Seasons of Investing: When It’s Time To Dig In

I just answered an email from a real estate investor where the investor was more or less updating me as to his situation and asking about other opportunities in the Kansas City area marketplace. And I feel I’d like to share some basic beliefs that I have concerning his situation here. No names, of course.

It is my belief that real estate investing should work for you, not you working for your real estate investment properties. By that statement I mean that you should use maximum leverage to acquire your properties. Leverage to the point of cash flow, however. In very few cases would I ever recommend or okay purchasing an income property that you know will bring red ink every month.

Let’s take a look at this situation and see what you would advise.

  • Household income of $150,000/yr.
  • Primary home with mortgage and price reflecting that kind of household income.
  • One single family home as a rental property with about $200/mo positive cash flow. This property is in a solid growth area of about 5%-7% historically. Even this year I would expect 2%-4%.
  • A downtown loft with negative cash flow of about $30/mo.
  • Set to close on another downtown apartment this fall that will most likely bring break-even cash flow at best, probable negative cash flow to some small degree.
  • The downtown housing market for condos is currently over-built, though not terribly so. I see great growth opportunity here as downtown Kansas City continues to update and rebuild. But we’re talking about a long term forecast for profit here. 6-8 year hold period to realize expected gains, in my opinion.
  • One more condo in a very affluent KC suburb that breaks even.
  • HELOC that is nearly tapped out.j
  • Few cash reserves that I know of.

I’m not sure about you, but when I look at that I don’t see immediate danger, but I don’t necessarily like what I see, either.

My recommendation:

  • Build a cash reserve!!! A few months vacancies will put the hurt on a situation like this. With the HELOC nearly tapped out there needs to be some liquid help somewhere. A minimum of 3 months of cash to cover all mortgages is what I’d shoot for before considering anything else.
  • After the cash reserves are built, re-evaluate the market and current holdings. Most likely you’ll want to sit tight and collect the rents. Keep them rented!
  • After the cash reserves are built, then you can save up more cash for your next investment properties. There are great opportunities in today’s market place. Go get one.

Listen, I’m a real estate agent recommending that this investor NOT buy at this time. Maybe they’ll go somewhere else and get someone to help them. But I don’t think it prudent.

Keep in mind, for this individual I’m recommending not buy. But for those who practice real estate investing and have cash and good credit, you can pick up some nice properties at this time. I have about 6 identified right now. Call me.

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Filed under Personal Real Estate Opinions

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