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An Overlooked Opportunity in Real Estate

by Connie Yoshimura

     One of the little discussed opportunities in residential real estate is the small income property. Whether you choose a duplex, triplex, or four-plex, it’s an excellent way to begin a real estate portfolio for the small investor, or first time homebuyer. If you qualify for a VA owner-occupied loan, you can purchase a duplex with a mortgage of up to $625,500 with a zero down payment. VA does require you to have six months in principal, interest, taxes and insurance in reserves. If you’re worried about the monthly payment, VA allows up to 75% of market rents for rental side income which is added to the owner’s income for qualifying for the mortgage. The 25% of the non-allocated rents is to be reserved for maintenance, repairs and vacancy.

     Not a veteran? FHA has owner-occupied financing for only a 3.5% down payment.  Loan limits are $497,000 for a duplex; $601,500 for a triplex and $747,500 for a four-plex. For an owner-occupied duplex, there are also no reserve requirements. FHA also allows 85% of the market rent for rental income side.

     Fannie Mae and AHFC loan limits are even higher. For a duplex, both will finance up to $800,775. AHFC will require a 10% down payment and Fannie Mae a 15% down payment. Both will require the buyer to demonstrate they have six months of reserves in cash. That’s still an excellent investment opportunity with 30 year fixed rates still below 4%. It seems like a first time homeowner or small investor couldn’t go wrong with one of these purchases. The only problem is finding a property to purchase. These loan limits are statewide and so there may be other opportunities around the state, but in Anchorage, with a tight rental market, and sluggish building permits, even a good duplex is hard to find, particularly if you are looking for one that is less than ten years old. The vast majority of our rental housing was built during the boom years of the l980’s. Although for us long-time Alaskans that doesn’t seem that long ago, the reality is these properties are now over 30 years old and have not only become cosmetically, but functionally obsolete.

     Much of Anchorage’s multi-family acreage zoned R2, R3 or R4 has been taken up with condominium development the past fifteen years. Builders can earn an extra $10,000 to $15,000 per side by selling each side separately as a condo. That’s an opportunity that’s hard to give up when you build for a living. So the development of the owner-occupied rental properties is really left up to the owner-builder who has the time to search for that infill lot that larger builders tend to overlook because it’s inefficient to build only one building at a time. Occasionally, you see a duplex or four plex popping up in Fairview or Spenard, both popular rental areas, where tear-downs are still reasonably priced. It’s a good opportunity for the small investor and helps create more affordable housing in Alaska’s largest city.

A Look Inside Anchorage's Housing Stock

by Connie Yoshimura

     According to the U.S. Census Bureau, American Community Survey, there are approximate 104,980 occupied housing units in Anchorage.  Seventy-five percent of those units were built before l990, making Anchorage a haven for remodelers but a frustrating home search experience for buyers who can’t afford the remodeling costs associated with a 25 year old home. The problem of our aging housing stock has been exacerbated by a lack of residential building permits over the past decade.  Anchorage’s neighbor to the north, the Matanuska-Susitna Borough, has led the state in single family construction. From 2003 to 2013, 4,797 new single family homes were permitted in Anchorage versus 10,588 in Mat-Su.  Why?  Land is cheap and  there is lots of it. Plus, the permitting process is abbreviated or, in some instances, does not exist, allowing for faster and thus less expensive construction.  So buyers have willingly traded drive time for a larger lot and more house, all at a lower cost per square foot.

     Although the MOA encourages multi-family development of medium to high density units per acre, only 28% of existing homes in Anchorage are multi-family, 6% duplex and 4% mobile homes (our at risk low income housing).  A whopping 62% are single family, according to a housing report  published in the February 2015 issue of Alaska Economic Trends, a publication of the Alaska Department of Labor which reinforces  our residents strong preference for single family homes.

     For the past several months, Anchorage’s for sale inventory has averaged less than 400 single family units per week. Inventory is usually seasonally low during the winter months but in past years low inventory has been in the 600 unit range, not below 400.  Homes priced under $400,000 are a quick sale with frequently competing multiple offers.  Our recent population growth has been due to births and so there is a strong move-up market from two bedroom condos and townhomes to single family homes.  Within the single family home market, there is also a strong preference for four bedrooms to accommodate the expanding family and the need for home offices.  The majority of our  aging housing stock is three bedrooms and builders with four bedroom models, all on the second floor, sell well because there is less resale competition, even with the higher cost of the home due, in part,  to additional square footage.

     Despite the perpetual  threat of state budget cuts, January and February MLS statistics showed only a decline of 1.82 percent when compared to the 2014 average sales price.  For now, this decline can be attributed to the time of year.  New home starts usually create a bump in sales price but that normally doesn’t occur until early June, once the ground has thawed and builders are able to dig foundations without heating and tenting.  For the  first two months of this year only 29 single family homes were permitted in Anchorage.

     Anchorage residents like to move more frequently than their national neighbors. Thirty three percent of Anchorage residents have moved in the past five years compared to only 27% with our neighbors in the lower 48.  Once reason for this internal community migration is the sales price of the average home in Anchorage, after adjusted for inflation, rose 48% from l993 to 2013, making home ownership an excellent financial investment.    Whether or not that good investment in home ownership will continue depends upon a steady economy and continued growth in population.

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Dwell Realty
561 E. 36th Ave., Suite 200
Anchorage AK 99503