Monday, April 30, 2007

Building a Real Estate Portfolio: Learn to Fly

I remember that day very clearly. I waited with anticipation, and apprehension for 3:00 pm to arrive. I was so excited that I arrived 10 minutes early even though I only lived 4 minutes away. The date was July 23, 2002. 68402 was the Cessna 152 I was about to fly for my Private Pilot's license exam. Aside from my wedding day and the birth of my children, NOTHING exceeds the sense of accomplishment I felt that day.

"Congratulations. You are now a private pilot."

Those words still ring in my ear. It was the culmination of a lot of work. The direct result of careful planning, much study, learned execution and faith in the flight instructor I had hired to guide me through the process.

My instructor was Felicia Barton. I've since lost track of her. But I'll never forget her. "Airspeed. Center line." "Airspeed. Center line." "Emergency. Where will you land?" Those words of hers ring through my ears to this very day with every flight I take. Even while driving my MINI. I purposely live close to small airports and watch as many approaches/take-offs as I can. I mentally fly every single day.

Why am I writing about flying?

Because it is really no different than what the newer real estate investor goes through when they are getting started. You step out on faith and the first thing you decide is that you are going to do it.

The next thing that any prudent flight student will do is carefully choose their flight instructor. Your life will literally be in that person's hands for years and years to come. After all, it is the training that will come back when you need it most. Or it wont. It just depends on whether you had a great flight instructor...and whether or not you were a great student.

Little successes will build on top of other small successes. When that plane lifted off the ground for the very first time under my control Felicia took the wheel as I followed along. She was talking to the tower, adjusting the throttle. Following directions. Turning to 270. Adjust mixture level. Head on a swivel to look for traffic. Trim needs adjusting.

My head was swimming. Would I ever learn to do all of this? And all at the same time?

You never stop learning to fly. You never stop learning about real estate investing. To me, with my life experiences, they are practically the same. Both allow freedom. Both require planning. Both allow the chance to soar. Both can cause ruin.

Choose your path carefully. Plan. But step out. The sense of accomplishment in knowing that I can fly is unbelievable. Knowing that I am taking steps to have wealth that will allow me to retire comfortably and that I can leave for my kids will be like that July day. "Congratulations. You are a millionaire."

*** *** *** ***

I was reading a website today out of California. It's called The Money Alert. There are a couple of articles worth reading.

The site looks informative and discusses all manners of investing, not just real estate. Take a look and see what you think.

Saturday, April 28, 2007

Kansas City Real Estate Investing: Keep Money In Reserve

The Kansas City rental market is pretty good right now. And that is good news for the real estate investor. Vacancies seem to be filling pretty quickly right now. So that means less time spent worrying about how many mortgage payments you will have to make without and income coming in.

A good rule of thumb for me, and what I would advise for my clients, is keeping a minimum cash reserve in your operating account of three month's worth of mortgage payments for each property you use as income property. Does that sound like a lot? What if you want to use that cash to buy another can't miss property?

Proceed with caution. Ever had a vacancy? It really isn't that bad for one month, even two. But I had one client about a year and a half ago who owns 13 rental units. During one 4 month stretch they had 8, 7, 4 and 3 vacancies. It was a freak occurrence for them. Nothing like 8 of the 13 units being vacant had ever happened to them before. But it did. That is a huge cash drain. Had they not had the cash reserves it may have sunk them.

In fact, they scoff at my 3 month rule. For them it is 6 months. And that is fine with me. What isn't fine with me is people who want to buy income property with 100% loans and finance the closing costs. With no cash reserves. That is a recipe for disaster. And I would rather they build up some cash before we proceed.

Thursday, April 26, 2007

Real Estate Guru: Watch Your Wallet!

I had a great evening, real estate wise. The best part was working with an investor who has owned rental houses before but has never had to do any tenant selection on her own. So I've been walking her through advertising the income property and answering calls/emails and tonight we met together with a prospective tenant couple. She let me do all the talking, question answering/asking and such. She seemed to show tenants houses the same way I show houses to her...I let them look around and leave them alone. But she said she wasn't suprised at how I went over in detail what I would expect from them as tenants and, in turn, what they could expect from her as a landlord.

