Saturday, June 30, 2007

How Much Money Will I Need To Reitre? Retirement Calculator

From our friends over at CNNMoney is this link to a retirement calculator.

Real estate investing can help you to achieve your Retirement Worth Having. But how much money is that going to take to mix in with your personal plans?

Real Estate Investing Equals A Retirement Worth Having

Are you one of the millions of Americans trying to figure out how you are going to have a Retirement Worth Having? Why not think about small time real estate investing?

I'm not talking about committing hundreds of thousands of dollar and every weekend of your time. I'm talking about owning one, two, five or maybe as many as ten homes for investment purposes. Too hard? Well, start with one. If that does it for you move on to another. When you reach your limit, you'll know.
But here is what owning just one income property can do for you over the next fifteen years of your life. And if you think that is too long, how old are you and what is your life expectancy?
This example will not be all inclusive and I simply don't want to write 10,000 words showing how I arrived at all of this. You are welcome to call or email for details.
Buy $175,000 duplex with 25% down at 7.12% interest. Monthly rents at $1,475. Now, I'm going to take into account 5% vacancies and other expenses like insurance, taxes and general maintenance. Also, there will be 5% risers on the income and property value figured in. Here we go;
Year 1 - Income of $17,700 minus expenses of $6,800 minus debt service of $10,608 equals $292 yearly income. House value still $175,000. (To account for slow growth this year and as a cushion. - Hey, I'm being ultra conservative here to make a point.)
Year 5 - Income of $22,500 minus expenses of $8,315 minus debt service of $10,608 equals $3,577 yearly income. House value is now $210,000.
Year 15 - Income off $34,500 minus expenses of $13,750 minus debt service of $10,608 equals $10,142 yearly income. House value is now $319,500.
Note: There were a couple years in there I did not count or did not count in full 5% risers. Again, just being conservative.
So let's look carefully at this. And we are not going to discuss all the 4 Benefits that we know we have when investing in real estate. We are only going to consider the net equity of the house after 8% sales costs. (You know, the real estate agent, title company and the like.) We're not even considering the cash flow you had and can see for yourself. Because you probably spent that on your kids' education or a BMW or another rental property.
House value is now $319,500 minus the $25,560 in sales fees minus the remaining loan balance of $97,600 equals $196,340.
Chris, what about capital gains taxes? What about state capital gains taxes? What about, what about, what about?
To be fair, cap gains taxes are 15% for the feds and vary state to state. But you want to count those? Okay. But to get the details you also need to go back and adjust your yearly income by adding in depreciation. Ah, oh. Now we have depreciation recapture to worry about.

Listen, there are a lot of things going on here. This is an overly simplistic way to get you to stop and think about your Retirement Worth Having and how real estate investing can be a valuable tool in the box. Obviously, you are going to need to work with a professional to counsel you through the landmines and pitfalls to maximize your benefits.
Just stop though, for a minute, and think about the retirement you want to have. How will it look? Where will it be? What amount of money do you need to make that happen? Would another $196,000 help?

Friday, June 29, 2007

Congratulations Julian Wright Out of Kansas

Congratulations go out to Julian Wright out of Kansas University. The two-year Jayhawk out of Chicago becomes another Kansas millionaire.

Of course, the NCAA in it's infinite wisdom will count Julian against Kansas' graduation rates. After all, in their eyes it would be better for him to get his diploma so that he can earn $43,000/yr rather than the guaranteed $1,449,300 he'll make this year, the guaranteed $1,558,000 he'll make the next season and the contracted additional $3M plus he'll be eligible for in years three and four.

Yes, I know this has nothing to do with Kansas City real estate or real estate investing and there is the possibility Missouri fans will hate me...but I do love my Kansas Jayhawks.

Two New Real Estate Links Additions

I've been reading these two blogs for a while. And I'd like to make sure that you are aware of them. Add them to your RSS like hopefully you've added mine.

Subscribe in a reader

Realtor Wives
A great read from a non-real estate agent. Though she does have an interest.




Lenderama
I've been invited to contribute to this blog concerning the interests of the mortgage professionals out there.



I would also like to take a minute and copy Realtor Wives' sentiment and welcome fellow Kansas City real estate blogger Rebekah Herzog to cyberspace. There are so few of us here in KC, compared to the rest of the world... Now, she works for the competition so don't like her too much! :) But I think it will be great to have another voice out there.

A-Team Construction: Thank You

In Wednesday's post I wrote about how inspections and repairs can lead you down roads you didn't know you were going to go down. The same can be true when the repairs aren't done to the workman like quality that they should be.

I just want to give a special shout out to A-Team Construction and specifically Stan Withers who bailed me out on such short notice.

On the re-inspect some of the repair items were not done or not done in a quality fashion. And this with less than 48 hours to go. Without the help of Stan we would not be closing on the home an hour and eleven minutes from now.

You can reach A-Team Construction at 816.835.2248. They do basement and kitchen remodels, design and build, and commercial tenant finishes.

How is that for a free ad in return for great, last minute service?

Wednesday, June 27, 2007

Pandora's Box: Real Estate Inspection Negotiations and Repairs

I am fully aware that there are readers of this blog that believe selling real estate is no big deal. And in the hotter market earlier this decade and on the right transaction, you were right.

