Kansas Rental House

While I’m in the process of purchasing a home for my son and his family to live in for an equity sharing agreement we’ve come up with I thought I would share the numbers with you so that you can have good awareness of what a quality Kansas rental houses looks like from a real estate investor’s perspective. So here we go..

The home is located in Olathe, Kansas in a decidedly non-rental neighborhood.  It’s your standard split entry, raised ranch sort of house with 3 bedrooms, 2.5 baths and in very nice condition.  Good school districts.  Furnace and water heater updated within the last seven years, the roof has about 5-8 years of life left though it appears in good shape.  There has been foundation work done in the past though it is hardly noticeable.  Fenced yard, great deck, updated kitchen and tasteful carpet/paint throughout.

Price asked was $210,000 and I have it under contract at $200,780…that is with me waiving my 3.0% buyer’s agent commission.  So for most income property buyers the price would be $207,000….on the market for less than a week.

I’m putting 25% down and buying .25% of the rate down to 4.625 which means my monthly payment will be $774.26/mo for P&I only.  Throw in taxes of $223.92/mo and homeowner’s insurance of $80.92/mo and you end up with a monthly nut of $1,079.10/mo.

Now, to put this in perspective, the home is about 600 sq. ft. larger than the apartment they were living in at $1,105/mo.  So right away, we’ve got a win going on for my son…and yet we are going to keep this strictly about being a Kansas City area landlord.

It is my belief I can rent this home out at $1,295-$1,325 all day long.  So we use $1,300/mo.

Immediately, if self managed, revenues exceed PITI by about $2,400/yr.  Then, there is the principal reduction.  And lest we forget tax benefits and appreciation.

For a complete and more detailed analysis of this and other properties you may be interested in purchasing, reach out to me.  I’m happy to help.

Get Rich Slowly Through Real Estate Investing

There are many forms of buying, rehabbing, selling houses that are called real estate investing.  Especially here in Kansas City where our relatively low prices make it easy for east and west coast money to come in and attempt to manipulate our real estate market.  Yet, I’d like to purpose to you that the best way for most rank and file, mom and pop if you will, real estate investors is to get rich slowly through real estate investing.

No.  It isn’t sexy.  No. I don’t get to stand up in front of big crowds, play loud music, speak super fast and tell tales of a deal I did six years ago like it was yesterday.  But I do get to help many professional wage earners to secure their retirement worth having through the strategy of buying right and holding the property through successful property management whether that be through their own efforts or that of a professional property manager.

Take the following scenario available in Johnson County, Kansas ( a suburb county of Kansas City, MO) in the town of Olathe.

Ranch house priced at $185,000 because the owners have been in there quite a while and it needs some (quite a bit) of updating.  New carpet, paint, fixtures, etc. The After Repair Value is around $195,000 – $205,000 depending on said updates. So not nearly enough to flip, but again, a ranch home in Olathe, Kansas with great schools.  A solid rental house for years to come.

Let’s say you buy at $180,000 (I have no inside knowledge, just an assumption) and put 25% down ($45,000).  That leaves a remainder to be financed of $135,000 and let’s just say that you get an income property interest rate of 5%.

Principal and Interest  equal $724.71/mo. 

Now we have to figure expenses, right?  For updating, I’m just gonna throw in about $12,000 for all those updates we spoke about. I believe you could do it a little less expensively and yet we are working the property up to the standards that today’s renters are looking for when they lease a home.  So yes, you can skimp.  And yes, it will cost you vacancy time.  In other words, you need to have your home up to the same standards as the homes around you.  That will be an immediate cash expenditure, bringing your total investment up to $57,000 in the home.  (The down payment plus improvements.)

Now lets talk about rents.  A quick look around on a few rental website and comparing some of the 400 plus homes we manage at Ad Astra Realty, Inc Property Management and I believe the rents will be between $1,450 and $1,525.  So let’s say $1,475 as the rents. Is that okay?

