Trees and Your Income Property

The more experience I have as a property manager the more aware I am about trees and your income property.  Look, trees are expensive.  Some types of trees are adept at getting in to your sewer pipes.  (Think willow trees.)  Some trees are extremely fragil.  (Think Bradford pears.)  And any tree is subject to  carpenter ants, lightning. etc.

Taking a tree down can cost upwards of $4,000.  That can wipe out an entire year’s cash flow.  We have a cottonwood tree in Independence, MO right now that was struck by lightning this spring.  It’s now crippled and dying and becoming a hazard to the house we manage and the house next door.  $3,400 is the estimate to take it down.  Ouch.

And it’s not like just anyone can do tree work.  A 30′-40′ tree needs to be worked on by a professional.  A professional who is bonded, licensed and insured. And check those references.  You simply don’t want the liability of damage should things go badly bringing down a big tree.

I’m not saying you should buy only barren prairie houses.  I am saying you should be aware of the trees.  What kind of trees?  How large?  How old?  How close to the house? (Too close to the house and they can contribute to foundation problems.) Just pay attention.  That’s what I’m saying.

 

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Rental Property For Your Retirement

Let’s talk about the value of rental property for your retirement.  And let’s throw away the discussions about cash on cash returns and cap rates and the like.  Let’s just get down to what your retirement is going to look like if you add even one rental property to the plan.  You already have social security (supposedly) that’s going to come in.  You should have some sort of IRA or 401k that your employer maybe contributing to.  My wife works for a Kansas school district so there is the KPERs required plan. Your state may have something similar.  Etc.

But most people won’t have enough. Here is how even one rental property can help you with your retirement planning. Buckle up.  Get comfortable and get out your calculator.

THE INVESTMENT PROPERTY FACTS
We’re going to base this on a lower bell curve house in Johnson County, Kansas.  Not the best cash flow county but a safe, go-the-distance county where we know our investment isn’t going to turn in to a melting ice cube.

Purchase cost is $168,500.   (Turn key, with closing costs.)
25% down payment at 4.875% & a 30 year amortization
Expected rent $1,425/mo = $17,400/yr
Expenses figured at 38% of Gross Rents which include;

  • taxes
  • insurance
  • property management
  • utilities when vacant
  • basic repairs
  • miscellaneous

With those expectations (based on 12 years of experience) your yearly cash flow would be a paltry $2,929 year.

THE NEXT 10 YEARS
We all know that over time real estate has proven to be a safe hedge against inflation.  We also know that in the decade to come there will be ups and downs and stagnant periods and boom times and, well, if you’ve lived more than 30 years you’ve seen some big swings. So looking in to my crystal ball I can only go with history.  And history in the Kansas City market tells me an average of about 3.25% – 3.5% per year over any given 10 year period.

But, I’m not even going to figure that. After 10 years we are saying that we;

  • had a 2.5% per year steady appreciation rate
  • only took out $1,500/yr of that $2,929/yr cash flow because of additional expenses, safety, etc
  • didn’t raise rents one time until the 12th month of the 10th year.

THE 5 YEARS AFTER THAT
Now we raise the rents up to an acceptable ratio with the value of our house currently.  For the next 5 years, with no variances, we go from $1,425/mo to $1,950/mo.  We recalculate our expenses because we also expect those to rise.  Because we had a fixed rate mortgage our annual debt service stays the same.

Thereby, our cash flow has now jumped to approximately $6,649/yr.  Yet, we are only going to account for $4,000/yr in the figures below because I believe in being conservative and there is nothing wrong with having extra.

15 YEARS FROM THE PURCHASE OF OUR INVESTMENT PROPERTY
Now retirement is getting closer.  Let’s take a look at where you are.

On this rental home that has been of good service to you you now have an equity position of not the original 25% you started with (your down payment) but of 65%.  Because the tenants have paid down $40,250 m/l of your loan principal and the appreciation train has dropped you off at a home value of $244,000 m/l  your total equity in the home is $160,500!  That’s not a bad rise from your original $44,750 investment (with closing costs included).

The cash kicked off over the years doesn’t seem so bad now, either.  Remember the first 10 years we weren’t figuring any rises in rent and keeping only $1,500 /yr.  Times ten we have generated $15,000.  Now in the last five years we have generated another $20,000 /yr in cash flow with the adjustments in rent.    So that’s $35,000 more this rental property has kicked off over the last 15 years.

