Why invest in multifamily homes for sale in Minneapolis? What are the reasons for putting your money on this type of property? How do they stack up against other property types? And what has accounted for their popularity in recent years?
Read on for answers to these and other burning questions.
WHAT IS A MULTI-FAMILY HOME AND WHY IS IT SO POPULAR
A multifamily home is a single building or residential property that’s divided to accommodate more than one family living in separate units. These legal housing units are available in a range of sizes, from studio types to 3-bedroom units. Some properties may even provide common areas such as playgrounds, childcare centers, and community gathering spaces.
Unlike condos or townhouses, a multifamily home and all the units therein are owned by one person.
If you own a multifamily property and plan to live in one of the units, it is then considered an owner-occupied property. Otherwise, you’re considered an investor.
According to the National Association of Realtors (NAR), there were 93,000 more multifamily units under construction than there were single-family homes in September 2022. NAR also noted the decline in single-family homes under construction from May to August 2022.
Analysts believe that the strong performance of investments in multifamily homes reflect the following, among other factors:
- Migration patterns within and outside each state
- The rise in new households, the highest sustained rate in 50 years
- The rapid rise in home prices resulting in lower homeownership rates
- Affordability and supply issues plaguing single-family homebuyers
ULTIMATE GUIDE TO CHOOSING MULTI-FAMILY HOMES FOR SALE IN MINNEAPOLIS
Now that you know why multifamily properties are all the rage, here’s a quick but informative guide to help you choose the type of multifamily property to invest in.
Types of multi-family homes
Multifamily properties for sale in Minneapolis can come in a range of heights and densities – from low-rise duplexes to high-rise apartments. Multifamily housing is also built to complement the character and scale of the surrounding neighborhood. Some multifamily properties can be financed through a regular mortgage, while others may require a commercial property loan. Consult your agent for details.
Here’s a rundown of multifamily types:
Duplexes are typically two-story homes with different families living on each floor. Both units may share a front door, but they will each have separate entrances for privacy. For first-time investors, starting with a duplex is their best option.
Townhouses are multi-family properties where two families live in one home separated by an interior wall. The units will have separate entrances and utility meters. Both families can also purchase their units separately. Townhomes are typically financed like single-family homes, with other financing options available as well.
- Apartment complex
Apartment complexes are single buildings with at least five or more separate housing units. Residents of an apartment complex may share common resources and amenities, such as a swimming pool, parking garage, playground, or reception.
You will need to obtain commercial financing when purchasing an apartment complex, as buildings with at least five units require commercial loans. This type of multifamily property is generally pricier than purchasing a townhouse or a duplex.
- Semi-detached house
Semi-detached homes are similar to a townhouse in that they share a common wall with another home. The only difference is that while townhouses may share multiple walls on either side of the dwelling, semi-detached homes share only one wall with another home. Semi-detached homes also typically have their own parcel of land in the front and back yards, and maintenance is usually up to the owner.
5 tips for investing in multi-family rental property
There are certain characteristics that make a property a good investment. If you’re not familiar with the characteristics you want in a multifamily home, you can also consult a real estate professional. To make sure you choose the property that best suits your needs, here is a quick checklist of the things you should be looking for in a multi-family rental property:
- Find a good area and location
Determining a good area and location is one of the most important factors in purchasing a multi-family home for sale in Minneapolis. The location of the property determines how fast you can attract tenants and how much you can charge for rent. Investors like yourself should look for high-growth, high-yield areas where properties are in demand and are in good neighborhoods.
High-growth areas are places where employees and local businesses thrive. Sources of income and local industries should be diverse. Meanwhile, high-yield areas are places where properties are valued less relative to the residents’ income than in other areas. This means choosing places where cash returns and cap ratesare higher.
You can start your search by choosing an area you like. If you plan on living in one of the units, look for property in a part of town you don’t mind spending some time in. Perhaps in a neighborhood that’s close to family and friends. It’s also important to consider the accessibility of the place: is the area you’re looking at easy to drive or fly to? What’s the daily commute like?
- Determine your ideal number of units
Another important factor to consider is the total number of units in the property you’re looking to buy. Before you hit the real estate search tools, ask yourself how many units you can realistically get for your budget and how much you hope to earn.
