Yesterday I wrote a post comparing Kansas City income property to Los Angeles income property. Feel free to go back and read the article as it will help you to get a basis as to this discussion.
Where we left off was with Kansas City at a very slight advantage on cash flow…very slight…and a huge advantage over LA in the cash needed to invest category. I believe to get the said rental homes in LA to cash flow/break-even we needed to put down $294,995 while in KC the cash needed was $38,800.
I’m going to assume there are more investors out there with $40,000 than $300,000 in liquid investment capital. But if you have the capital you might be thinking..
“Chris. That’s well and good. But you know darn good and well that the Los Angeles housing market is always going to be more desirable and appreciate more rapidly than Kansas City.”
Of course, more desirable is always going to be open for discussion. But appreciation can definitely be measured. Kansas City has a historical appreciation rate of 5% over any given 10 years. Some years KC can be as high as 11%. Some years 1% – 2%. Los Angeles, on the other hand, can be prone to big surges and big drop offs. Timing the market in LA can lead to riches you will probably never reach in Kansas City.
How has timing the market worked out for you so far?
And that is only if you have the $300,000 to invest in the first place.
For our next measurement in the Kansas City versus Los Angeles investment property challenge I’m going to use the KC 5% historical appreciation rate for the City of Fountains. For the City of Angels, I am going to use a steady appreciation rate of 8.5%. I realize that LA is nowhere near that at the moment. But over most periods of time in history I can assume that LA’s appreciation rate will be at least half again as good as Kansas City’s.
We’ll use 5 years as our holding period of time before looking to cash out or using the tax code to exchange into other investment property or properties.
The Los Angeles area duplex we looked at yesterday appreciating at 8.5% a year should now have a fair market value of right about $902,000. That is an increase of $302,000 to your asset sheet. (Not including, of course, the other 3 of the 4 Benefits of real estate investing or the sales costs.)
The Kansas City (Olathe) area duplex we looked at yesterday appreciating at 5.0% a year should now have a fair market value of right about $247,500. That is an increase of $53,500 to your asset sheet. (Same exclusions as above.)
SO LA WINS. RIGHT?
Wait a minute before we start crowning LA king. We simply cannot forget that in Kansas City you had a cash savings of $256,195 on the initial down payment. With those remaining funds we can buy a minimum of 6 additional properties. Properly leveraged, perhaps even many more. But we’ll just keep it at a cash invested to cash invested ratio and we’ll save $23,395 that will go towards additional closing costs and taxes over the years.
So we’ll add 6 more rental duplexes to the Kansas City real estate investor’s portfolio. Now you have 7 properties appreciating $53,500 per property over the same 5 years for a total appreciation in Kansas City of $374,500.
Kansas City asset growth = $374,500
Los Angeles asset growth = $302,000