And we haven’t even touched on the tax advantages that your CPA has been helping you with over the years.

Essentially, your $44,750 investment in this one rental property has now become $195,500.

WHAT TO DO NOW
Now you have choices to make.  At this time I turn you over to your CPA for tax planning.  And we discuss the quality and condition of your property  as well as the equity that is just waiting to be mined for better leverage elsewhere.  Your choices include;

  • Keeping the property. Your equity position will increase as likely as your cash flow increasing as rents continue to rise over the years. This is a very conservative approach but you’ll know by this time how your other investments have worked out.
  • Selling the property outright.  You’ll have capital gains to pay as well as depreciation re-capture.  But you’ll have cash on hand for living expenses or medical bills or whatever you want.
  • Sell and acquire using a 1031 tax deferred exchange. You may wish to turn this one property in to three properties for the next 15 years.  We’ll have to see what the conditions are at that time.

Keep in mind we looked at a 15 year period of a steady, predictable economy.  (Yeah, right.)  Conditions may accelerate or decelerate this entire equation.  But we (me?) sometimes confuse ourselves.  We’re looking at all these sexy numbers and forget to get started! Today!  

I hope this helps you when you are thinking about what even one property can do for you.  Later, we can work out your particular situation if you like.  You may have more cash to invest in real estate.  You may have less cash to get started with your first income property.  Each person comes from a different place.

Give me a call today to help you make a retirement plan through real estate investing.  Let’s have A Retirement worth having.

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Compliance Is Complicated, Costly and Necessary

As a professional real estate agent in the states of Kansas and Missouri I run in to compliance issues each and every day. With each new contract I write I hire a compliance coordinator to make sure that myself, my brokerage and my clients are protected by making sure all the i’s are dotted and the t’s are crossed.  Did you know there are over a hundred different ways to make a contract inaccurate and therefore subject to being voided and/or being fined by the state in authority?

Property Management is another compliance nightmare. With so many forms to sign and initial and monies to be tracked and traced, there is always something that can be missed if you don’t hire another set of eyes to take a look.  And, believe it or not, there may still be something that slips through.

With each new day the states seem to come up with yet another thing to ask for and to look out for.  We were just discussing and lamenting an new requirement by the state of Kansas the other day.

Why this matters to you?  Because you don’t want a contract voided or a fine paid, do you?  Well, maybe you don’t care about the fine that agent and brokerage has to pay.  But a contract being voided?  You wouldn’t care for that.

And if you are a do-it-yourself landlord you better understand compliance, and the seven protected classes, very thoroughly.  Miss a Lead Based Paint Addendum and see what that could bring you if the feds come snooping around.  Disclosure?  Make sure you disclose what you know.  And the seven protected classes?  I hear landlords brazenly say they don’t let “this or that” in to their houses.  Well, that’s a lawsuit just waiting to happen.

Compliance is necessary because of the ever increasingly litigious society we live in.  Nothing is ever anybody’s fault any more and the lawyers always go where the money is whether there is basis in fact or not.  (Usually it costs you more to win than to settle, and the lawyers know this.)  Property means assets.  The lawyers and their clients want what you have.  Learn to protect it.

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Watch Your Money

When using a professional (or not so professional) property manager you need to watch your money.  Here at KC Property Manager we stress to the employees that a lot of sins can be forgiven.  You can miss an inspection or even choose a wrong tenant candidate (two great applications and the one that was chosen just does’t work out) but you simply cannot, under any circumstances, mess with an owner or tenant’s money!

I cannot tell you how many ways there are for property managers to steal from their rental property owners.

  • Not doing the work they promise for their fees.
  • Mis-allocation of monies.  (Say the property manager had some work done on one of his houses but had the contractor write down the address of one of your houses.)
  • Unreported rents.  (Telling you the tenant moves in next month when in fact the tenant has already moved in and has paid rent.)
  • Marking up bills when they say they won’t do that.
  • Negotiating kick-backs from vendors and contractors on work performed.

These are just a few of the ways our current landlords have told us they have been taken advantage of in the past.  As a guy that deals with other people’s money all the time, I can tell you there are ways even beyond these.

How to avoid being taken advantage of?