We have a couple more prospective tenants to show the house to on Friday evening and she'll be there to continue to learn. She wants to be her own property manager for a while to learn how it works from that angle.

I tell you all of this because I've been having a good time surfing around the web tonight and reading some very good real estate blogs. And on a few of them there are backhanded references to real estate gurus. (Deservedly so, IMO.)

If you are starting out in the real estate game you have three choices as I see them:
  1. Read all you can and go out on your own. Figure things out as you go.

  2. Hire an investment "mentor" and follow him down the path. (Someone who can actually show you what they are doing NOW...not 5 years ago.)

  3. Work with a professional real estate agent that has a proven track record. My guess is, and this is only a guess, that each major city only has about 4-7 of these guys. Here in KC my figure is about 6 out of the 13,000 agents. Better interview carefully!

But whatever you do...Don't buy the books, tapes and seminars of the real estate gurus! Why? Give me a call or email. We can discuss it.

Here are a couple links to sites that would be worth your time to visit:

The Successful Landlord Blog

Tenant Tales

Kansas City Wizards Soccer: Build A Stadium

Sorry. This isn't going to be a real estate post. It could be an investing post. Since OnGoal LLC purchased the Wizards last fall there have been some player and coaching changes. OnGoal LLC is hoping to do what the previous ownership (Lamar Hunt) wasn't able to do. Get a soccer specific stadium built in Kansas City to help the Wizards succeed here.

Last night the Wizards came into their home opener 1-1. They won the game 3-0 by waxing a pretty poor Toronto FC. Announced attendance: 7,438.

Even by MLS standards, this is pretty darn low. Now, if you live in Kansas City you know we had one monster rain storm last evening. Precisely why the attendance wasn't at lest 7,441. No way I was taking my boys out to sit in that kind of rain. (For all you that think soccer is boring, at least they still play in the rain....I'm just not going to sit in it!)

Everywhere soccer specific stadia have been built in the USA attendance has jumped. KC can get 16,000-19,000 out at Arrowhead. Do you know what that looks like in Arrowhead? But build a soccer specific 22,000 seat stadium and you'll create an atmosphere. A demand for tickets. A good time. Look at Columbus, LA, Dallas, etc. You might say that DC United thrives in RFK. And you would be right. I used to love going to games there. But DC has 3 times the population of KC, at least 2 times the money and 2 times the immigrants.

Congratulations on the win last night, Coach Onalfo. Let's hope the city can get behind you and the boys and go to Arrowhead and build a new stadium. I fully understand that the funds should mostly be private as there is no way any jurisdiction is going to build a stadium for soccer when they would just barely approve improvements for the Chiefs and Royals.

Even though the Wizards are Kansas City's last National Champions in 2000. Think about that.

Wednesday, April 25, 2007

Giving Property Management A Try In Kansas City

One of the important roles I play as an real estate investment counselor is helping my clients to find suitable property management for their property's location. In general, I would recommend a different property manager in Blue Springs than I would in Kansas City or than I would in Olathe. Kansas City is such a spread out area that it is nice to have a PM that really knows a specific area and will have a ready tenant pool available.

Every once in a while I have a client that would like to give property management a try on their own. And I think that is terrific. It's really a no lose situation. If you end up liking the job of managing your own income properties and find you are good at it you will save yourself anywhere from 6%-10% of your Gross Rents.

If it turns out you don't like the job, well, at least you will know the right questions to ask of your prospective PM and will understand the fees he charges.

Yesterday I had a client purchasing two income properties on the back end of a 1031 told me she would like to be the PM of these two new properties. She wanted me to walk her through the process of selecting a proper tenant to put into the vacant home she will soon be owning. We've negotiated the right to put up a For Rent sign and to show the property even before closing to minimize the time the home will sit vacant.

