Well, I pulled the trigger on my first duplex. Let’s walk through how it happened.

After determining the city (Minneapolis) and the type of property (multifamily) I wanted, I began to search Zillow for properties that fit my criteria. As I mentioned in a previous post, I wanted to find a property that would meet the 1% rule. In Minneapolis and the Twin Cities, rents range from roughly $1000 to $2500 for a two bedroom unit. I wanted to find a property around the $300k mark which means I needed to find a property that could bring in roughly $3000/month in rental income. After researching many of the neighborhoods and doing virtual home walkthroughs via Facetime, I found a property selling for $390k in the Minneapolis city limits. It had been on the market for 60 days by the time I had my contacts do a walkthrough and I felt like I could offer a lower price to get the home. So, with the support of a buyer’s agent, I offered $360k with the seller responsible for covering my closing costs (around $10k). All in, I was looking at around a $350k purchase price.

The seller accepted.

My offer was contingent on a 7 day inspection period. During that time, I hired a third-party home inspector to walk the house. It cost me around $400 to hire the inspector, but was well worth the cost. He found a few items that were potentially problematic including non-functioning AC for the lower unit, confusion over whether the tenants or the seller owned the existing washer and dryer, and problems with the detached garage’s roof. Based on these issues, I asked the seller for a $10k credit. I came up with this value based on the likelihood of needing to replace the AC unit (~$5k), replacing one washer and dryer (~$1k), and renovating the garage’s roof (~$4k). The seller accepted and we settled on a final purchase price of $350k.

Ultimately, my closing costs only came in at $5k, so the seller applied the remaining credit to the purchase price, meaning my all-in cost for this Minneapolis duplex was $345k!. Here are the numbers for an easier reference:

For $345k, I was the proud new owner of a Minneapolis duplex:

The duplex is composed of 2 units, both of which are 2 bed / 1 bath. It is an up and down duplex, meaning it’s one unit on top of the other. In this neighborhood, rents for 2 bedroom units range from around $1300 to $1800. My goal is to rent each unit out for $1500 each and another $50 for the garage. This means I am targeting $3050 in monthly income on a purchase price of $345k. This doesn’t quite meet the 1% rule (0.88%), but it was close enough for me.

So…what do these numbers show when we plug it into our handy calculator? Have a look:

In Year 1, I expect to cash flow around $475 for the year. I am essentially breaking even:

This assumes a 1 month vacancy for both units and $3000 worth of annual maintenance/expenses. It also factors in my (high) tax rate, insurance, and utilities.

My Year 1 annual return is 14% with a 10 year return of 191%. This shakes out to an annualized return of around 11 to 12% per year.

These annualized returns are based on an expected rent increase of 2% a year and expected housing appreciation of 2.5% a year. I think both of these numbers are fairly conservative as they are running underneath long term inflation rates.

Ultimately, this house didn’t quite meet my financial targets. I decided to be a little more flexible on my financial requirements simply to get involved in the industry. I spent around two months looking at various properties. I actually had an offer accepted on another property prior to this one, but I pulled out after the inspection report indicated major structural problems. Ultimately, I wanted to jump into the market and I was willing to waiver on my requirements to do so.

I still believe this will be a profitable endeavor. As long as I meet my fairly conservative forecasts, I’m looking at 11 to 12% gains per year. This is not much better than the historical S&P 500 average of 10%, but with how crazy the stock market has been over the last 15 years, I find it hard to see the S&P continuing to compound at 10% a year over the next ten years. Either way, I’m at peace with my decision and looking forward to the next steps. It’s been a crazy few months, but all things considered, the process went very smoothly, and I’m happy with how everything has turned out. Next up, construction and home renovation!