Buy Your Investment Property Right To Sleep At Night

The following is  a true story about a California real estate investor who bought his investment property here the right way.   The names and minor details have been changed to protect identities.

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Real estate investors here in Kansas City, California and everywhere else hear all the time “you make your money when you buy.”  But what does that mean?  Can I give you an example?  Well, yes, I can.

Steve has been an investor client of mine for about four years.  He owns property in California (one investment house, I believe) and a couple here in Kansas City.  He’s in the local business of Los Angeles which is to say he’s works with television.  He’s paid very well for what he does and he’s been nominated for many an award.  (May have even won a few for all I know.)  When a television series is a hit he can have job security for years.  When it closes down you just don’t know when your next steady check will be.

dragon_unemployedSteve hasn’t had a steady check for just about a year.  He’s done odds and ends jobs but that just doesn’t cut it.  He’s been spending his savings and while he’s not anywhere near destitute it was time to take some drastic action while waiting for his next big thing which begins this fall.  Which brings us to his current rental property holdings.

One place he has through me is a duplex that has not only his original equity from four years ago but also about a 10% –  12% gain in value since his purchase.  The place more than pays for itself each and every month, attracts high quality tenants and has a huge upside when this economy ramps back up…whenever that may be.   Another place he has through me is a single family home that he bought about 18 months ago.  We got it at a steal.  At the time the going rate for that house in Kansas City proper was, in my opinion after accounting for condition, neighborhood, etc., about $110,000 to $112,000.  I helped Steve buy this potential investment property for $97,500 with the bank kicking in $500 for closing costs.

Of course, to get it at this price we had to do some wrangling and looking.  And we had to put in a brand new heating and air conditioning system that ended up costing about $2,600.  We rented it for $925/mo and the first year or so went great.   But then the tenant lost her job and rent stopped shortly thereafter and we had to get rid of her.  We tried to rent but forty days and nights went by without a new tenant (about average for the neighborhood) and that just happened to coincide with the monetary pressures of our Steve.

Still 3 months from steady work, savings dwindling and one rental property vacant it was time to do something.  We looked at the entire situation.  Not dire.  But why wait to get there?  Why not use the assets at hand to ease the transition.  Kansas City will have more rental properties available when the time is right.  Of that, I’m sure.

I worked the numbers for Steve who said if I could get $110,000 for the place he could cover his initial investment, closing costs, HVAC and some vacancy along with my commission and he would be tickled pink.  Also, there would be very little capital gains and/or depreciation recapture to worry about since he had owned just shy of 2 years.  Vacancy losses would offset some of the taken depreciation.  They key was he could get his hands back on his initial equity investment and use that as his cushion after writing another huge tuition bill for his daughter’s college.

Now, because this house was located in a part of Kansas City that does pretty well regardless of economy and because this house is attractive to home buyers and renters alike and because this house was functional but not fancy it was not too difficult to sell.  I showed it to a different out-of-state investor who jumped on it.  A house right down the street had just sold for $129,500.  Now that house had about $3,000 worth of closing costs built in as well as a modernized kitchen and bathrooms. 

USA Costa Rica

Not to drag out the story too much, the buyer got the house for $108,900.  He got a house he could make money on and then modernize when the time comes to sell. He’ll have a modest equity gain when that happens and a quality rental house/house for his son going to UMKC in the mean time. He’s happy as punch.

Our seller, Steve, is happy because his gains/losses are absolutely negligable especially when you consider he only owned 19 months!  No, he didn’t make any money on this particular investment property.   But he also didn’t lose any.  And he bought the property in what some have called the worst housing crisis since the Great Depression.

I just want to hammer in the importance of working with a professional real estate agent that understands and works with investment property when you are looking at acquiring more rental property.  If you do, just about no matter what, you won’t lose money.  Here is a perfect example.

2 Comments

Filed under Real Estate Investing

2 responses to “Buy Your Investment Property Right To Sleep At Night

  1. Pat

    Did not know about vacancy losses. I only knew you could deduct interest, Taxes, insurance, and other costs.

  2. Sorry I wasn’t clear. You can’t deduct the loss, so to speak. But if you don’t make money that month you don’t have that income. So that income isn’t working against your expenses. See what I mean?

    ie, your expenses never stop. If the house shows a loss that loss can offset any obligations that the house may have generated.

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