To give you a taste of the rental market in the Waldo area of Kansas City we entered her listing on craigslist and and in less than 18 hours I have already received 7 emails with inquiries and one appointment to show the house.

Now we just have to weed through these prospect tenants to see who the best candidate will be. Job history, current income, credit history and a criminal background check will be part of the process. Some of this can be done through a good tenant screening company. Additionally, I believe a lot can be done by checking a couple of references on your own. By talking in depth with the prospect and asking the right questions.

Between these we should be able to select a tenant that will enjoy and respect the investment property. And help to make this person's first foray into property management a fun and educational one.

Monday, April 23, 2007

Earth Day and Your Home: Energy Saving Ideas

Another Earth Day has come and gone. I didn't really do anything special to mark the occasion. Nothing out of the ordinary, at any rate. My family and I spent about 4 hours out at Shawnee Mission Park where there was an Earth Day celebration. We didn't go to the celebration. But we did enjoy what nature had to offer.

We bar-b-q'd. We hiked. We flew kites. We put our feet in one of the lakes. We enjoyed a very small piece of the Earth that God gave us.

I laugh when I hear Democrats and Republicans discuss the ecology and environment in political terms. Is it really a partisan issue? I was really pleased today to hear John McCain give a speech promising to lower carbon emissions for both United State security issues and for the good of the human race in relation to the world in which we live.

Listen. I'm not an eco-radical. Humans need to cut down trees to build housing. But we have a duty to plant more. We need oil to fuel our current state of affairs. But we need to immediately begin finding alternatives. And that is going to cost businesses and the private sector money. Big money. But again, what is the alternative?

I'm not going to rant too long on this issue. I've written before about smart growth both for aesthetic and practical reasons. I just want to offer 5 things that any home owner can do to help do his/her part. And if you have investment properties, you can make a bigger impact!

  1. Change out as many light bulbs as is practical. Use the newer fluorescent bulbs. What a difference they can make!

  2. Turn off the water while brushing your teeth. How much water would that save in a year?

  3. Use your ceiling fans more and your air conditioner less. I live in Kansas where it can get to 97 degrees with 87% humidity. I'm not talking about those days.

  4. Service your furnace/ac at least once a year to keep it in top operating condition.

  5. Turn off all the lights, televisions, computers and radios that are not in use.

These are not hard and in fact can help to save you some money. The Earth and the Earth's population need YOUR help. Won't you give it a try.

I would love to hear additional ideas.

Property Management Done Properly

Property management is hard work. It takes discipline to do the due diligence. It takes a "hard heart" to not believe everything you hear. And it takes fortitude to make tough decisions.

The single best thing you can do when renting your investment property is proper tenant screening. Interview them. Let them interview you. Ask questions. Lots of questions. And do background checks.

Here you will find a link to a blogger I found very recently. This short blog says a lot. Take the time and make the jump. It's short. Succinct. To the point.

Sunday, April 22, 2007

Real Estate Investing Tool: 1031 Exchange

A 1031 tax deferred exchange is an excellent tool for the real estate investor. And there are plenty of good sources to find out more about that tool without me rehashing the whole process in great detail.

Follow these two links to get more details and benefits of the 1031 exchange:

Jeff Brown's Bawld Guy Talking
Starker Services, Inc.

This post, however, is here to talk about what the real estate investor can do to minimize his/her feelings of overwhelming pressure when they are in the middle of a 1031 exchange. And how a real estate agent working with investment properties can help to walk that exchanger through.

Click here to read the rest of this post...

Saturday, April 21, 2007

Real Estate Investing in Kansas City: On Your Mark, Get Set, Get Set, Get Set...Oh, Go Already!

About two weeks back I was interviewing a potential Buyer client. He had found me through one of my blogs and said that he had liked what he had seen about my real estate investing philosophies here in the Kansas City area. I was flattered. But I was also growing leery of his motivation.

