Investment Property Case Study

Real estate investment gurus love to talk in terms of “no guarantees”, pro formas and about deals from 10+ years ago. But I want to give you an Investment Property Case Study from right here in the Kansas City real estate investing universe.  The following is real though I will not give addresses or client names, etc.  Not only is it real, it’s still going on right now.

THE SET UP
In 2011 I had two fund managers from the Los Angeles area of California come meet with me about investing in rental property here in Kansas City.  They wanted returns formulated on rents being two times investment.  That is to say they wanted an all in price (purchase, closings costs, rehab) to be $40,000 if the rents were $800/mo.  Easier said than done in any neighborhood you’d actually want to live in.

So I took them out and showed them around.  Then I sat with them and asked me to make it more of a 1.6 ratio or 1.7 to get in to better neighborhoods with better houses and better schools. After showing them what I could do, I went to work.

ACQUIRING RENTAL PROPERTIES
From May of 2011 to March of 2013 we acquired 56 rental properties.  Most were in 2011-2012 when the market was just waking up from it’s downfall in 2008-2010. What would these numbers show if we had started acquiring in 2009!!!????!!! Most of the properties were 3 bedrooms with 1-2 baths.  All were in Missouri in Kansas City, Raytown, Independence, Grandview, Gladstone, etc.

PURCHASE, REHAB, RENT
After the closing we would set to work rehabbing to rental standards.  Then rent at or slightly below market as quickly as possible.  With this strategy we’ve been able to hold these properties to about 6% vacancy.  All investment properties were paid for with cash.

THE MATH
I’m not going to break down everything. Not for this post.  But most of the expenses listed below were generated in the first 30-40 days after purchase…during the rehab portion of the property life. The rest of the expenses have been since they have been generating income with tenants in them.  Expenses include repairs, rehabs, insurance, management, utilities when vacant…literally everything except taxes, which will add up.  The income has been generated from the first tenant through to today.

THE RESULTS
Here you go.  This is why owning rental property is a great investment.

Purchase & Closing Costs          $1,944,191
Expenses                                       $1,267,330
Total Investment to date    $3,211,521

Total income to date             $1,212,159  

CURRENT VALUE
The current value is based on comps with minimal additional repairs/improvements to the income property.     The cost of sales would have to come off the value including but not limited to repairs for inspection requirements, realtor fees, closing costs including title fees, etc.  Figure about 12% -15% cost of sales with all that in mind.

Current Value                          $3,807,500

Now there are differing ways to calculate your returns and I’m not going to go in to details because of the spread of months between the first and last purchase, time line of the repairs, etc.  But no matter how you look at it the real estate investors that came to Kansas City have come out okay.

Fusing these two sets of results is my favorite way to look at it.

Current Value                                $3,807,500
Purchase Price + Initial Rehab  $2,792,623
Cost v Value Differential     $1,014,877

Total income to date                   $1,212,159
Expenses since rehab                 $ 420,398
Positive Cash Flow                 $791,761

As I said there are professional accountants out there that will give you several different formulas and of course all of this does not include the property taxes, as I noted above.  Those taxes could add up to a takeaway of about $90,000.  I just don’t want to take the time at this time to go in and add them all up. But in any case, those numbers are significantly better than the numbers my IRA returns.  🙂

Now, you may not have $3M to invest. Neither do I. But you can do one house. Or two.  Get started today.  Your retirement will thank you later.

If you have any questions about investing in real estate here in the Kansas City area, please, do not hesitate to contact Chris Lengquist at 913-568-1579.

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Filed under Investment Property, Kansas City, Kansas City Real Estate

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