To do this, you’ll need to evaluate the property as a whole:
- How large should the property be
- How many units should it have
- How large should each unit be
Veteran real estate investors may opt for buildings with more units, but if you’re new to multi-property investing, it may be best to start with a duplex, triplex, or quadplex as they’re more affordable and have the least amount of risk involved.
- Consider cost and renovations
Another valuable aspect of purchasing a multifamily home has to do with the cost of the property itself and the expected renovations and maintenance. If you plan on living in one unit of a duplex, for example, you can qualify for owner-occupied financing. You can then use the second unit’s rent as additional income and factor that into your lender’s qualifying ratio.
As an investor, you need to make sure you have a good credit score as this will greatly impact the qualifying process. Factor in your credit score, debt-to-income ratio, and down payment when looking for financing options for your real estate purchase.
- Calculate your potential rental income and find your 50%
Your potential rental income is what you can realistically earn in rental income. To start, crunch the numbers and determine your regular mortgage payments, monthly repair budget, and typical rent prices in the neighborhood.
Be guided by the 50% rule, which states that you should spend 50% of your investment’s estimated income (rent payments, storage fees, parking fees, etc.) on expenses (repairs, maintenance, etc.). The difference between your estimated monthly income and estimated monthly expense is your net operating income (NOI). This can help investors, beginners or veterans, avoid the mistake of underestimating expenses and overestimating their profits.
- Calculate cash flow and cap rate
Another important step in choosing a multi-family property for sale in Minneapolis is calculating your cash flow and cap rate.
The cash flow is how much money you stand to earn. You calculate this by subtracting the monthly mortgage from the property’s NOI. The resulting number can help you figure out if the property is a good investment or not.
Another thing you need to calculate is the property’s capitalization or cap rate. This number indicates how quickly you can get a return on your investment. To calculate cap rates, take your monthly net operating income and multiply it by 12 to get your annual rate. Divide this number by the property’s current market value.
Higher cap rates are not always better. Higher cap rates just mean that you’ll have higher risks and returns, while lower cap rates mean lower risks and returns. The cap rate of a safe investment is typically 1% to 2%, but you should shoot for a cap rate in the 5% to 10% range. Anything lower may not be sufficient for you. On the other hand, if your cap rate is higher, you need to understand all the risks associated with your investment.
6 BENEFITS OF INVESTING IN A MULTI-FAMILY HOME
If you’re still on the fence about purchasing a multifamily home for sale in Minneapolis, check out the benefits of investing in this type of property:
Increase your income
With rent coming in from multiple units, the extra income you earn from your tenants can help offset the costs of your mortgage and your own housing. And it follows that you can make more investing in a multifamily home versus a single-family property.
Directly control your rentals
If you occupy one of the units, you have more control over the property, its value, and repairs. It’s also easier to catch problems quickly and address the issue before the situation gets worse. And with the number of tenants, the property generates more income, and this increases the property’s value.
Expand your investment portfolio
Purchasing a multifamily home allows you to expand your real estate investment portfolio and add to your income stream, even if you choose not to live in one of the units.
Enjoy more tax benefits
You can also enjoy more tax benefits if you own a multifamily housing unit. You can write off most of the repair costs and the interest you pay on your mortgage can be considered a business expense. Investors can also depreciate the property to offset a significant portion of the rental income collected each year, which makes this property type a highly attractive asset class for investors.
Choose among multiple ways to invest
You can invest in a multifamily property individually or you can work with other investors. Some choose to invest via syndication, although with this method, you take a more passive role in the partnership. You can also contribute to a fund dedicated to investing in multifamily properties across the country. Not only does this diversify the location of your holdings, it also mitigates risks. You can invest via a real estate investment trust (REIT), which helps you preserve liquidity.
Multifamily properties are also easier to scale versus single-family homes. That’s because multifamily homes are more conducive to house hacking (or finding ways to generate income from your home) or owner-occupancy. Investing in multifamily properties allows you to acquire several properties within one building, helping you grow your portfolio and giving you the opportunity to venture into a mixed-use apartment building in the future.