His motivation to actually buy a property, that is. It seemed that he had read the books I recommend along with half a dozen others. He had been to workshops and seminars that I've never even heard of. He was member of both investment clubs here in Kansas City. Had an LLC. Had an accountant. A lawyer was all lined up. So to was a property manager. Mortgage guys had been interviewed. There was even someone he was considering hiring as a mentor.

And all this had only taken him three years.

Now, I am big on setting goals before you get started. Knowing your criteria for a good income property is a must before I'll go out and show you any homes. Pre-qualification/pre-approval a necessity. But come on. Do you really need the whole "team" together before you get started on your first property?

I am not pooh-poohing preparedness. Far from it. But this is a classic case of paralysis by analysis. Always preparing and never acting. Sooner or later don't you have to buy a property to be a real estate investor here in Kansas City...or anywhere for that matter?

It was my advice to this would be real estate tycoon that he really focus on purchasing his first income property in the next few weeks or months if he wanted to get his business off the ground. I would help him to evaluate neighborhoods, properties and incomes. But he needed to actually commit to that before I would go to a great deal of trouble. After all, when you hire me to be your Buyer's Agent, you are hiring a professional real estate agent who can navigate you through the benefits and mis-steps of owning rental properties. This is what I do. Here are references you are welcome to check.

We had a great conversation. It lasted about 45 minutes. He left very enthused and looking forward to emailing me his criteria and pre-qualification letter. He was really ready, this time, to buy an investment property.

I'm still waiting for the email.

If you are the customer of which I'm speaking and you read this and you think I'm speaking of you, you may be right. Don't think for a moment I am minimizing your efforts or your dreams. On the contrary I want you to act on them. I hope to hear from you, or from anyone else reading this blog who fits that mold, very soon.

One last comment on this topic. Johnson County has appreciated about 3.85% (average) over the last three years. That $200,000 duplex he could have bought in 2004 would now be worth $224,000. Is this a good decision?

Thursday, April 19, 2007

Market Cycles, Vacancy Rates & Your Income Properties

I'm not very good at fortune telling. I tell everyone my crystal ball is cracked. Want proof?
I bought a house in Suburban Maryland when the market was down. I purchased it for $8,000 lower than the previous buyer had paid for it. 5 years later I sold it for a handsome $44,000 appreciation. It sold for $142,000. The highest price ever for a townhouse in that community. Boy! I really knew what I was doing.
Er, no I didn't. 4 years later that neighborhood was selling in the $390's. Now, with the real estate slip on out there you could probably pick it up in the $330,000-$340,000 range. (But the lady that bought my house has "lost" $60,000 in equity over the last 10 months. Never mind that she has really "gained" $200,000 in 5 years. A little better than my $44,000.)
I don't tell you that story to discredit myself. Only to say that when you are working with real estate anything can happen. When you are purchasing income property you need to base your numbers on today. Does the property hold it's own today? Don't bank on future growth to cover your negative spread. Use the future equity growth to create your wealth.
Use today's cash flow, principal reduction and depreciation to pay for the property and to begin building that nest egg. Count on those three and you can't go wrong.


The Value Of A Good Home Inspector

This is a special thank you to a home inspection service here in the Kansas City area that I use and recommend regularly. In fact, he sometimes contributes articles here on BBQ Capital.

I have a current client that has some 1031 exchange money that needs to be "identified" by no later than Friday. Because of this we are looking at which property is more profitable that the other, which is in better shape, which has fewer oncoming headaches, etc.

Anyway, while we were deciding on which houses to make final bids on he was kind enough to come out and just look at a few issues we had without yet doing the full inspection. Obviously, we paid him for his time and travel. But getting him to come out and look at a few concerns helped us to get a better idea as to which properties to pursue.

Wednesday, April 18, 2007

Skepticism and Real Estate Investing

It seems the real estate industry has caused some problems for itself with it's non-stop touting of real estate investing, er speculating, these last few years.

First, you need to know what real estate investing is. It is the acquisition of property based on sound financial analysis with a target return in mind. Usually I recommend a cumulative return (from the 4 Benefits found in the right side bar) of somewhere in the 22%-26% range. If you have a sound criteria and the property does not fit, don't buy.