But I've always said this: "I don't get paid for selling a place so much as I get paid for getting it closed."

Right now I'm in the middle of a transaction that has been one thing after the other on the repairs. What started out as a simple repair has uncovered safety issues, code violations and antiquated equipment for which the parts could only be found in one place.

Of course, locating the parts was no easy task and the shipping of them to make the closing deadline is as expensive as the parts themselves. In the grand scheme of your life, the few extra hundred dollars the repairs are costing are small in comparison. But when you first learn you are going to have to spend those dollars emotions can boil to the top.

Real estate agents can bring experience and trained negotiating skills. They can know when to negotiate and when not to. (Yes, there is a time not to.) Real estate agents bring knowledge of markets and market trends.

And one of the most important things and agent can do is bring his experience as a filter. A liaison if you will. Turning a "$%^& NO" into a "here's what I think we can do about this." An agent can be the calm in the storm. The clear thinker.

Think about that.

Tuesday, June 26, 2007

Kansas City Star Report On Housing Condition

From today's Kansas City Star: KC faces housing surplus

It's worth your time to make the jump to see a market report based on numbers. The most interesting paragraph in the article is this;

Overall, the Realtors reported that it was still a buyer’s market for new homes in greater Kansas City, with a 8.8-month supply available at the current sales pace. The market for existing homes was more balanced with 5.8-month supply at the current sales pace. The inventory-to-monthly sales ratios for new and existing homes were at their lowest levels since August.

Folks, we've been spoiled. A 5.8 month supply of homes has always been considered balanced. We are back to the future. Price your home realistically and let your real estate agent do his or her job...assuming you picked the right one.

When Real Estate Agent & Rehab Investor Meet There Will Be Frustration

An ongoing conversation in the field of real estate investing is the working relationship between the real estate agent and the rehab investor. Or flipper as some of you would say. Christopher Smith of Equity Scout wrote an article titled Realtors and Investors :: Are you speaking the same language?


First, let me just say that Christopher Smith is probably one of the best bloggers out there on his subject. I love his stuff and the thinking he makes me do. Christopher is an investor. I am an agent. So I answered the post with my own titled Real Estate Investor vs. Real Estate Agent: What's A Quality Investment Property? In a great many ways I think my post supported his.

Last night I received yet another comment on the post. A recurring theme in the ongoing relationship between agent and rehabber. Frustration.

Rehabber's Point of View ( I believe)

The rehabber needs properties with enough margin between the ARV (after repair value) and the acquisition costs for him to successfully rehab the house AND cover his acquisition costs AND cover his carrying costs AND to make a profit.

Real Estate Agent's Point of View

Many newer rehabbers will try to rely on real estate agents to find them. Good luck. I've said a million times over the phone that there is not a search I can do for houses that are for sale for 45%, 50% or 60% of ARV. If, on occasion, I stumble across one that the listing agent wasn't smart enough to buy for himself I will either move on it myself or reward one of the rehabbers already on my list.

The rehabber turns to the agents because if he can get the agent to find these homes for him (rather than doing what successful rehabbers do and that is find the houses themselves through obituaries and NODs) then his job is easier.

The agent (the newer ones anyway) like the idea of working with these rehabbers because they will sell 8-10 houses a year to them, guaranteed!

Well, probably not. The agent will spend hours upon hours searching through the MLS and previewing homes they THINK will work because they do not fully understand the business of rehabbing. Then they will take the rehabber out on tour.

The rehabber gets frustrated because the agent isn't understanding him and not showing him properties that he can make a profit on. Not when the pencil and paper meet. (Or worse, he doesn't do the pencil and paper and is a candidate for the next NOD.)

The agent, after showing 20 houses and many sleepless nights covering the MLS, finally says "I'm not working with investors because they are never happy and never buy anything."

The rehabber says "Agents don't want to work with us because all they care about is a quick commission."

Neither side is fully right. Neither side is fully wrong.

For me and my business, I work with mostly Buy & Hold real estate investors. I do have a couple of clients that rehab properties. And like I said earlier, I have a hard enough time finding them enough to keep them satisfied throughout the year. And by satisfied I mean I find them 1-2 a year. I do that for a couple different people. That's about it. And I KNOW what a rehabber needs. There just aren't many out there.

The relationship between real estate agent and rehabber can work. But both sides need to fully understand each other, their motivations, their criteria and the results they expect.

Monday, June 25, 2007

Nothing To Do With Real Estate or Investing

This post has nothing to do with real estate or investing. In fact, it has nothing to do with Kansas City. Rather, it's simply to point out that once in a while evil lawyers can be defeated with their own nonsense.


I guess this attorney should have hired Alan Shore.

Real Estate Investing Q&A : Personal Stories

Today I would like to fully introduce you to a real estate investor client of mine even though modesty on his part has restricted me giving you his full name. I have worked for Al S. for a little longer than a year now.

When you read his answers to these real estate investing questions please notice that his whole economic picture today is more comfortable than most people's. And he didn't own hundreds of income properties. In fact, he owned fewer than ten rental homes.

Q: How long have you been investing in real estate? 50 years.