Expenses will matter, too.  We need to account for insurance and taxes and let’s add in some property management, a few unexpected repairs for the year and utilities while the place is empty….which brings up vacancy.

Historically speaking, we used to count vacancy somewhere in the 10% range when doing these figures.  Yet, since 2008 I have been hard pressed to find vacancies above 5% here in Johnson County, Kansas.   So I’m gonna use 5%.

Now it is math time.

$17,700  Gross Rents minus
$     885  Vacancy
$  1,200  Insurance
$  2,682  Taxes (2018)
$     200  Utilities
$     900  Repairs
$     500  Misc (because)
$  1,976  Property Management (includes lease-out)
$  8,697  Principal and Interest

= $660 Cash Flow Before Taxes  (Wooohooooo! You’re rich.)

No, $660/yr cash flow isn’t gonna make you rich.  Heck, that is only $55/mo m/l.  And if you are the type that manages your own rental homes, well, you can add another $1,976 to your earnings.  But since most of my sales clients hire me to manage their properties, I thought I’d add that in.

What are the other ways you are making money on this home?

Well, let’s see.  There is Principal Reduction.  The fact that your tenants are making your house payments for you is terrific!  Consulting an amortization table I calculate that your tenants have paid $1,829.53 of your balance in the first twelve months.  (Of course, that goes up each year because of the way home mortgages are amortized.)

Then there is Depreciation.  You get to tell the government your home is worth less each year.  (What a great country!)  That is another of the 4 Benefits of Real Estate Investing. That’s another $5,200 m/l in benefits of the property.

Interest totals $6,704 after a year.  We get to deduct that as well.  So with Depreciation and Interest we create roughly $11,900 of deductions.  Say you are in the 32% tax bracket and after subtracting those deductions from your Net Operating Income of $9,357 you have created a tax savings of $813.

Now let us figure your return.  Your total benefits without appreciation add up to

$   660  Cash Flow Before Taxes
$1,829 Principal Reduction
$   813 Tax Benefits
Total benefit of rental home before appreciation is $3,302.

You invested $57,000 in the home between purchase and fix up.  So your overall return the first year is roughly 5.8%

Is that good? Is that bad?  I don’t know.  Maybe you are making more than that somewhere else?  Everything is relative.

Appreciation is where the magic happens though appreciation is only something I can tell you happened as I simply cannot predict what it will be.  I can use history.  Through the ups and downs of the many economies I have seen in my real estate career since 2002 I can show you that in Johnson County, Kansas appreciation has been pretty darned close to a 3.5% straight line.   So can we use that?

If I have your permission then, let’s just say that the $195,000 appreciates 2.5% in 2019 as that is about where I expect it to be.  (Again, I never really know.)  That adds on $4,875 in benefits.  Now you have the 4 Benefits all together and that totals $8,177.  So your return skyrockets to 14.3%.  Follow me?

The real money made in real estate investing in the Kansas City suburban city of Olathe is in the appreciation.  Time is working for you, not against you.  And your tenants are paying down the house all the while!

It’s getting rich slowly through real estate investing.  Pencil it out another ten years and see the equity you will have and the return that grows as rents creep up while your payment remains the same.

Now obviously, I cannot guarantee any of this.  I can only tell you what has worked for me and my clients since 2002.  If I can be of any service to you, don’t hesitate to contact me.  I’m easily found.  Just look in the Contact Information up and to your right.

 

 

Mortgages for Income Properties

Here is a video from one of my most trusted lenders when it comes to buying income properties. He has helped many of my Kansas City real estate investors to buy investment property without any surprises at the end.  This information is accurate as of March 2017.

Is It Time To Evaluate Your Investment Property

The New Year is fast approaching and I have to ask; Is it time to evaluate your investment property?

Many of our clients purchased their rental properties during the Great Recession.  They bought low and now may be the time to sell high.  Or is it?

The very first thing you need to know in order to make an intelligent decision is to get a comparative market analysis of your income property.  Listen, it doesn’t have to be detailed.   But if you can be plus or minus 3%-5% you can have a good idea as to how to measure your future options.