Real estate speculating, on the other hand, is buying property banking on the fact that it will appreciate high enough and quickly enough that it will exceed your poor decision making. (Sorry, do I sound negative?) This is what was going on when people were purchasing condos off the plan, selling them 3 months later, and in turn those people would sell them 3 months later and so on until there was no way left for people to be able to justify the expense of personal living or the returns it would make as a Buy & Hold property.

I bring all this up because a blogger here in Kansas City linked to one of my blogs and turned the title into a negative. I left his link there. And it should be said that I read the blogger on occasion. And I'm really not even mad at him. To an extent, his perception of real estate investing is based on what the TLC and Home & Garden channels, the National Association of REALTORS and a whole lot of real estate "gurus" and agents have been saying and doing.

By way of his comments section I have invited him to debate the issue. There is an education process that needs to take place across Kansas City and this country about what real estate investing is all about, when it's appropriate and when it's not. I welcome the debate with any of my readers. (As long as it's based on merit, not emotion.) Heck, Kansas City has been considered a "city of concern" by the FBI because of all the fraudulent real estate transactions that have taken place here. Even by city councilwomen and men running for congress.

This blog is set up to be a real estate discussion. And your input is always appreciated. Hope to hear from you.

Tuesday, April 17, 2007

Virginia Tech Is In My Thoughts & Prayers

Please keep the victims and families of these kids in your thoughts and prayers. God Bless.

Monday, April 16, 2007

I Have $35,000 for Rental Property - Now What?

Coming to me with $35,000 to start your real estate investment career is terrific. Let's just see what we can do with that money.

How about we take it and split it in two? We'll buy a couple of Waldo area homes, put 10% down, run mortgage payments (with escrows) of about $725 and we'll get rents of about $775. Not great cash flow. In fact, pretty dead even. So why do I want to to that?

Currently your $35,000 is sitting in an IRA or CD or stock. Let's give you the benefit of the doubt and say you are earning 8% on the money. That is a $2,800 gain for the year. Heck, I'll take it if you don't want it.

But now let's look at that same $35,000 in the above scenario. Remember, there are 4 Benefits to investing in real estate (see side bar) and we are only going to talk about the appreciation factor here. Not Cash Flow Before Taxes because it's minimal to nothing here. Not Principal Reduction even though that can really add up. Not me you'll love me at tax time. We're only going to discuss the Appreciation benefit.

With that $35,000 you should have leveraged yourself into about $200,000-$225,000 worth of real estate. So let us take the smaller number of $200,000. Historically, Kansas City real estate appreciates at about 5% a year. But I believe we'll have another flatish year at 2%-3%. Again, let's use the lower number of 2%. $200,000 x 2% means a $4,000 increase.

"Well Chris. That's only $1,200 better than the return I was getting in the stock market."

You are right. And couldn't be more wrong. Remember, we are only calculating ONE of the 4 Benefits of owning residential investment property. Remember, we didn't fully leverage your capital. And remember, we are in a flat year of real estate growth. What happens if it really takes off, again? (And quit talking to me about dips in the west and east. We didn't get the growth they were getting so why do you think you'll get those dips...ALL REAL ESTATE IS LOCAL!

Your thoughts?

Sunday, April 15, 2007

Four Duplexes in Kansas City Area For Sale - All Good Choices

Right now I'm pretty excited about the market here in the Greater Kansas City area, at least where investment property is concerned. Over the course of the last 4 days I have found 4 duplexes that rate "Buy" in my opinion. Two happen to be in Blue Springs, the other two are in Olathe.

The really nice thing about these four income properties is that they are all over the map as far as growth and cash flow are concerned. The smallest on in Blue Springs would have excellent cash flow with as little as 10% down on about a $120,000 purchase. Good to great growth can be had on the $240,000 duplex in Olathe and it will hold it's own with 20% down.

Should you have some cash languishing in a non-performing stock or gaining modest interest in your 401(k), we really need to talk. Retirement is just around the corner...or could be.