Q: What made you purchase your first house? Upon being discharged from Air Force after the Korean War I got married and used the GI Bill to buy a duplex and lived in one side. The tenant advised me that I should not buy the place because it was a dump and not worth the price they were asking. Well, he bought the dump for me with his rent payments and I moved up to a nicer dump while he remained living there paying rent for many more years.

Q: Did you know what you were doing or did you just jump in? Owning rental income property runs in my family. My dad supplemented his seasonal job with income from rental property income. My brother and sister also became involved in rental properties. Both of them have been more aggressive investors than I. My sister owned a city block of rentals in New York and my brother owned several nice Westchester New York properties. Both have since divested their holdings to spend more time traveling.I am also in the process of doing the same.

Q: What has been your biggest headache over the years? Not buying more properties. Like the saying goes "Get lots when your young".

Q: Were there months you were worried you would not have enough money? Fortunately by picking good properties and selecting good tenants the cash flow was usually enough to cover expenses. There was one occasion when a property I purchase with owner financing at 7% had a 5 year balloon payment due. Refinancing rates had climbed to 19 % at the time the balloon payment was due. The rental income would not support such an interest rate so my offer was to let the former owner take the property back. He thought that he would prefer to continue collecting 7% for another 5 years as better deal for both of us. When the next balloon date arrived, interest rates returned to a reasonable level allowing me to refinance through a bank.

Q: Name your biggest reward over the years of your investing. Good cash flow; good appreciation; good tax shelter to save income taxes on my day job ; plus providing a goods service to good people in need of a good place to live.

Q: Did you realize what your income properties would be worth some day? There was always the fear that property values might drop as well as the wish that they would go up, up and away. Just like any other risk-reward adventure there is excitement in taking the risk. Real Estate has been one of my better investments from both a financial as well as a feeling of personal accomplishment. My other investments, such as stocks, have had some financial results but lacked the personal feeling of accomplishment because the results were the actions of others. Owning,managing and controlling an entire investment, like a real estate investment, is an entrepreneurial adventure.

Q: You chose to just liquidate your properties. Why did you decide to not utilize the IRC 1031 tax deferred exchange? 1031 exchanges are a good tool to use to make full utilization of sales proceeds by delaying the tax consequences to a later date. But like the saying goes "you can pay Uncle Sam now or pay uncle Sam later, but you will pay Uncle Sam." I chose to pay Uncle Sam now and taking what was left over to enjoy traveling and eating good meals while I am young enough to do so.

Saturday, June 23, 2007

Duplex For Sale In Blue Springs, MO - I Really Like

While scanning for real estate investment property that make sense I came across two duplexes in Blue Springs, Missouri that are for sale. They have to be sold as a package.

I have a client with a duplex right down the street so I am very familiar. Love the neighborhood. Attracts good tenants and has good vacancy rates.

Contact me to find out more about these two income properties.

Friday, June 22, 2007

This Explains A Lot

According to this link from Yahoo! I really am smarter than everybody else. Er, check that. At least smarter than my siblings. Er, well, I'm the smartest in my own mind... :)

Now the next thing you know they are gonna find is that Kansas Jayhawks are smarter than Missouri Tigers. Start the hate mail, now.

Kansas City, Missouri Rental Licensing

I received this email from KCRAR. That's Kansas City Regional Association of REALTORS. I am in full agreement that we do not want, nor do we need rental licensing in Kansas City, MO for investment property owners and/or their rental properties.


Now, I'm not for slum lords, either. So as you read this be sure to understand that most of my clients keep clean and relatively updated units in operation and available to their tenants. There are already measures that could be put in force to make sure tenant living quarters are safe and clean. Use those.

And before KCMO decides to go after the landlords, why don't they first go after themselves. I've never seen a more disorganized and incompetent housing authority in all my life as the experiences I've had with the Kansas City Housing Authority. I guess they want landlords to do what they cannot. Hmmmmm.


The Kansas City, Missouri City Council is considering a proposal to create a rental licensing program for landlords in KCMO, including registration fees, inspection requirements, and other costly and cumbersome regulations. KCRAR opposes such programs, as we believe they unfairly target investment property owners, do very little to address the problem of blight in neighborhoods, discourage investment in rental properties, and increase the cost of housing to lower income tenants who are most at risk of losing their shelter.

Please help us fight this proposal by contacting members of the Kansas City MO Public Safety and Neighborhood Committee and adding your voice to our opposition.

Thank you.

Send a letter to the following decision maker(s):

Council Member Cathy Jolly
Council Member Cindy Circo
Council Member John Sharp
Council Member Melba Curls
Council Member Sharon Sanders Brooks

Learning From The Past: Moving Forward

Real estate investing can be a humbling business. Stray to far from sound economic guidelines and sooner or later, it seems, you will pay the price. Then what do you do?

Another real estate agent from Nebraska and I were speaking through email last week. He had been burned big time by his real estate investing endeavours earlier in his life. When the Carter/Reagan years hit he lost everything...including his word as he had to file for bankruptcy.

In his early years it came easy and he continued to expand his parameters on what risk he would take on. When inflation shot to 18% he was doomed.

He wallowed in doubt and self pity for a while. Then took a hard look around. He was 41 years old without any formal secondary education and just a real estate license. There were no high paying surgeon jobs out there for people without medical degrees and the same was true with most professions he thought about.

