Friday, January 27, 2006

Net Operating Income - Cash Flow Before Taxes

Gross Scheduled Rents
minus
Vacancy (5%-6% usually used)
minus
Property Taxes
minus
insurance
minus
General Expenses (repairs, sinking fund, leasing)
equals
Net Operating Income
minus
Annual Debt Service
equals
Cash Flow Before Taxes

Thursday, January 26, 2006

How To Determine Value

This is where the rubber meets the road.

My first question is personal property or investment property?

Personal Property - My advice here is work with an experienced REALTOR with a proven track record. Why? Because there is a little bit of art mixed with science here. It is extremely rare that a particular property will exactly match a neighboring property. And even if it did the negotiation skills of the Buyer and/or Seller would probably be different. Having said that, personal properties are mostly priced using a comparison model. It is helpful to know how your house compares to the other houses in your neighborhood. More bedrooms? Less baths? Are the mechanicals new or 15 years old? All of these are factors. So is the season of the year and motivation to sell.

Sit down with your real estate agent and go over the numbers for the last 12 months. Look for trends and be honest when comparing your home to your neighbors. Look at the home from a Buyer's eye. (You may be very proud of the new roof and furnace. And the Buyer does notice that. But the Buyer also expected the house to have a dry inside and heat in the winter.)

Investment Property - I've said it before and continue to stand on my soap box. When buying income property the price should be based on the cash flow that property will produce. What should that be? I cannot answer that. It depends on your goals. If you are an investor looking for a 15% cash on cash return you will have an entirely different approach to the value as an investor looking for any home that will have an 8% cap rate.

Before you go out and look at properties I would advise you sitting down with an informed real estate agent and determine what your goals are for your money before you invest in rental properties. Yes, you have to take comparisons into account. But don't base your bid on those alone.

Wednesday, January 25, 2006

1031 (Starker) Exchanges

Last evening I held a workshop concerning 1031 Exchanges. Geoffrey Allison of Starker Services, Inc. came to my office and spoke to some of my clients about how to use the current tax laws to their advantage. It was a great workshop as far as I was concerned.

If you do not know what a Starker exchange is I highly suggest you research it if you own investment properties. Rather than me explain here what one is and how they operate I would simply suggest clicking on the link provided above and do your own research. Suffice it to say that it is a great tool the Federal Government provides to allow you to retain wealth to help build further wealth.

After checking out Starker Services, Inc., or any other qualified intermediary you may know of, feel free to call me with specific questions.

Monday, January 23, 2006

Stock Market or Real Estate?

Let' s do some simple math.

$100,000 of stocks appreciating at 6% will yield you $106,000 at the end of the year. Of course you have to have $100,000 invested to accomplish this. (Yes, I know you can get fancy, but that is the basics.)

$100,000 invested in real estate can give you $500,000 worth of real estate holdings. How? 20% down on 5 homes with a market value of $100,000 each equals $100,000 invested with a worth of $500,000. If each home appreciates 5% your $100,000 investment yields you $25,000 worth of appreciation.

Or how about you find properties that will cash flow with only 10% down. Now at 10% down on $100,000 properties each appreciating at 5% you have 10 properties for a total of $50,000 appreciation in one year! Are you getting the message?

Yes. The gains are tied up in the house and you would have to liquidate the holdings to have access to it. Or would you? You could refinance. Or sell a share of the house.

And, we haven't even spoken of the other 3 benefits of owning investment real estate. What are they?

1. Cash flow before taxes.
2. Loan paydown by somebody else.
3. Depreciation.

Where do you want to invest for your retirement?

When Everything Fits - Act Quick

Every once in a while a perfect property will come along. How do you know it's perfect? It fits your criteria. (I've spoken before of how important it is to know exactly what you are looking for, ie, house type, bedrooms, price range, area of town, needed repairs, etc.) You've run the numbers and they cash flow to your criteria or the play room is perfect for little Johnny. Everything works.

But for whatever reason you decide to wait a day, think it over and possibly discuss it with a relative. You then decide after talking to Dad and sleeping on it that you want to make an offer. But, alas, it's too late. The property is under contract.