  • Make sure your property manager uses a cloud based software program that allows you or your accountant to monitor monies in and monies out. Yes, this software can be manipulated but it usually leaves a trail.
  • Don’t be afraid to hire an independent set of eyes to drive by your property every once in a while and see the general condition.
  • Get on the phone.  Talk to your property manager every once in a while. Get to know them and then trust your gut.  If they aren’t answering questions, or worse, not returning your calls you might get immediately suspicious. 

Listen, there is no full proof way to make sure you aren’t ever the victim of dishonest business practices.  Crooks have more time to figure out their schemes than you have.  But use some common sense and intuition when it comes to monitoring your money.

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Real Estate Investing Just Makes Sense

Real estate investing just makes sense.  First, there are four ways you make money;

  1. Cash flow before taxes
  2. Principal reduction
  3. Tax advantages
  4. Appreciation

I have talked about these 4 Benefits of Real Estate Investing time and time again. (Follow the link.) And I’m going to keep talking about them.  

Cash Flow Before Taxes
If your home isn’t going to generate cash flow…DO NOT BUY IT!  (Or if you already have “income property” that doesn’t cash flow….SELL IT!  How much cash flow?  Well, that is up to you, the type of property, where it’s located, the end goal, etc.  Seek the advice of a qualified investment real estate agent or hire Chris as a Real Estate Counselor to help you evaluate a rental property.

Principal Reduction
Your tenants are buying you a house!!!!  That’s all I will say for now.

Tax Advantages
Listen, we live in a great country and taxes are necessary to keep us all free and to educate our kids and to drive on roads, etc.  But real estate can help shelter a great deal of your tax burden.  (And provide quality housing, create a larger tax base overall, etc.)

Appreciation
This is the one we can never predict with certainty, but over the life a house it almost always is an effective hedge against inflationary pressures, at the very least.  Unless, you are one of these guys that likes to chase low priced rental property in hopes for ROI’s of 20% or greater all the time. Then you are probably buying low end property in neighborhoods that could very well be on the decline.  Treat those like melting ice cubes.  But you aren’t doing the neighbors any favors.

There are a great many social benefits to being a buy and hold real estate investor besides just the money.  Helping to stabilize neighborhoods.  Providing quality housing.  Providing jobs.  Do it right.  And reap the rewards.  

Investing in real estate just makes sense.

 

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Property Management Fun

There is never a dull moment in property management.  Just when you think you have everything under control, rain happens.  The kind of storms we get here in the Kansas City area can really cause havoc with their wind and rain.  Here in the Olathe area last Sunday we ended up with about 3 inches of rain in about 9 hours. Two heavy downpours added up to those 3 inches.

Of course, with that amount of water this going to be runoff and therefore, some water in basements.

Why do people finish off basements?

I mean, I did in my house.  But I didn’t use drywall and great carpet.  So every once in a while when it does get a little wet I dryvac it up and move on.  But when a basement has plush carpet and drywall and the sump stops or the sewer backs up or there is rain pouring in from the window wells that are flooded, well, you get the picture.

So just when you think you have everything under control, property management wise, here comes a storm, or snow, or broken trees.  Now granted, we manage 200+ homes and this isn’t happening to all of them.  But every time here is storm you can bet we have some work to do on 3-4 houses.

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Raytown Investment Property For Sale

This Raytown home is for sale and would make either a great home for a new person or family looking to build memories and a life, or to continue it’s service as a wonderful rental home making good returns a given.

raytown investment property

This ranch home features 3 bedrooms and 2 full baths and a very roomy garage.  You’ll find beautiful hardwood floors and spacious rooms and closets.  Partially renovated in 2012 and sitting on a nice corner lot.  The house is offered at $74,750.

For you real estate investors out there the last tenant was there from 2012 until July of 2014 and liked the house but needed to move closer to their new job.  Rent was  $895.00 a month and $875 – $895 would be the expected range for any new tenants.  The house has been professionally managed and financials for the last 2 years would be available with any acceptable offer.

To see more pictures of this house follow this link: Raytown Home For Sale

House was current and active in the Heartland MLS as of July 29, 2014.  Any future dates this house may or may not still be available.

Chris Lengquist
KWR, Diamond Partners, Inc
Olathe, Kansas
913-322-7500 o
913-322-7515 d

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