Finally, he set back on the bath of building wealth through real estate. "A common man's vehicle" I think he said. It was tough. Every time he gathered a little money he would buy something else. This time however every property had to pencil. And pencil with conservative numbers.

No overnight success stories. Just 22 years more of hard work, balancing acts, tough choices and self-denial. And yet, here he sits. A millionaire again.

We all get slapped in the face once in a while. What are you going to do about it? Quit?

A former United State Marine once told me, while I was wallowing in my own self pity, "FIDO, man."

Forget It. Drive On.

Thursday, June 21, 2007

I'm Confused

I have to say I'm a little confused. I keep hearing on the television and some other real estate agents that the housing market is slowing down. Why am I getting busier? Oh, I'm not complaining. No, no, no. I'm just saying that it seems to getting busier, at least for me.

***

A fellow agent of mine let me know she has a developer out in Shawnee that is going to be releasing 95 (I think that was the number) build able lots this weekend. If you are a builder or investor interested in such a project, let me know.

***

If you are looking for homes that can be purchased at 50% of ARV, please no more calls. I have enough people on my list unhappy with me as it is. Folks, these properties don't grow on trees. Now if you are looking for Rehab & Hold properties or rental homes or longer term investment properties...opportunities abound. Buy & Hold real estate investing is where to go, now. The short term gains are tougher to find.

Wednesday, June 20, 2007

Great BBQs of Kansas City

Hey folks. There must be 200 BBQ's in Kansas City. Or Bar-b-q's. Or Barbeques. See how confusing it can be.

Anyway, here is a map to my favorites. Now, if you aren't on the map all you need to do is send me a gift certificate for $25 to come try yours! :) Just kidding. It's my goal in life to get to as many as I can before I die. Of course, eating all that barbeque might make that come sooner than later.

But what a way to go. Anyway, these are places I frequent. Obviously, living in Olathe, the maps is skewed towards where I'm at. Anyway, ENJOY!


Depreciation And Your Rental Property

Yesterday over at my other blog on ActiveRain I authored a post titled How Are Your Current Real Estate Investments Going? To get background for this post it might be wise and go and read that post.


But the gist of the post was that if you've owned the same income property in Kansas City for 7 years or longer you are probably no longer maximizing your returns the way you should be. That in fact;
  1. You are no longer maximizing your leverage
  2. If you are properly bifurcating your depreciation you have already exhausted your personal property portion (with the exception of new personal property added)

Leverage was discussed there. We'll talk about your depreciation here.


Depreciation

Bifurcate is just a $10 word for cost segregation. There are actually 4 ways you can segregate your depreciation on your investment property;
  1. Land (which of course doesn't depreciate)
  2. Personal Property (over 5 years)
  3. Land Improvements (over 15 years)
  4. Building (over 27.5 years)
Most people are probably only utilizing #1 & #4. They are overlooking (or your accountant is) #2 & #3. But if you are maximizing your depreciation you can see that by year 7 you have already exhausted all your beginning personal property depreciation and 1/2 of your land improvements.

Why is that a big deal? Because if you have broken out your costs you will probably find that personal property depreciation accounts for between 40% - 50% of your yearly depreciation total. At least at first.

Now as you change carpet, appliances, lighting fixtures and the like you can start a new 5 year schedule on those items. But about 1/2 of your beginning depreciation number is now gone. It's not coming back.

In addition, you are also 25% of the way through your building depreciation. That investment property that used to give you overall returns of 22%-24% is now generating overall returns of 13%-15%. And it will continue to slide down from there. No matter how much your cash flow continues to build. (Well, there might be exceptions that I haven't seen.)

It could be that you just don't want to change houses or there are sentimental reasons you don't want to exchange or you are just happy with the money you have. But if you are still in the growth phase and you are looking to maximize that Retirement Worth Having, you may wish to consider sitting down with knowledgeable investment real estate agent or tax planner and figure out what to do next.

Kansas Gets Releford

This has nothing to do with real estate. But it's just as important. Bill Self of the Kansas Jayhawks just secured his first big time recruit for the 2008-2009 season. We're losing 5 seniors in 2008 as well as a couple (probably) players to the NBA. 2008-2009 will be young, young squad. But stocked with blue chippers? I hope so.


Congrats to Travis Releford and Bill Self. Keep the Kansas Basketball tradition alive!

Tuesday, June 19, 2007

Kansas City Homes For Sale :: News & Updates

Everywhere I go, when people find out I'm a real estate agent in the Kansas City area they ask me how the current real estate market is.

"How many homes for sale are there right now?"

"Are things as bad as they sound on television?"

"Should I try to buy or sell right now?"

All I can say is that in my opinion, the real estate market in Kansas City this year is pretty much the same as last year. Did you survive last year? Then you'll be fine this year. In fact, my earnings are pretty much even (slightly above) last year even though I've sold a few fewer units. Kinda strange, huh?

***

The house shown above is a house for sale located in the northeast section of Kansas City. Fully rehabbed and ready for a tenant or homeowner. The home is priced significantly below recent appraisals. Instant equity. It's not my listing but rather an investor is looking to move this house so they can move on to the next. Email at listwithchris@kw.com if you have any interest. I can give you details then.