• Should I continue to hold because I’m making good money on my investment?
• Should I 1030 Exchange myself in to fewer but more valuable income properties?
• Should I sell, pay the tax and relax?

There are, of course, a few other options and variables not the least of which is “where are you in your life?”  What I am saying is that the real estate market in Kansas City has changed by leaps and bounds since 2009 and so may have your investment needs.

So, is it time to evaluate your investment properties?  If it is, give me a call at 913-568-1579.  I’d love to help.

The Power of Passive Income

As I get older I begin to appreciate more and more the power of passive income.  How awesome is it to figure out a way that you continue to earn based on earlier investments or efforts?

Of course at this website you would expect me to talk about passive income as it relates to residential investment property.  And you’d be right.  But in this article I’m not going to bore you with breakdowns of cash flow. You can find that elsewhere in the website.

But I am going to ask you to stop, just for a minute, and imagine your life with more passive income.  What would your retirement be like? How much earlier could you retire?  What would you do with your retirement?

Passive income is allowing me to ride my bicycle more. It’s allowing me to see Mexico more.  It’s allowing me more peace of mind.  And how much is that worth?

Income property isn’t the only form of passive income out there.  But I FIRMLY BELIEVE that each investment portfolio should have at least a measure of rental properties.

Real Estate Investing Versus The Stock Market : Part 2

Yesterday I did a post describing the benefits of a rental property after 20 years of ownership.  Please read Real Estate Investing Versus The Stock Market : Part 1 for the entire scenario and to catch up to where we are today.  Because today we’re going to ask what if you had taken that $38,500 ($35,000 for the down payment and $3,500 for closing costs) and left it in the stock market versus investing in a rental house.

THE INVESTMENT
I will readily admit to not being as in tune with the stock market as quite possibly many of our readers. I do real estate.  So that makes sense.  Yes, I have an IRA.  Yes, my wife has a pension with KPERs. Yes, I have other investments (though not large) in mutual funds and one other well known stock.  The point is,  I don’t eat, breath and live in the stock market.  And I don’t believe most working professionals have the time or expertise to follow the market on an hourly or even daily basis, either.

So we’re going to say that your $38,500 is in a nicely performing mutual fund (or stocks, heck, I don’t care.) that after all the buy fees, sell fees, yearly fees, etc, is yielding you a nice return of  9% per year, for the next 20 years.  I’m told, and have researched, that 9% is a good return number to be expected.   (Are you getting 9%?)  Yes, I am well aware that spikes and dips can happen.  But how is that any different than real estate?

So, using a very simple investment calculator math you simply take that $38,500 at a 9% annual return and you end up with a balance of $215,770.

REAL ESTATE VERSUS STOCK MARKET
Looking at yesterday’s real estate returns after 20 years (but not calculating increases in rent or tax benefits and conservatively adjusting for additional obsolescence) we had a total benefit of $216,611.

The same $38,500 invested in the stock market over the same period of time became $215,770.

PICK’EM?
Can we agree here that the difference is not that great? But what if…?

RISING RENTS
Rents rise and fall like housing prices…and the stock market.  Let’s just say that rents rise over the years at 2%, or slightly less.  Not unusual. Well, with that being the case, we have a different ball game.

Remember, our Part 1 scenario considered the cash flow before taxes to be $1,536/yr based on a rent rate of $1,575.  Now lets say that we calculate the rent rises.  I won’t bore you with all the math, but it takes our total 20 year cash flow before taxes number from $30,720 to $63,150.  That’s another $32,430 in favor of the rental house.

MOVING FORWARD
Listen, in my experience real estate is not as easily liquidated and carries more risk.  However, it is easily leveraged by real estate investors with good credit and assets and you can harvest the equity out of this house 10 years in to create a second income property with similar numbers.  Now the game has changed!

To be fair, stocks/mutual funds take less management, are easier to liquidate or buy/trade, and carry a whole let less risk.