Friday, April 13, 2007

Working With A Coach While Investing In Real Estate - Just Run The Play

Coaching. You've heard the word. The first thing that comes to most people's minds is a sports coach. Someone who leads, trains and calls the plays.

That's what I do.

Yes, I'm a real estate agent. And yes, residential investment property is my specialty. Truth be told I look at myself as an investment counselor. You tell me what return goals you have in mind, how much credit and cash you have to bring to the table and I'll be able to tell you what your expectations should be. Where in town you should invest. What property manager to hire. What type of tenant you will attract. And what your returns both in cash flow and appreciation will/should be.

Remember that when you are hiring me you are hiring a professional that knows his business. I can provide references to check out. Transaction history to review. But ultimately, you have to be recruited to my team. You have to trust what I teach you. You have to run the plays I call. How successful is the basketball player who constantly questions the coach he's playing for?

When choosing your coach keep this in mind. It should be the goal of any coach to succeed. To win. To accomplish the goals that are set out. It should also be the coach's job to train and motivate. To someday see his "players" do better than he did. To go on capable of doing so without him. That is true success for the coach. And everyboy wins.

Thursday, April 12, 2007

Keeping An Eye Out For Great Investment Properties

Keeping an eye out for sharp investment properties takes discipline, experience and a keen knowledge of what today's renters are looking for.

Make no mistake about it. When you own rental property and you have a vacancy you are competing against all of the other vacancies out there. Your prospective tenants know this and are looking for a lot of the same attributes for their home as a home buyer would be looking for theirs.

Today I had the chance to get out and see 11 properties. Obviously, I was most impressed with the properties my buyer was impressed with. We liked the same things. Clean, freshly painted walls, newer roofs, structural integrity, proximity to conveniences and work zones, free flowing floor plans and well maintained and groomed exteriors.

And you know what? The homes that fit the above criteria were priced remarkably similar to the houses that didn't meet any or all of those standards.

Some home investors are in a position that they are looking for "distressed" properties that they can improve and have some built in equity. But many of my buyers are working professionals with busy lives. They are looking for turn key properties that are not going to have a lot of future maintenance issues.

After finding and identifying the proper home candidates the next thing to do is sit down and figure out going rent rates for each unit and their corresponding expenses. From that point, it is very easy for me to package a home up for the right buyer.

Not every buyer wants or needs the same thing. Not every house will fit every buyer. My job is knowing the differences and where to apply them.

Tuesday, April 10, 2007

Demystifying Real Estate Investing - Learn From The Right People and Keep It Simple

Tonight I had the pleasure to speak before 120+ people at the MAREI monthly meeting. I was received warmly and I had a great time. There were many different real estate investing philosophies in that room and I'm sure many differing opinions as to whether I knew what I was talking about...or not.

And isn't that funny? I realize that my particular brand of investing for my future (and guiding you to do the same) isn't for everybody. In that room there were people taking notes. And there were people nodding off. Here is my hope, however, for each and every person I have the honor to discuss real estate with: That you have a retirement goal that you are working towards and that you have the guts to step out and make it happen.

Knowledge is something that is ongoing. I never stop searching for those wiser than me in my particular discipline regarding investing in real estate. But in concert with knowledge is something called Action. One without the other is simply wasting your time...and probably your money.

Anyway, I need to move on. It just gets me all worked up. :)

Here is a link to an interview by Liz Strauss of a gentleman that I speak of often here on BBQ Capital. If you want to get your thinking straight about long term real estate investing then I would hope you would take the time to read it.

Quick Note

Sorry about the lack of a really great post today. I've been out showing all day and dealing with a closing that just never ends. (And people think real estate agents are paid to sell houses. We're paid to get them closed!)

Anyway, hope to see you are MAREI tonight! Stop by and say "hi" if you are a regular BBQ Capital reader. Judging by my stat counter, there are quite a few of you.