***

Oddly enough, as interest rates are creeping up I'm seeing an increase in phone calls inquiring about investment property. I guess people are worried we might be heading back to the days where 7.25% to 8.25% was normal.

I'm not really sure most people realize how good we've had it these last 7-8 years.

Note to home owners under 35 years old: 5.0% - 6.0% interest rates are not normal throughout real estate history. And they may be gone now until you are in your 60s. Who can know?

***
Do you enjoy this blog? I'm constantly looking for input as to making more interactive and useful for you. Always feel free to leave a comment or send an email to let me know your opinion as to what I could do to make it better for you.

Saturday, June 16, 2007

Landlord Tales of Nighmare Tenants

This was found on MSN. I'm in a hurry and will read it later in it's entirety. But the overview looked like something of interest for this real estate investing blog.

Why should you hire a property manager?

Friday, June 15, 2007

Your First Investment Property

Yesterday evening Jeff Brown over at Bawldguy wrote a post titled Your First Real Estate Investment - Often The Most Critical. As always, it is an excellent resource for the real estate investor.


His title really got me to thinking. And while I agree completely with his post, especially since he mentioned Kansas City, the other side of his title should say something to the effect of how important that first property is that it doesn't run you out of real estate investing.

I love working with all real estate investors. But there is a special satisfaction with working with "newbies." They come all excited and are ready to purchase just about anything. An experienced investor I seldom have to say "WAIT!!!" to. But a newbie? I'm constantly talking them OUT of properties.

This may sound very self serving. But the whole experience reminds me of what gold-fever must have been like. At this time or your real estate investing career, having a professional's opinion matters more than ever.

It doesn't matter how much those rental homes will appreciate over the next 25 years using tax deferred exchanges if you buy an investment property that drains money from your grocery bill every month, has tenants that need evicting and other issues you never even considered. You'll sell, take your losses and tell everyone how hard real estate investing really is.

When what you really needed was a proper education, a professional consultation, and a clear head. Take this advice, tag it on to Bawldguy's post and get ready to go. We'll see you at the top.

News You Can Use

Midwest Airlines is being taken over by Air-Tran. As a Kansas Citian, this isn't good news. Midwest has been a good civic partner for Kansas City. Air-Tran? Can you say Southwest Airlines without any of the status?


***

The foreclosure market is at historic levels, on the high side. And look which states are causing the problem. We have quite a few here, but we are in much better shape in the Greater Kansas City area.

***

Hey St. Louis, I thought your baseball team was supposed to be better than ours. Kind of reminds me of 1985. :)

***
Congratulations to Jacque Vaughn of the San Antonio Spurs. Another Jayhawk gets a ring. I know Kansas has had Clyde Lovellette,Wilt Chamberlin, JoJo White, Darnell Valentine, Danny Manning, Paul Pierce, Kirk Hinrich and so many more. But Jacque Vaughn will always be my favorite point guard. A pure point guard and a perfect NBA backup. Plays 10-11 minutes a game without turnovers but with assists. What else could a coach ask for?

***


***

Newsflash. Slower sales mean higher commissions to your real estate agent. Why is this a surprise? When all you had to do to sell a home was put out a sign and wait 72 hours of course commission rates for real estate agents was going to drop. But now, when sales are slower and it takes a professional to get the word out about your home, of course commission rates are going to rise.

Why do people not think economic theory applies also to real estate? Same with the whole rising prices thing. Didn't we see this story a few years ago with the stock market? Learn people. Learn.

Thursday, June 14, 2007

Kansas City Events and Other Miscellaneous Thoughts


Kansas City's Rhythm & Ribs is happening this weekend. If you like the Blues, Jazz and BBQ, you might want to think about visiting Kansas City's historic 18th & Vine district. Pat Matheny, George Benson & Al Jarreau. Need I say more? See you there.



***

My son went down this really cool luge ride yesterday in New Zealand. Check it out.

***
I have a closing today. That's always an exciting day for everyone. My investor gets a sharp new property that will help them have a retirement worth having. (Especially these. Brand new townhouses for $108,900 that rent for $925-$950/mo. Eat your heart out California.) The builder sells another property which frees up money to build more. A tenant will get a quality home. And I get paid for my efforts. Everybody wins.

***

Just so you'll keep up to date: It's only 120 more days until Midnight Madness. What's Midnight Madness? It's when the NCAA allows college basketball teams to begin practicing. Ahh. Soon my beloved Jayhawks will be taking the floor again!

Wednesday, June 13, 2007

Conventional Loan v. Interest Only Loan For Your Income Property Investments

Today we are going to have a little fun with math. I used to hate math. But in my business now, math is my friend. So sit down. This post might be a long one.


As you know, I'm real big on knowing what the outcome of your 4 Benefits of real estate investing will be BEFORE you purchase an income property. And sometimes my clients like me to advise them on different financing options. So today we are going to compare conventional non-owner occupant financing with interest only non-owner occupant financing.

The first note to make here is that when you go with an interest only loan you immediately reduce your 2nd Benefit, Principal Reduction, to zero. So I'm not crazy about that. But is that a bad thing?