And, let’s be clear, I own both rental property and mutual funds/stocks.  My preference after I have maxed out my IRA (and that of my wife) each year is to put the money in to real estate.  Just makes more sense to me. Why?

1. Real estate has better returns.
2. Real estate has better tax advantages.
3. Real estate can be passed on capital gains tax free.
4. Real estate can be leveraged.
5. Some one else (tenant) is providing some of the equity growth.
6. I have more control over house or property manager than I have over a far away company making widgets.

I could go on and on.  I am not saying don’t invest in the market.  I am saying, you should also be investing in real estate.

 

 

Real Estate Investing Versus The Stock Market : Part 1

I have not done this for a while so it’s time to do it again.  Let’s look at real estate investing versus the stock market.  You may want to get comfortable and get out  a calculator to follow along.  Part 1 isn’t  a short post.  But when it comes to your retirement, shouldn’t you invest a few minutes to see whether you should leave that $35,000 in the stock market or to put it in rental housing?

OVERALL SCENARIO
Let’s say you are 45 years old with a plan to retire in September of 3034 at 65 years old.  You are maxing out your IRA contributions every year (Roth or Traditional, I don’t care) and/or are using your employer’s retirement plan.  Still, you have extra monies that you invest passively in the stock market in some mutual fund that isn’t giving you the results you are after or desire or heck, you just want to diversify.

In our scenario about to unfold you will need approximately $38,500 in cash to pay for the down payment and closing costs. The mortgage company will insist that this not deplete all your “on hand” cash so you’ll still need another $6,000-$8,000 in reserves easily accessible.

THE INCOME PROPERTY
First let’s look at the income property we are going to acquire.  It’s a “typical” lower bell curve house in Johnson County, Kansas, a “better-off” suburb of Kansas City, Missouri. The house would most likely be in Overland Park or Olathe.  Quite possibly it will be a 3-4 bedroom, 2-2.5 bath split level home with a 2 car garage in either the Shawnee Mission or Olathe School Districts. Good school districts. We’re also going to say, for the sake of this argument, that the home is a turn-key investment property that is professionally managed by us.

The negotiated purchase price will be $175,000 plus roughly $3,500 in closing costs since you will be leveraging with a 30 year mortgage at 5.75% with 20% down ($35,000) and, hypothetically speaking, closing on August 30, 2014 making your first payment due on October 1, 2014.  Therefore, your house payments will be $817.00 for principal and interest only.

THE INCOME
A house such as described should rent for about $1,575 all day long with good demand and, in our current rental market, with less than 30 days of vacancy.  That translates to a $18,900 a year in income. No.  You do not get to spend all that!  Because first, there is vacancy.

THE EXPENSES
Our Kansas City area property management company, KCPropertyManager.com has over 200 homes in our portfolio and we can tell you that on the Missouri side vacancies run about 7-8%.  On the Kansas side, at least right now, vacancies are running closer to 3-4%.

But that is not all, we cannot forget about taxes, insurance, repairs, sinking fund (for future repairs like roofs, appliances, etc, and fees for utilities and professional property management as well as any other miscellaneous costs.  Now, I can break all those down for you. However, as a Kansas City real estate agent who helps real estate investors every day, I can tell you that rental property expenses run anywhere from about 30-34% for self-managed homes to 35-40% for professionally managed homes.  Sure, any particular year can be slightly better or worse, but those are the averages I’m finding here in Kansas City.  (It’s also a function of what neighborhood you are in…but that’s a blog post for a whole other day.)

CASH FLOW BEFORE TAXES
I have written many times about the 4 Benefits of Real Estate Investing  so you can go back to those posts to see the details. CFBT = NOI (net operating income) – Annual Debt Relief.  For our example Kansas City rental property here the Cash Flow Before Taxes is roughly $1,536/yr.  Or a whopping $128/mo.  Vacation baby!