This is no big deal if you were "stretching" your criteria. If you can sleep fine without getting the property then it probably didn't fit what you were looking for anyway. But if your criteria was clearly defined and you chose to procrastinate you will probably kick yourself!

I want to say this, again, as clearly as I can. Set your criteria before you start looking for an investment property. (Same goes for a personal home. Though more subjective criteria will probably be used.) If the property fits that criteria get it under contract...under your control. Then you can proceed to pick it apart and decide whether or not to move forward. If you have used a competent REALTOR there will be an inspection clause that will let you out if the property turns out not to be to your satisfaction. But get the property under your control as soon as possible.

Friday, January 20, 2006

Calling All Builders

This is a shout out to any builders out there that would like to run some numbers and models on whether or not it would be feasible to build some traditional, infill housing. New Urbanism is something that has intrigued me for years and I would be extremely proud to be a part of such a project. A builder in Minneapolis is actually doing the kind of building that I believe Kansas City would benefit from. Take a look at the two links provided in this paragraph and come back and let me know if you or anyone else you know would have any interest.

As you may have seen in my bio I used to reside in Suburban Maryland/Washington, DC. A community was built within 5 miles of my home that is still outstanding today. Kentlands is the name of the neighborhood and it was built in Georgetown style with all the modern conveniences that spoil us. It is the perfect mix and match of housing for such a large project.

Building a Kentlands here in Kansas City may not be feasible because of the lack of popularity of townhouse living here in the heartland. But smaller, denser housing with eye appeal would fly off the market. I'm convinced of it.

Tuesday, January 17, 2006

Kansas City Housing Bubble?

I read daily of the impending housing bubble burst on the coasts. But what about here in the heartland? Are we in danger of our homes becoming less valuable than they are? Or can we count on the continued steady upward climb?

Like everyone else, the following comments are just my opinion. But let's break a few things down;

1. My phone is still ringing like crazy. It is true that a lot of the calls are marginal credit risk buyers. But somehow the market has not yet exhausted all of these buyers. And when these buyers buy, or new buyers that are just entering the home ownership market buy, they allow the other levels to move up or down, depending on their desires.

2. It is also true that while my phone is still ringing the inventory is still expanding. And let me just say that some sellers seem to have an inflated view of their property's worth. Is it bad counsel by a REALTOR or their own expectations? Hard to say. But as we step deeper and deeper into a buyer's market it is more important than ever to do your homework and price your house right!

3. Investors make up as much as 24% of the overall residential market. What will they do in 2006? My guess is most will hold and many more will continue to buy as the market gets softer and more opportunities are to be found. But if they quit buying and start dumping homes on the market, look out! (This is the greatest fear on the coasts.) In KC, I just don't see any reason that I would advise my clients to do that.

4. Foreclosures are rising. Slowly but surely. All this easy financing has created a homeownership class of people just getting by. If their rates jump on their ARMs, or if little Susie gets hospitalized they may lose their home. Any neighborhood can withstand a foreclosure or two. But any more than that and it could seriously affect your home's value. The Charlotte Observer has done an excellent series on this subject.

One of the great things about living hear in the Kansas City area is it's economic predictability. Seldom do we get great jumps in growth. And seldom do we crash hard. I own investment property and see no reason to sell. The market's value seems to be right on track here. And I'm staying in.

Saturday, January 14, 2006

Multi-Family Homes vs. Single Family Homes

Eh. What a day...sports wise. First my Jayhawks lose to Kansas State for the first time in a 113 years! Then both of my sons' basketball teams fall short. Then the Redskins lose. And my Chiefs aren't even playing. Let's move on...

This morning I held an Investor's Workshop. And I touched on an important subject that I want to go over with people, again. It's the question of which is better for the long-term investor to own.

Single Family Homes

Advantages - The great thing about SFHs is that they tend to appreciate in line with their neighborhood, independent of what rental rates are. When you go to sell you might sell to another investor. But you will most likely sell to a buyer looking for a home of their own. The buyer looking for their own home will probably be a little less savvy when it comes to negotiation. And since they are looking at a home for personal reasons and expect to hold it for a while they are less likely to be looking for big discounts when they purchase. So your appreciation and buyer pool will most likely be better than that of the multi-family home (MFH). Some investors also believe you get a little better quality tenant who is looking a little more long term.