First we need some ground rules:
  • $175,000 duplex in play here
  • 20% down payment ($35,000)
  • Financing based on $140,000
  • 6.95% interest, amortized over thirty years
  • 5% appreciation (on average)
  • Rents are $1,500/mo. (not escalating)
  • Expenses are $6,920/yr and include property management, taxes, insurance, a healthy reserve fund and 5% vacancy
Conventional Financing

With the conventional financing for our sample rental duplex the monthly debt service will be $926.73. Or $11,121 per year. Plugging in our numbers from above we know that our formula goes something like:

18,000 GRI
6,920 Expenses
11,080 NOI
11,121 Debt Service
( 41) yr Cash Flow Before Taxes.

So the property is paying for itself. And that's great! California real estate investors would kill for these numbers. Same is true in Florida and Washington and New York.

At the end of the 6 year holding period we are looking at a investment property that is worth somewhere around $234,500. (Remember our 5% per year average appreciation.) So we should be thinking about an IRC 1031 exchange to re-maximize our leverage.
The Principal Reduction over these 6 years has been $10,317.

So when we measure only the first 2 Benefit we have a gain $10,071.

Interest Only Financing

With interest only financing for our sample duplex the monthly debt service will be $810.83/mo. Or $9,730/yr. Using the exact same formula from above (we'll start from the NOI) will look something like this:

11,080 NOI
9,723 Debt Service
1,357 Cash Flow Before Taxes

So now this property is generating a fairly substantial monthly cash flow. At the end of the 6 year holding period the house will still be worth the same as our conventional financing house. Let us take the 6 years CFBT and we'll show $8,142. We cannot add to that any principal reduction so the entire benefit from the first 2 Benefits only is $8,142.

So conventional financing wins, right? I don't really know. Only you can make the decision of which is better for you. I can tell you this, however.

If you were to take those same monies that you put down for a 80% ltv on your interest only loan and bought two houses with 90% ltv on interest only loans I bet you would find a completely different story.

Now that you know how to do it. Why don't you work out the numbers and let me know what you found.

Tuesday, June 12, 2007

Property Maintenance & Your Home's Value

This post if for home owners and investment property owners alike. You need to be keenly aware of how your home is perceived by others when it is on the market. I'm going to give a couple of stories to illustrate my point.

The "Regular" Home Owner

I was out over the weekend looking at some single family homes for sale here in Olathe, Kansas. The first time home buyers I was working with ended up selecting a very nice home that had obviously been cared for over the years. Fresh paint, updated appliances and lighting fixtures were just a few of the items that had been improved over the years. The landscaping is well maintained and there was little if any wood rot on the exterior (a very common happening here in the heartland).

The funny thing is the other houses we saw weren't horrible. They were clean and pretty well kept. But they were asking the same sales price as this home. And they didn't have all the updates. They did have some wood rot. There just weren't quite up to snuff.

The Investment Property Owner
Listen carefully Mr. Landlord. You are probably more likely to let your rental house go because "I'm not living in it." Well, yes. But your tenants, real live human beings, are. And here is where you are supremely short-sighted. The more run down your property becomes the more expensive it will be to bring it up to "sales standard."

Unless you just plan on discounting the house upon it's sale. But I have met few (any?) real estate investors who will actually sell a long term rental home under market, even if that's where it deserves to be sold.

I'm showing a duplex I have for sale right now and the seller requires me to be at all the showings. (He has had some bad real estate agent experiences before.) The comments from the buyers are consistently "this is one of the nicest properties we've seen." Now they may or may not buy. But they recognize the value of the property because it has been kept clean, in good repair and up to date.



Both the "regular" house owner and the income property owner need to know that most buyers are looking for a "turn-key" home to either live in or invest in. So for your own benefit spend a little money each year doing necessary repairs and having the house inspected for termites. Get the wood rot fixed as you recognize it rather than putting it off year after year.

Every once in a while change out a light fixture or two. Paint a room. Change the kitchen cabinet pulls to reflect today's tastes. These sound like little things. But consciously or unconsciously, buyers recognize the care.

Monday, June 11, 2007

First Time Home Buyers

I love working with residential investment property. But to keep myself fresh I also really enjoy working with young home buyers. Especially, first time home buyers.

This weekend I had the opportunity to work with a young couple that was referred to me. The excitement in their eyes and nervousness in their signature is something that always takes me back to my first house.


To the real estate agents out there, don't forget about this market segment. It reminds you of the pure joy of our business. To young home buyers out there, get started. People do everyday. It's scary. But it's doable. And if you manage your finances properly, you will find it tough to lose.

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For those of you who know me well you know my oldest boy is over in Fiji, New Zealand and Australia this month. To follow his exploits and those of his fellow student ambassadors just click here.

Saturday, June 09, 2007

Yahoo! Says Real Estate Sky Isn't Falling

What? A rational article from the "media" about real estate values? Congratulations to Yahoo! for using their heads.


I read a funny article in the USA Today a few days ago, that I believe I referenced, and they just couldn't say enough negative things about real estate. They were comparing real estate investing to investing in the stock market.

Never mind that they forgot to mention leverage. Or principal reduction. Or depreciation. But to each his own.