HOW TO FIND MULTI-FAMILY HOMES FOR SALE IN MINNEAPOLIS
As of 2021, Minneapolis had approximately 425,336 residents, with 74.3% of the population above 16 years old in the civilian labor force. The median household income in 2021 dollars was $70,099, while the per capita income was $43,925. Some of the major industries in the area include electronics, milling, machinery, medical products, food processing, and graphic arts, among others.
With a growing population and a pretty solid economic base, Minneapolis is a prime location to invest in multifamily housing. Here are some methods you can find a multifamily property to invest in among prime locations in Minneapolis, MN:
- Use the MLS
There are two main ways to find multifamily homes for sale in Minneapolis: on-market and off-market searching. If you’re going to employ on-market searching you’ll need to use an MLS or a multiple listing service. Owners or real estate brokers will typically list the property for sale on an MLS to be syndicated to real estate platforms. You will need access to an MLS account through a monthly subscription, or you can work with an expert real estate agent to get the details you need.
- Look for off-market deals
Another method you can use to find good deals on multifamily homes for sale in Minneapolis is to look for off-market deals. Sometimes, owners will test the waters and list their properties for sale using websites and services other than the general marketplace. Some owners will do this to avoid paying an agent’s commission. You can find great deals this way, but there may be some risk, as the listing may not be on an accredited website.
- Direct solicitation
In direct solicitation, you can send the property owners a letter or postcard indicating your intent to purchase their property directly from them. Investors typically use this method when the property owners have owned the property for more than 20 years, if the property has depreciated significantly, or if the owner has moved out of state. There are online tools that you can use, such as Reonomy, which provides property, building, and owner information.
Typical multi-family homes for sale in Minneapolis
Like most of America, housing in Minneapolis is low on inventory. Duplexes and other multi-family housing can be harder to come by versus single-family homes. But you may be able to find good deals if you know where to look.
Minneapolis has duplexes, triplexes, quadplexes, and semi-detached homes. These multifamily properties will typically have 2 or more garages, 2 to 4 bedrooms, full baths and half-baths, kitchenettes, and common rooms. Some come fully furnished with HVAC systems ready to go.
Many of these multifamily homes for sale are newly renovated and feature new appliances, cabinets, storage, walk-in closets, and decks. They’re also typically located near schools and shopping centers and have easy access to freeways and public transport.
CHOOSING AN AGENT TO HELP YOU FIND THE BEST MULTIFAMILY HOMES
Purchasing a multifamily property requires commitment. It takes considerable time and resources to get your investment up and running. So be prepared when you make the leap.
This is why you need to work with a real estate expert who specializes in both residential and commercial real estate. Here are the qualities your real estate agent must possess so they can effectively help you find the right multifamily home for sale in Minneapolis:
The agent understands your specific criteria
While many residential and commercial real estate agents can help you find good properties on the market, an exceptional agent understands your specific criteria. They can even help you crunch the numbers and analyze the potential cost, cap rate, return, vacancy rates, and risks of the properties you’re looking at.
The agent provides tools and valuable information
A good real estate agent should have a wide variety of tools, data sources, and other resources at their disposal. Some of the data you may need during the purchasing process may include liens, taxes, seller appraisals, and ground plots. You can use the data your agent provides to gauge opportunities for forced appreciation and make informed decisions so you know exactly what you’re jumping into before you finalize your multifamily purchase.
The agent shares their experience and expertise
A great real estate agent should also have ample experience and expertise in dealing with multifamily homes in your chosen area. Many multifamily homes are considered commercial properties, so find out if your agent specializes in commercial real estate as well.
The agent has first-hand knowledge of investing
While not a requirement, it is a definite plus if your agent has first-hand knowledge of investing, or is an actual real estate investor as well. If so, then they’re in a better position to gauge the risks and rewards of your planned investment.
WORK WITH MINNESOTA’S TOP REAL ESTATE AGENThttps://www.facebook.com/photo.php?fbid=653772812845151&set=pb.100046373147538.-2207520000.&type=3
If you’re looking to invest in your first multifamily property in Minneapolis, it’s important to work with the best team of real estate agents in Minnesota. Scott Haubrich is one such professional. Scott is a Minnesota native with more than 25 years of real estate experience. His in-depth knowledge of the local market, expert negotiation skills, and professional resources can help you sort through the best multifamily homes for sale in Minneapolis and find the best deals.