Uh, no.  The cash for this particular house is enough to cover all the expenses and build a very modest reserve as time flows by.  But you are not going to Europe for a month with the cash flow.  We’re talking about Buy & Hold Retirement real estate investing here.  Not cash flow hunting.  If you want cash flow, we need to either put more money down or look over to the Missouri side at a lower price point.  But then you’ll lose much of benefits 3 & 4 that are still to be discussed.

After 20 years of this your income property would have generated $30,720 of cash flow benefits (before taxes).

PRINCIPAL REDUCTION
Ah, yes.  My favorite benefit of real estate investing.  Each month your tenants pay their rent they are also paying down your mortgage!  Your rent house, the one not kicking off very much cash flow, after twenty years has a principal reduction, courtesy of your tenants over the years, of $65,571.

That’s more than twice your cash flow.  Now we’re getting somewhere.

TAX BENEFITS
This one may be tricky for me to extrapolate 20 years without spending my life writing about it.  But the first year tax benefits should be about $350.  As a reminder Tax Benefits are

NOI – Interest paid (per year) – Depreciation (per year).

Suffice it to say that with each passing year your CPA will make sure he is reducing your overall tax burden as much as current tax law will allow.  You can always subtract the interest and there is a specific depreciation schedule that extends over 29.5 years.

For our purposes in this entire argument, I’m going to pretty much null this investment property benefit.  Oh, make no mistake, it’s real but for the purposes of our argumentative experiment we’ll just consider it gravy.

APPRECIATION
Did you live through 2007-2011?  Here in Kansas City it was more like 2008 – 2012 when all you east and west coast readers caused our money supply to just stop!  So appreciation is not a God given right when you own real estate of any kind.  We learned that up close and personal. Right?

Historically, however, we know that real estate tends to be a great hedge against inflation.  Here in Kansas City in Johnson County, Kansas real estate prices tend to float just above inflation.  For  our argument here, we’re going to say that our economy for the next 20 years will be pretty much like it is today.  (Quit laughing.  I cannot tell the future any better than you can. I know darned good and well there will be rises, dips and the unforeseen.)

So, with all that said, let’s say that the income property in question appreciates at 3% per year.  That would be a fair slow growth number for the Kansas City area.  (Check out the last 10 years on average.)  After twenty years, our rent house that you purchased for $175,000 would now be valued at $316,000.  That’s a gain of $141,000.

TOTAL BENEFITS AFTER 20 YEARS
Cash Flow Before Taxes     $30,720
Principal Reduction     $65,571
Tax Benefits     n/a
Appreciation     $141,000
Total Benefits   $237,291

I HEAR YOU!
I already know some of your objections. So let’s do it.  (Even while conveniently forgetting that rents quite likely go up over the years…but we’ll not even count that…just like the tax benefits.)

Additional repairs.  My calculated expenses ratio accounts for the property to pay for most of is own obsolescence and make-ready turn overs.  But housing can take hits planned or otherwise.  So let’s subtract an additional $8,000 for a roof, $4,500 for heating and a/c, $800 for a water heater and $5,500 to fix a bunch of wood rot and get a good paint job.  That’s a total of $18,800.  Heck, let’s throw another 10% on top of that and make it $20,680.

Sales costs. Well now, this could get complicated.  Are you going to sell outright, pay the capital gains and the depreciation re-capture?  Not advised.  Are you going to refinance and pull the money out to do other things like vacation, re-invest in other housing or stocks?  1031 Tax Deffered Exchange?  Or, are you going to let it go and form trust wherein you can leave this property to your kids or heirs, capital gains tax free, upon your passing?  These are all scenarios that may very well be different 20 years from now than they are today.  So I am not going to figure in sales costs…but not to worry.  I won’t figure in sales costs on the stocks and/or mutual funds, either.

THEREFORE
If you take your Total Benefits – Additional Repairs you have an Adjust Benefits Total of $216,611 after 20 years of ownership of this investment property.

PART 2 TO FOLLOW…

 Chris Lengquist
Keller Williams Realty
Diamond Partners, Inc
13671 S Murlen Road
Olathe, KS  66062
913-568-1579