Real estate investing still makes sense. In fact, even in today’s troubled waters investing in income property still kicks the hiney of most other investment vehicles. And it should. After all, it’s more labor intensive (even with a professional property manager) and it’s not very liquid. It could take months or years to sell, depending where you are, and to avoid locking in losses you may have to hold longer than you originally expected.
The Kansas City real estate investing market is still margins above other areas of the country. We do not have the huge depression. Our unemployment is still lower than most of the country. And our real estate values haven’t declined anywhere near other markets. We’re not perfect. Go to the areas of town I’ve never recommended and you’ll find plenty of examples of bad stories. But let’s take a look at a real live rental property currently for sale.
Rental Duplex Example
There is a duplex here in suburban Kansas City that is for sale. What they are asking and what they will get is of course, negotiable. But I figure this duplex will sell for about $111,000 and with closing costs and very minor repairs thrown in you’re probably all in at $115,000.
Nice rental neighborhood. Safe and desirable school district. Two beds, one bath each side. Rents on one side are $525 (long term tenant) and vacant on the other. Three bedrooms in the same neighborhood rent for between $825 and $950. So the real rents here should be about $625 to $650.
Let’s subtract our vacancy (6.0%) and other expenses adding up to about 32.7% of annual rents (includes property management, taxes, misc., utilities, etc.) and you’re left with about $9,200 of Net Operating Income. Subtract your debt service (20% down at 6 1/8%) and you have an annual cash flow before taxes of $2,720.
Throw in Principal Reduction (always my fav) and add back in tax consequences after reducing your NOI with interest and depreciation and you have a net first year benefit of about $3,571.
What is $3,571?
That’s a 13.6% return on your cash invested.
That’s an 8.0 Cap Rate.
That’s Cash on Cash at about 10.4%
Where else are you earning 10.4% on your money after expenses?