Kansas City isn't going through a negative growth period. In fact, many areas of Kansas City still have very fair to reasonable growth. A couple areas are doing very nicely, thank you. The sky isn't falling. Real estate was never as good or as easy as the media were making it out to be a couple of years ago.

And it's not as bad as they are making it out today. Just my humble opinion...again.

Friday, June 08, 2007

New Real Estate Links

Today I'm adding two very worthy sites to my Real Estate Links section. You'll want to add these to your reading.

RE Agent in Connecticut aka The Sock Puppet

REALTOR GENIUS

The 1% Rule When Investing In Real Estate: Is It Dead Or Alive?


Would you believe me if I told you there was a place on this planet Earth, right here in the United States, where the 1% Rule was still in play when considering residential real estate investing?

There is. And those of you that know me well know where it might be. I'm working on plans to help my real estate investor clients to know when and where to put their hard earned investment capital.

For those of you unfamiliar with the 1% Rule it goes something like this. Buy your income property or rental houses or investment homes (whatever you call them) where the rent is 1% of the sales price. In other words, if the home costs $100,000 then the rents would be $1,000 per month.

A fantasy you say? If I lived in California or Washington, DC or New York or Florida and owned income property there I would be skeptical, as well. But there are such places here in the Heartland.

Kansas City is a great place to invest in income housing. No question about it. But there are a couple of other jewels out there where growth is STILL happening and rents are strong. More on this as things come closer to finalization.

Thursday, June 07, 2007

All Brick Overland Park, Kansas Duplex For Sale

Overland Park, Kansas Duplex For Sale Offered at $173,500
I try not to pimp my listings too badly on this blog. But this one I like so much I want it out there.

In the heart of Overland Park this duplex features 2 bedrooms and 1 bath on each side. (One of the baths completely remodeled and updated. Looks great!) Hardwood floors run throughout. Some are bare and look good and some is carpeted.

Rent on one side is from a long term tenant at $700/mo. Rent on the vacant side is asking $780/mo. He's had good traffic there but rejected a couple applicants. Owner wants to rent the storage space in shared garage for a period of 1 year for an additional $75/mo.

Expenses include taxes at about $1,769/yr and insurance at $586.41/yr. (I would expect that the insurance will go up significantly since he's owned it quite a while.) There are no HOA's and the owner has taken care of the lawn himself.

This brick duplex is one of four that share a courtyard. Previous knowledge allows me to let you know that the other 3 all have owner occupants living in one side. So you know the upkeep is there. I sold the one catercorner to this one last summer for $166,900 even though it didn't have an updated bath or fresh, professional interior painting.

Give me a call, email or pony express letter if you would like more information on this Overland Park, Kansas duplex that is for sale.

Current State of the Kansas City Real Estate Investing Market



Here are my opinions on the current Kansas City investment market for real estate:

Buy & Holds - This market is in great shape. There are several values out there right now and many, many homes priced at a realistic market value based on their community. I'm high on duplexes and fourplexes and lukewarm on single family homes. Several apartments for sale right now have grabbed my attention, as well. I'm forecasting a 5-7 year hold period for maximum use of depreciation, appreciation and then an IRC 1031 exchange.

Rehab Properties/Flipping - This market scares me at this time. Sure, there are some good properties out there. I just haven't seen them. Many foreclosures right now are aborted rehab situations. Not enough appreciation and housing demand to make this a lucrative enterprise at this time.

Buy, Rehab & Hold - I'm very high on this strategy. Very high. There are many a house for sale right now that are value priced but not lean enough to do buy, rehab, and sell. But if you can buy, rehab and have $12,000 of equity before you hire a property manager and put a renter in, why not?

Rental Market - In many parts of the city the rental market is extremely strong. Only a few pockets of weakness that I have seen. Most of the property managers I speak to have the same opinion. Gone are the days of long vacancies and rental incentives to get people in. Unless you are a pioneer on the outskirts of town. Then you are probably running high vacancy rates and banking on end-game appreciation. I'm not thrilled with that idea as housing growth (building) has greatly slowed.

Lease Option Market - I do very few of these. But three different real estate investors I know have successfully entered into lease option agreements with their "tenants" within the last 45 days. So there are people out there looking.

Personal Note: I read yesterday in USA Today that many real estate investors are leaving real estate and going back into stocks. Finally in the article, they distinguished between the Buy & Hold investor and the real estate speculator. They also based all of real estate's benefits on appreciation only.

Don't forget there are 4 Benefits to real estate investing:

  1. Cash Flow Before Taxes
  2. Principal Reduction
  3. Depreciation
  4. Appreciation
Of course, plan with your financial advisor. Diversity is the name of the game. Bawldguy did a great post about using insurance to gain the funds for real estate. Of course, out there you are paying $750,000 for the same duplexes we can get for $175,000.

Wednesday, June 06, 2007

Sad News

Thank you for whatever help you may have been. But it appears that the worst has befallen Kelsey. Keep her and her family in your prayers.

Understanding the Size of the Kansas City Real Estate Market



Kansas City, geographically, is a huge area. Huge. Don't believe me? Check this out:

Kansas City Metropolitan Area*

  • Population 1,967,405
  • 27th largest metro (by population)
  • Area covered 5,406 square miles

Los Angeles Metropolitan Area*

  • Population 12,943,547
  • 2nd largest metro (by population)
  • Area covered 4,850 square miles

Wow! What a difference. Los Angeles has 6.5 times the amount of people and less land to put them in!