Monday, April 09, 2007

Monday Morning in Kansas City

Just a few thoughts on this cold Monday morning;

  • It's hard to take the scientific proof of global warming seriously when we here in Kansas City have suffered through the coldest winter I can ever remember here. It's been below 33 degrees for each of the last 4 evenings. Out east they had a White Easter. What is going on? (Actually, I've read this is a result of GW.)

  • Staying with the global warming theme (and I'm not saying it's fact...but very well could be) I believe there is no reason for us not to be doing more to conserve the earth's resources. If we can do better we should. Take a look at this link. Apparently the technology is real and it is there to cut energy use drastically. Johnson County tax payers even benefit from it. Why are we not using it more? Smart growth is more than zoning. It's also energy use, aesthetics, healthy.

  • Tomorrow I will be speaking at the MAREI monthly meeting. If you are wanting to find out more about Buy & Hold real estate investing then you will want to be in attendance. I'm going to break it own for you so that you will know what to buy.

  • Speaking of Kansas City real estate investing make sure you read Sunday's Kansas City Star. Yet another article of crooked people doing crooked things. You may think you know what you are doing when it comes to real estate investing, but are you sure? These people lost tens of thousands of dollars and ruined their credit. But hey! They saved the REALTOR fees!
  • The Kansas City Royals are off to a 2-4 start. This has ruined my hopes for an undefeated season.

  • April's issue of National Geographic has a great feature on the Flint Hills of Kansas. Beautiful photography (as always) and well done.

Thursday, April 05, 2007

Investment Property Analysis Doesn't Have To Be Complicated

People love to complicate things. Especially the gurus. After all, they do have two hours to fill when they are trying to convince you to purchase their book and tape systems. Knowing your investment property has profit potential is very important. Measuring it against every other property within a 20 mile radius, isn't.

Again, there are 4 Benefits to investing in real estate;

  1. Cash Flow Before Taxes
  2. Principal Reduction
  3. Depreciation
  4. Appreciation
You hear about cap rates and gross rent multipliers and internal rates of return and the list goes on. But figuring your total rate of return doesn't have to be rocket science.

Figure your 4 Benefits and their total revenue and divide that by the amount of cash you have invested. There is your return. Then you can compare property to property.

Or, you can do what I hear so many of you do. Put down as little as you can on the purchase and trust that the rents will cover the house payment along with escrows. If that works then buy it! (Not necessarily the strategy I recommend. But it beats not doing anything at all. So long as it works out...)

Wednesday, April 04, 2007

Homes for Sale in Olathe, Kansas: Homes That Are Really Moving

No. That headline is not hype or a sales gimmick. But it could read Overland Park, Kansas City, Leawood, or Rockville, Maryland. The facts are the facts. If you price your home correctly, it will sell.

There is absolutely nothing wrong with the current real estate market in and around Olathe, Kansas. It's true that we are not experiencing 8%-10% growth right now. It is true that we have more sellers than buyers right now. And it is true that the mortgage money has gotten a little more difficult to get right now. But, hey, do you remember the late '70's and mid '80's? That, my friends was a tough, tough real estate market.

The Truth About Selling A Home In Olathe Right Now

  • Pricing...and condition are king (they MUST be in relation to one another)
  • Inventory is your neighbor selling his house is now your competitor
  • Just because you refinanced to take a trip to the Bahamas doesn't mean your buyer wants to pay for it
  • If you owned your house for 3 years or longer you made money on it 99.9% of the time
  • Forget about 2 years ago...concentrate on here and now
  • Work with a professional agent and they will help you get your home sold

The Truth About Buying A Home In Olathe Right Now

  • Inventory is up so you have a wider choice, and a little more time to make your decisions
  • Sellers are not giving homes away - the market is slower, people haven't lost their minds
  • You are likely to do very well negotiating extra issues like warranties, repairs, condition, timeliness of closing, closing costs and treats like appliances, gift cards, etc.
  • Experienced or "wired" agents will know through networking which houses might be a little more of a good "deal" than others
  • While most sellers are not desperate, there may be some good foreclosures out there and if you have a little extra capital for repairs you can build some great sweat-equity

Folks, many people think and say we are in a bad or down market. The truth is, historically, when there is a 6 month supply of houses on the market for sale we call that "in balance".
It's just that so many people

  • Got used to hearing stories about what was happening on the west and east coasts
  • Came into the market in the last 5 years and thought that was the norm because they had little experience in any other kind of real estate market

Interest rates are still great! Ask anyone 44 or over about 17%, 19% or even 20% home mortgages. And yet, people still moved and still bought homes and still sold homes.

