Los Angeles v. Kansas City: Which City Is Better For Your Investment Dollar? Part 2

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.

LOS ANGELES

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.)

KANSAS CITY

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

7 Comments

Filed under City Comparisons, Kansas City, Real Estate Investing

7 responses to “Los Angeles v. Kansas City: Which City Is Better For Your Investment Dollar? Part 2

  1. Jeff Brown

    Only you would be brave enough to take on So Cal, then prove you’re right in the same post.

    To take your thoughts a step further, you’ve shown KC investors how to stay local if they must, and make more money than they’ve ever dreamed.

    KC readers – allow this guy to secure your retirement. It’s there for the taking.

  2. Chris Lengquist

    We win in real estate. We win in BBQ. You win in weather and just about anything else.

    Thanks for the kind words.

  3. Anonymous

    A Sherman Oaks, CA investor client sent me the following email…

    Hi Chris,

    You’re preaching to the choir with that article. By the way, I would take the neighborhood in Olathe anyday over Lake Balboa. This is why I’m continually interested in Kansas City.

  4. Anonymous

    I’m one of the investors from L.A. who was sold on what KC has to offer before I ever set foot there. Chris knows KC, he knows real estate, he knows investment properties in particular. Yes, he did invite me to a BBQ while I ws there, but alas, I had to return to the smog city before I could enjoy it.

  5. Anonymous

    You forgot that you have 7 times the tenant headaches and 7 times the resale headaches and the heat/cold factor. All this for 5 years for a lousy $25 grand? That’s less than $100 a week to run yourself ragged in a no glamor environment.

  6. Chris Lengquist

    Kansas City no glamour? Really? Well, you are right, of course. But that’s okay. We like it that way out here.

    As far as tenant headaches and the like, you will get those periodically. But I manage quite a few properties between my own and some of my clients. Through proper tenant screening, and chosen income range, I probably only hear from tenants about two times a month.

    Most people dealing with a lot of headaches are usually buying housing that will attract lower income tenants. But they buy those homes because either they cannot afford better or are looking for maximum cash flow. But with cash flow, sadly, comes the headaches you spoke of.

    And the last thing I’ll point out is these numbers are all based on paying a property manager. So if you are running yourself ragged, something is wrong.

    Thanks for you comments. They are welcome.

  7. Pingback: Los Angeles v. Kansas City: Which City Is Better For Your Real Estate Investment Dollar? « Kansas City Real Estate Investing

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