Want 8%+ Returns? Investment Properties in Dakota County Have That

Prices on homes fell a bit more in 2010 and there continue to be a large number of bank owned foreclosure properties available.  Lately, I’ve been finding really good investment opportunities on bank owned townhouses in Dakota County.  So much so that I’ve personally started investing my own money in them.  As a somewhat conservative investor I haven’t wanted to have all of my money in the stock market so I’ve been looking for ways to have a safe 7%+ return on a part of my savings.  Instead of 7% I’m actually finding 8%+ returns on townhouses so in the last 2+ months I’ve purchased 2 investment properties to use as rentals (and am looking for more).

Investment Decisions

Before you get into investment properties there are a number of things you should think about.  The first question is what type of investment do you want?  The most common are:

• Rental – A traditional model where you find tenants and hold the property for some years while receiving cash flow from rents and hopefully some appreciation in the property at a future time
• Rent To Own – A combined model where you find a tenant that doesn’t have the credit to purchase a home today but will sign a contract to rent the property today with an option to purchase at a set price in a few years
• Flip – Purchase an investment property with the idea of doing renovations and the putting it back on the market quickly to sell at a higher price that a more traditional move-in buyer will pay

There are very different considerations for these models.  The rental model involves becoming a landlord which carries risks and potential headaches.  The flip model usually involves taking on properties with many defects and lots of work in updating the property through hard work or hiring of contractors.

We decided on the rental model as it is easier to project cash flows and returns.  We also chose to focus on townhouses as these properties come with a Home Owners Association (HOA) that maintains the outside which means less work for the landlord.  Finally, we are focusing on newer townhouses with the thought that tenants like newer better and they should have fewer maintenance issues.  Of course, each investor may have their own ideas of what works best for them.

Evaluating Properties

The way to go about evaluating potential investment properties is to use a tool (like my Microsoft Excel calculator) to track all of the acquisition costs, projected income and projected expenses.

• Acquisition Costs – includes the cost of purchasing a property plus your costs of closing.  In addition, you should add in all of the costs associated with getting the property into good, rentable condition.  For example, this may include new carpet, paint, appliances, lighting or repairs.
• Projected Income – this includes getting a solid estimate of projected rents.  The best way to do this is look at Craigslist for similar rentals but Hotpads is also a decent site for rental rates.  You should probably factor in some amount for vacancy losses.
• Projected Expenses – this includes insurance, HOA fees, repairs, accounting/legal, taxes and other costs of the property.  These can certainly vary quite a bit.  The nice thing about townhouses is that your 2 biggest expenses (HOA fees & taxes) are easy to calculate.

You actually want to project your income and expenses first as knowing those 2 items will help you calculate what your acquisition cost can be in order to make the return you are looking for.

Example Property

To give you an idea of how this looks in action, here are some snippets from my actual spreadsheet showing my first investment property.  This is a home that sold brand new in 2007 for $198,000:

The acquisition costs:

The projected income:

The projected expenses and overall return:

I purchased this property for $100,000.  I am projecting $1,200/month in rent with a 5% allowance for vacancy.  My total expenses including HOA fees, taxes and conservative estimates on legal, insurance & repairs add up to $5,600/year.  This nets me a return of almost 8.1%.

The 2nd townhouse I’m buying actually has a slightly better return at 8.2% with conservative estimates.

Buying With Cash

One thing to be aware of is that the banks that own these properties much prefer cash offers over ones with financing and they are willing to take less money if you are a cash buyer.  You definitely have a lot of leverage with cash offers and can often get a significant discount from list price.

For example, in the property listed above I became aware that the bank took my cash offer over a buyer using financing who had offered $10,000 more.

Certainly it’s possible to buy investment properties with financing.  The metrics in the spreadsheet will look very different as you will have a much smaller monthly cash flow but the return may actually be better because you are outlaying so much less cash up front.

Other Considerations

If you are going to be buying investment properties in Dakota County and renting them there are a number of other considerations including:

• Getting a lease agreement
• Creating rental & application policies as well as a tenant screening process
• Figuring out the legal structure to hold the properties in to protect yourself from liability

There are a number of good websites out there for property investors like BiggerPockets or the Minnesota Real Estate Investors Association.  Consulting with an attorney and/or accountant is definitely recommended.

Getting Started

If you are interested in learning more about real estate investment properties in Dakota County (or anywhere in the Twin Cities) you should definitely find a Realtor that has experience of their own with real estate investing.  I’d be happy to share my analysis tools/resources and help build a list of potential properties that would match your investment strategy.

All you need to do is contact me to get started on finding your own 8%+ returns.

Bill Wallace is a Realtor at RE/MAX Results in Apple Valley, MN with a focus on Dakota County and the Southern Twin Cities including – Apple Valley, Bloomington, Burnsville, Eagan, Farmington, Inver Grove Heights, Lakeville, Mendota Heights, Prior Lake, Richfield, Rosemount, Savage, Shakopee, South St. Paul and West St. Paul.