Curious to learn more about investing in residential real estate? Read our blog about Twin Cities residential real estate investment to learn about some pros and cons, commercial versus residential real estate investing, and residential real estate investment strategies.
Let us know if you have any more questions, one of our Twin Cities realtors will be in touch as soon as possible!
1. Single-Family Investment Property
When purchasing a single-family home as an investment property, most investors will simply break even the first few months to a year of ownership. After the first year or so, tax breaks and rental increases may result in earning a profit within a few years.
A huge benefit to investing in a single-family home is that you can use the profit from that investment to finance your next purchase. A con of investing in a single-family property is there is no economy of scale. For example, if you fix a roof on a four-plex, you have reroofed four units, which is 25% per unit. If you fix a roof on a single-family, your cost is 100% per unit.
If you're a handy person, sweat equity can pay off. By buying a fixer-upper, you can make well-planned and thoughtful updates that can increase the value of the property. Depending on local regulations, you may be able to rent the units at a higher price.
2. Multi-Family Investment Property
There are many benefits to investing in a multi-family property in the Twin Cities. Read our blog about the Top 4 Benefits of Buying an Investment Property. If the property is earning rental income when you purchase it, the debt-to-income ratio will be reduced, allowing you to purchase a bigger investment than if the property is vacant at the time.
With multi-family properties, the expenses remain flat while rental income has the potential to increase year after year. For example, you purchase your first duplex as an owner-occupant. At first, the property needs a little bit of elbow grease. You move in, and start updating the units bit by bit. Your first year of rental income is about $1,500 per month. As the years progress, you continue updating the units with things like new tile, new countertops, new stainless appliances, and many other beautiful touches. In a few years, that same duplex can be generating $1,635 per month, while your mortgage and maintenance costs remain the same as when you first bought it. That extra income each month can be used to finance your next home purchase or larger investment property.
3. Commercial Residential Investment Property
Commercial residential properties are described as any residential property with five or more units. Commercial residential properties typically have more stringent financing requirements-- investors may be required to put as much as 50% down or more, depending on the current rental income of the property. One thing to consider before investing in a commercial residential investment property is that these types of properties may not be owner-occupied, therefore, they have different tax benefits than a regular multi-family property.
Currently in the Twin Cities, available housing inventory continues to remain low and prices continue to rise. When there is a high demand amongst would-be buyers, they turn to the rental market, making it easier to profit from owning a multi-family property, and less likely to deal with lengthy vacancies in your building.
4. Condominiums as Investment Property
While ownership held in a condo is similar to other residential properties, ownership rights and how the property is managed is different.
- The space inside the condo unit belongs to the owner, as well as a share of the common spaces such as elevators, hallways, etc.
- Depending on the associations rules, you may have the opportunity to sublet the condominium.
- Some lenders view condos as a slightly higher risk, so they might require a higher down payment.
- There may be occupancy restrictions involved with a condominium. Many associations set a percentage limit of how many units can be part of the short-term rental pool.
In some cases, a single-family detached home may be part of a condominium format.
- Some neighborhoods condominiumize their area and share amenities such as community centers, hiking trails, and other fun activities for all of the condo owners to enjoy.
No matter which type of condominium you intend to purchase, we always recommend reading the bylaws before entering into a contract. Many real estate contracts allow buyers a ten day right of rescission period to review all the necessary documents before moving forward with the purchase. It's also extremely important to read through the board meeting minutes to get an idea of how the association is run and the financials to determine if there is sufficient money in the reserves to pay for the imminent expenses of the common areas.
5. Tax Benefits of Investment Property
Historic home renovations can lead to more tax credits. Changing a well-built historic mansion into several apartments with architectural charm, you may be able to take a tax credit up to 20% of the cost of renovations.
- The home needs to be listed on the National Register of Historic Places, or located in a historic district.
- With this type of investment, there are more guidelines to follow and rules about what can or cannot be changed due to local historical regulations.
Low-income housing opportunities may also lead to tax credits, making it a desirable investment. When you invest in a historic home or a low-income housing opportunity you may be able to get a tax credit, which is typically more beneficial than a tax deduction.
- A $100 tax deduction in a 33% tax bracket might save $33 in taxes.
- A $100 tax credit in a 33% tax bracket saves $100 in taxes.
- Example: An investor has a $20,000 tax credit for building a low-income apartment building. The investor owes $45,000 in taxes for that year, but after applying the credit, their taxes are reduced to $25,000.
Depending on the type of property you choose to invest in, you may also be able to write off the following expenses as tax deductions:
- Mortgage Interest
- Property Tax
- Operating Expenses
For more information, reach out to a licensed tax professional to learn about the different tax benefits for rental real estate property owners.
6. Fair Housing is for Everyone
Remember, fair housing is for everyone. When investing in any type of rental property you must adhere to federal and state fair housing laws. The federal laws prohibit discrimination against the following classes:
- National Origin
- Familial Status
In Minnesota, the following classes are protected in addition to the federal housing laws:
- Marital Status
- Public Assistance
- Gender Identity
Email us any questions you have about investing in residential real estate in Minneapolis, Saint Paul, or any of the surrounding communities.
One of our Twin Cities realtors will be in touch as soon as possible.