Monday, April 02, 2007

Real Estate Investing in Real Life: After the Bubble

Identifying The Problem

The real estate bubble on both coasts has deflated. You have property worth about 95% of what it was just a few short months ago. You're looking in the mirror and asking yourself how you are going to cover the spread between what your investment property is costing you and what the actual rents are. You've just realized, or maybe you knew all along, that you weren't a real estate investor. You were a real estate speculator. Now you have to change gears and come up with a formula to hold on.

It will take hard work on your part. Maybe some creative financing and a little bit of luck. Lease option purchases, owner carry-backs and value added services may be needed for you to cover the negative cash flow spread you have created for yourself. Possibly even <gulp> a realization that you will need to liquidate some of your personal belongings to make good on your word.

But here is the deal about real estate investing. (Because that is what you are now: a real estate investor. You have properties that won't sell for what you have in them so now you have to hold them, manage them and bide your time until the market catches up or exceeds your debts so that you can liquidate or exchange them.) At no point in American history has real estate failed to exceed previous high values at some point in the scale. It may take 2 months or 2 years or 10 years. But eventually the market will rebound. The buyer's earnings will catch up and demand will exceed supply. Real estate is cyclical. And you need to remember that when things are tough.

Get rich quick is what got you into this mess. Self discipline and sound real estate investing fundamentals are what is needed now to get you out.

And lest you believe that this phenomenon was limited to California, Florida and Washington, DC you need to realize that people here in the Heartland got caught up in some of the silly financing that came from out west. 103% investment loans, zero down on negative am loans and the like. Again, if you find yourself with property not worth what you owe you are going to have to get down and get serious about learning the fundamental principles of owning and managing rental properties.

Working Your Way Out

The first thing you are going to need to do is block some time out of your week to learn about real life real estate investing. You need to know how to figure Gross Rent Multipliers and Cap Rates and Total Returns. You need to completely understand the 4 Benefits of Owning Investment Real Estate. You need to study your property in relation to it's setting. What are the competing rent rates? Vacancies? Is your property vacant? If so, what will it take to get it to rent for top dollar? If occupied, how much longer is the lease term? Would they be interested in increasing the monthly rate in return for an option and/or credit to purchase?

You need to start reading from informed investors who have been through the market cycles before. You may need counseling from a professional real estate agent that works with investment property. (I heard a quote the other day that made me laugh out loud...."why would you turn your hard earned capital over to an agent handing out refrigerator magnets?")

Does your spouse work? If not you may need to speak to a professional tax consultant about the passive loss rule that can help to offset some, much or even all of your losses.

You need to get serious about your predicament and figure out a means to get through these times. I recommend reading Building Wealth One House At A Time by John Schaub. I recommend not listening to anyone that does not either own or work with investment property. I recommend not watching late night television and spending your money on investment systems that simply do not work in the real world. (If I had a dime for every time a new investor wanted me to take some absolutely ridiculous offer to my seller I could retire right now.)

Avoiding The Problem In The Future

Now that you've been through a good portion of the real estate cycle you may be more wary and wise about real estate in the future. Rather than purchasing a home with marginal (at best) numbers you will hold on to your hard earned investment capital until you find a property that better meets your criteria. You'll go ahead and learn about 1031 tax deferred exchanges now instead of waiting till the last moment so you will know how to hang onto your equity when the time comes.

You will hunker down and really learn the fundamentals of profitable real estate investing.

Should you have any specific questions or comments I would love to hear from you.