Disadvantages - This is a huge one for the newer investor. If you don't have a PAYING tenant that month you don't have any income that month. Also, SFHs can be spread out all over town causing you some maintenance and upkeep hassles.

Multi-Family Homes

Advantages - I believe duplexes are an excellent way for the newer investor to get started. Or, if you are looking at buying your first home and you are also looking towards investing a duplex will let you do both. Quite simply, live in one side and rent the other. A great way to get your feet wet. The major advantage is if you have one vacancy you still have 50% (or so) of your income that month. Or if you have a fourplex and one unit is empty you still have 75% of your income. And so on. A great safety net. Also, your maintenance tends to be concentrated in a smaller area helping you with upkeep and scheduling.

Disadvantages - Appreciation tends to be tied to the income a duplex or other MFH produces. As mentioned in an earlier blog, any investor worth his salt will not be doing comparables to determine the profitability of a MFH. Offers will be based on the income and expenses of that property. And that being the case your appreciation will be tied to the rise and fall of rents. When rents have been depressed for a while SFHs have probably raced by in appreciation. And lastly, when you go to sell you have a more limited pool of buyers and those buyers tend to be pretty savvy negotiators since they most likely own other investment properties.

So which do I recommend? Well, both, really. It depends on your criteria and your tolerance and ability to pay during vacancies. As you move along in your career I would recommend a mix of both. But that's just my thoughts on the subject!

Wednesday, January 11, 2006

A Client's Comments

One of my clients wrote a response to one of my postings. His comments were longer than the 300 words allowed under comments so he emailed me the doc and I'm posting it here for you to read.

It should be said that he makes money in real estate far differently than I do. He does follow NODs and looks for opportunities in all sorts of places. But the point is he works. And he works hard and with a plan. He knows his criteria and if I call him with something outside that criteria, regardless of how sweet it is, he will simply pass.

Anyway, here are his comments;

First of all, Chris is absolutely right on! For those of you that are just getting to know Chris...LISTEN UP. Also, there is no way to get rich quick. Getting rich is easy, but very boring. You must have a sound fiscal education. You can however shorten the learning curve by taking the time to learn every day. I attend several seminars yearly, some of which cost thousands of dollars. Your education is the most important part of your life. You either need to be the expert, or hire one. I do both. As far as finding prospects...There are a million ways. You must first set your current cash flow needs, then your long term goals. The late night gurus(the right ones) absolutely know what they are talking about. I know many investors who employ these strategies. I even employ a few. For me...Life is about family, and freedom. I work very hard to generate large profits. I do however work when I want. Learn as much as you can from Chris, and others and you can write your own ticket.

Erik

Tuesday, January 10, 2006

Recommended Reading

Three books I highly recommend reading. A little something in each of these.

1. The Millionaire Real Estate Investor by Gary Keller
2. Building Wealth One House At A Time by John Schaub
3. Successful Real Estate Investing by Robert Shemin

Monday, January 09, 2006

Condition vs. Price

I was out over the weekend looking at possible investment properties with a client. Some of the properties had been on the market quite a while. Now I will readily admit that the market is becoming more and more a Buyer's market and houses are taking a little more time to sell than even a year ago. But the condition and price of your house still, and always will, have a lot to do with how fast your property sells.

Let me make this as clear as possible. If you want top dollar when you sell your house your house had better be in top condition. If it's not you need to hope you are in a hot Seller's market (not in Kansas City at this time) or that your Buyer is from out of town and will not compare your property (highly unlikely) to any of the other properties for sale.

There is nothing wrong with selling a property that is not in top condition. But your REALTOR cannot work miracles for you. If every house in your neighborhood is in good condition and every house has sold between $200,000 and $210,000, that is great. And if your house needs quite a bit of work and is located in that neighborhood you can still sell it. But Buyers (and their agents) are generally not stupid. If your place needs $15,000 to bring it up to date most people are not going to offer more than $180,000 - $185,000. It just makes sense.

Be realistic about your pricing. It's the best thing you can do to sell your house. Don't under price it. But be realistic.

