Estate Market Update
Here in the Twin Cities, there are currently 32,915 homes on the market. This is a decrease of 3.4% compared to 2007 at the same time. In spite of this decrease, we are historically still at very high active listing inventory levels. Some people say “nothing is selling” right now in the Twin Cities. Actually, there were 867 properties that went pending this past week, which is only a decrease of 1.4% compared to 2007. We also had 2,002 new listings come onto the market last week, and this is down 6.4% compared to last year.

Don’t let the so called “experts” fool you. There is a ton of buying and selling activity taking place in our local real estate market. For real estate investors, there has almost never been a better buying opportunity in history. Our team has seen a number of our investor clients realize this unique buying opportunity. It seems the die-hard investors who have owned properties for many, many years understand this unique time period we are in.

What is the Big Picture with Real Estate Investing?

Many beginning investors often ask: “What is the big picture with real estate investing? What is the end goal?” Well, depending upon your personal long term goals, most investors want to own a number of properties free and clear and be collecting monthly rent on each property. Many investors also strive for “cash flow” on each property. Because of the recent downturn in the local real estate market, prices have dropped, rents have risen, and properties are once again cash flowing for investors!

Our team has worked with a number of investors who buy single family homes as investment properties.

Why Single Family Homes?

There are a number of reasons why buying single family homes as rentals makes sense. First of all, you will attract in my experience, a better tenant. Not to generalize, but someone who is renting an apartment at $500 a month is in most cases, not going to take as much pride in their property as someone who is renting a nice single family home. My experience is also that the tenants seem to be much less vagrant. In other words, they are not moving every six months, or every year for that matter. Once they move in, they will stay longer than you would think!

Appreciation-wise, single family homes perform the best. If you look at long term appreciation numbers in any market, they do the best; much better than townhomes, condos, and multi-family.

One note of interest: with single family homes, you’re not tied to rental market like multi-family housing. For valuation purposes, when you sell a multi-unit building (duplex, four-plex, 10-unit building), the value of your property is determined by the rents that each of the units is getting. In other words, when the time comes to sell that property, the prospective buyer will add up all the rents on the units, and he or she will figure out a price that the building cash flows at. This is the price that an investor is going to offer you. If the rental market is soft at that time, your sales price is going to be lower than you want. However, with single family homes, when you resell it, you are going to be reselling it probably to another owner occupied buyer. Not an investor. And that buyer, or their agent, is going to pull up comparable sales on similar homes in the same MLS area. There is no connection to the rental market. In this case, you can ride the waves of appreciation much better than with multi family. Multi-family is not a bad investment choice. I’m simply saying that single family will appreciate better over time.

With single family homes, the tenants maintain the property for you. They cut the grass, rake the leaves, shovel snow, you name it. You do not have to do any of that. There are no association fees like condos and town homes, and as a result, they tend to cash flow better.

The tenants pay all utilities, and as I have mentioned, single family homes are by far the easiest to resell. Much easier than a condo, townhome or a multi-family building.

The last item is that single family homes have less tenant issues. With duplexes and multi-family, you have a grouping of people that live very close to each other that do not know each other. One person is playing their loud music too loud for the other one person is being too noisy for the other one. I could go on and on. Ask anyone who owns multi-family. There are definitely more tenant issues that you will have to deal with. With a single family home, every person in the house knows each other. They work out their differences between each other. No late night phone calls to you the owner!

I should mention. We work with investors that purchase all sorts of multi-family, single family, townhomes and condos. There are pros and cons to each really.

What Kind of Single Family Homes make Good Rentals?

In my experience, the types of homes that are easiest to rent, and consequently, easiest to resell when the time comes, have the following characteristics:

• First of all, find a home that has at least 3 to 4 good sized bedrooms. My experience is that anything smaller than a three bedroom is a little tough to rent out. However, if you purchase one that has three bedrooms, it is much easier to rent, and much easier to resell when the time comes.
• The home needs to have two bathrooms, at least two showers. If you have four friends living there, they are going to need at least two showers. Also, with resale, that 2nd bathroom is really needed.
• The home should be located on a quiet street and have a backyard. Obviously, you will be able to rent out the home if it is on a busy street, or if it has no backyard, but again, think long term. When you resell the home 10, 20, or 30 years down the road, you want the type of home that is the easiest to sell. Busy roads and a lack of a backyard can really hinder the process of any home needing to be sold.
• Turn-key rentals – Would you want to move into the home? Is it clean, updated? Again, at one point in each person’s life, each of us has rented. Put yourself in the prospective tenants’ shoes. Is this home something that you like? That you and your family would move into?
• You definitely don’t want to purchase a home that is too small square feet wise. For a 3 or 4 bedroom home, I would not go any smaller than 1500 square feet. If you get below that, it is extremely difficult to rent out. Families need space!

Again, the local Twin Cities real estate market is creating such an outstanding buying opportunity for all real estate investors. Take your time to make an informed decision. Work with experts who also own rental property themselves and who can guide you the real estate investing process!