So What Does All This Mean To You?

It means, quite simply, that you need an expert when you are buying or selling a home in the Kansas City area. I live in Olathe and I see signs from agents who live in the Northland (north of the Missouri River) listing homes here. Why? Are they experts in Olathe? I see Olathe agents listing homes in Blue Springs. That is 34 miles away! How much of an expert can you be?

I do drive around all day because I'm comparing investment numbers to investment numbers. So to me and my clients it really doesn't matter where I find them good values. Investors are looking for return on their investments. Not convenience of shopping centers and etc. (Yes, I know that counts, but not as much as ROI.)

Occasionally, I will list regular single family homes. But it better be in an area that I am intimately familiar with. Otherwise, you should be looking for another agent that will be a good marketer for your situation.

I Can Refer You To Good LOCAL Agents

Because I get all around town working with income property I meet a lot of different real estate agents with a lot of different companies. If you are looking to buy or sell a home over in Lee's Summit feel free to give me a call. I can refer you to a good house agent over there. Same is true for the Northland and Wyandotte County.

As the real estat market continues to shake out and the part time real estate agents fall away it will be more and more important for the consumer to choose their agent carefully.

*Statistical information found on Wikipedia

Find Kelsey of Overland Park, Kansas

This girl went to the same high school I did. She was abducted the other night and it has turned into national news. If you see her, please contact the authorities of Overland Park, Kansas.

You can find out all you need to know at FindKelsey.com.

Monday, June 04, 2007

Lording the Land: Doubters Inc. (or: Should you Incorporate?)

Lording the Land: Doubters Inc. (or: Should you Incorporate?)

Take your time to go over and read this explanation on LLC vs sole proprietorship. I seem to stand alone on my conviction to have not formed an LLC for me and my property. At least I know there is someone else out there that thinks along the same lines as I do.

I found this blogger through the Carnival of Real Estate Investing on Equity Scout. Take a look.

Young People of America: Invest In Real Estate

Young people are learning to invest in real estate. Young people today seem to be learning a lot faster than my generation. True, I'm only 42. So it's not like I'm a geezer, yet. But when I am working with these 24, 25, 26 & 27 year old clients I feel like a proud papa.

- - -See this photo? Even with the movement towards financial security, this is about the right ratio of "people in the crowd" actually making the move towards owning income property. - - -
This won't be a long blog post. It is really just a post to say how proud I am to help these kids get started. Rather than spend all their money on trips and single family homes that are too big for them at this time I'm seeing twenty-somethings purchase a duplex, rent out half and live in the other side.
The plan is nearly always the same: Live in one side and rent the other for about 2-3 years. Then, move on to the single family home (or another duplex) as an owner-occupant and keep the duplex as an investment property.
A few will be satisfied with that. And that is fine. Think about it. If they don't do anything else, if they don't buy another rental property. If they don't 1031 exchange. If they don't lease option, etc. When they are in their 50's they'll have a piece of property that is 100% paid for, cash flowing tremendously and can sell it to help fund their retirement.
Editor's note: The above strategy is not recommended as a good long term strategy. But even that strategy is 1,000% better than what most people will do.
And another terrific thing is these young adults are still investing in their 401K's and/or their IRAs. And even better, a few are taking on other income properties, as well.
So there is definite hope for the generation that follows mine. Self-reliance and entrepreneurship are alive and well in America. And that is a good thing.

Friday, June 01, 2007

Friday Meanderings

Here are some blog posts worth reading:

Investors vs. Speculators::Which One are You?

1031 Tax Deferred Exchanges-200% Rule

So You've Decided To Buy A Property With A Friend...

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I ran into this guy the other day at the post office. If you like to Bar-b-q you are going to want to check out this site. And you know we Kansas Citians love to BBQ. American Barbecue Systems.
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Isn't it amazing how many different ways there are to say Bar-b-q. Let us list some:

  • BBQ
  • bar-b-q
  • barbecue

I guess it's appropriate since there are so many ways to BBQ. Memphis thinks thinks they are the best. (And they are good.) Carolina thinks they are the best. (I don't care for vinegar and cabbage on my sandwich, thank you.) Texas...well Texas has a Texas sized ego about everything. But here in Kansas City, we have a little of each of those. We're the Constantinople of BBQ.

And remember, grilling isn't BBQ. It's grilling. BBQ is low and slow.

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I've got a line on some pre-construction fourplexes out in Manhattan, KS if anyone wants any information.

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I'm noticing the rental market get stronger and stronger. My prediction from about 18 months ago is coming to fruition as lending standards are tightening and foreclosed homeowners are moving back into the rental market. Add to that slowing building and we should be nearing the bottom of the real estate cycle, here in Kansas City at any rate, in the next 12-24 months. Then things should slowly start to edge back up.

But we're not too bad now, relative to the rest of the country. At least our appreciation is 2%-3% instead of depreciation!

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My son leaves for the South Pacific for 21 days on Tuesday. I'm so envious of his trip.