Also, I spoke of buying based on comparable sales. Let me just say here that is the worst way to purchase investment property. You need to purchase investment property based on the income that property can produce. Not what Joe down the street paid for his. That's a whole other subject that you can write me about or I'll address in the future.

Friday, January 06, 2006


Completely updated Kansas City home across from the park and backing to green space. Beautiful wood floors. Ceramic tile in the bathrooms. Basement rec room. 3 good sized bedrooms. 2 bathrooms. Large kitchen. A must see. Offered at $119,500. Posted by Picasa

Appreciation + Paydown = Big Equity

There are four benefits to owning investment real estate.

1. Cash flow before taxes.
2. Mortgage paydown by OTHER people.
3. Appreciation.
4. Depreciation.

Let us ignore, for the moment, benefits 1 & 4. And let's assume the following;

Purchase cost of a property is $150,000.
You put 10% down.
Interest rate equals 7%.

Let's also assume an annual appreciation rate of 5%. (Historically some years have been higher. Some years have been lower. But let's assume 5% is your market area's average.)

After 5 years of 5% appreciation the market value of that property should be about $191,400.

Also, after 5 years of your tenants (OTHER people) paying your mortgage down the remaining balance should be about $127,078.

So in 5 years your equity has increased from $15,000 (initial cash invested) to $64,322 ($191,400 - $127,078). That is about a 428% increase in your investment in 5 years! More than a little better than that IRA I have with mutual funds.

At another time I'll discuss how the added benefits of items 1 & 4 adjust these numbers.

REALTOR Who Specializes in Investment Property

Almost by accident did I begin to learn about investment property and why you and I should own more than we do. One of my first clients was passed on to me as a new real estate sales person. This client owned a townhouse in a part of town nobody really wanted. It didn't cost much and even with 100% owner financing he could not seem to get it sold. So being new, I gave it the old college try. Well, low and behold I found a buyer and was I pleased with myself!

Several weeks after closing the seller called me and asked me if I would like to sell the other three townhomes he had in the same complex. It never occurred to me that he would own more than one investment property! But I was pleased with the challenge and eventually got those homes sold. After getting them all under contract (and by this time I had done my homework and knew he owned 23 more properties) the seller called and asked me to list 13 more of his homes!

Obviously, this was fantastic for a newer REALTOR, business wise. But it was also fantastic education wise. I learned a lot from that man. And with that beginning I really began to educate myself on the power of owning investment real estate.

Today, most of my business is working with people looking to increase, exchange or liquidate their real estate holdings. Some own 60+ properties. Some are looking to buy their first income property. I still learn from both. And I believe they learn from me, as well. This blog will take on isolated subjects as it moves forward. Feel free to give your comments and suggest topics. I'll give you my thoughts. You'll probably be able to tell me, right away, of someone who thinks differently. It really doesn't matter. You have to figure out what works best for you. What you feel comfortable with. That's why I'm here to help.

Get started! Read. Ask questions. Drive around neighborhoods. And when you are ready to really get going, set your criteria. After you have your criteria set in concrete, finding the right house gets easy.

Thursday, January 05, 2006

So Here We Go!




I've been reading other people's blogs and wondering why anyone would bother. Some of the things you find on the web baffle the mind. But as I keep reading, and thinking, it occurs to me that maybe there might be some people out there that would like to know what I think when it comes to a few areas, especially Residential Investment Properties located in and around Greater Kansas City.

First, I do not do the "get rich quick" schemes proposed by many a late night "guru". It's not that I do not believe you can make money with their techniques. It is just that when carefully studied they are techniques or skills that I either do not possess or do not want to learn. I do not solicit recent widows. I do not go through the NODs (Notice of Defaults) at the courthouse. It really doesn't bother me that some people do - and make good money because of it. It's just not what I want to do.

As a professional REALTOR and owner of investment property, it is my belief and philosophy to own, for the long term, quality rental housing. It is my personal goal to own a minimum of $1,000,000 of investment real estate and then to turn around and use the excess cash flow from these properties to pay down the notes to $0 as fast as possible. With average appreciation, and no monies owed, this should take care of retirement.

It is my professional goal to help at least 100 other people to accomplish the same goal. Is it doable? You bet. And I'll get into that in the coming blogs.