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Filed under Investment Property, Kansas City Real Estate
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.
Filed under Investment Property, Kansas City, Kansas City Real Estate
Johnson County, Kansas is where I live. It’s in suburban Kansas City and the investment property inventory possibilities from the multi-family housing stock is down right now. There has been significant competition in the bids for the “good” properties. I’ve said it before and I’m saying it again. “The worm has turned.”
It should be noted, however, that I still notice a significant difference in the movement of investment property on the Kansas side versus the Missouri side of the state line. Missouri investment property candidates are selling, but at a much slower pace.
I only write all this to let you know that other investors are back in the Kansas City market. I noticed this pick up in about mid 2013 and it’s steadily built. No boom, mind you. And I consider that good. At least for our market.
Filed under Kansas City Real Estate, Real Estate Investing
Yesterday I did a post describing the benefits of a rental property after 20 years of ownership. Please read Real Estate Investing Versus The Stock Market : Part 1 for the entire scenario and to catch up to where we are today. Because today we’re going to ask what if you had taken that $38,500 ($35,000 for the down payment and $3,500 for closing costs) and left it in the stock market versus investing in a rental house.
THE INVESTMENT
I will readily admit to not being as in tune with the stock market as quite possibly many of our readers. I do real estate. So that makes sense. Yes, I have an IRA. Yes, my wife has a pension with KPERs. Yes, I have other investments (though not large) in mutual funds and one other well known stock. The point is, I don’t eat, breath and live in the stock market. And I don’t believe most working professionals have the time or expertise to follow the market on an hourly or even daily basis, either.
So we’re going to say that your $38,500 is in a nicely performing mutual fund (or stocks, heck, I don’t care.) that after all the buy fees, sell fees, yearly fees, etc, is yielding you a nice return of 9% per year, for the next 20 years. I’m told, and have researched, that 9% is a good return number to be expected. (Are you getting 9%?) Yes, I am well aware that spikes and dips can happen. But how is that any different than real estate?
So, using a very simple investment calculator math you simply take that $38,500 at a 9% annual return and you end up with a balance of $215,770.
REAL ESTATE VERSUS STOCK MARKET
Looking at yesterday’s real estate returns after 20 years (but not calculating increases in rent or tax benefits and conservatively adjusting for additional obsolescence) we had a total benefit of $216,611.
The same $38,500 invested in the stock market over the same period of time became $215,770.
PICK’EM?
Can we agree here that the difference is not that great? But what if…?
RISING RENTS
Rents rise and fall like housing prices…and the stock market. Let’s just say that rents rise over the years at 2%, or slightly less. Not unusual. Well, with that being the case, we have a different ball game.
Remember, our Part 1 scenario considered the cash flow before taxes to be $1,536/yr based on a rent rate of $1,575. Now lets say that we calculate the rent rises. I won’t bore you with all the math, but it takes our total 20 year cash flow before taxes number from $30,720 to $63,150. That’s another $32,430 in favor of the rental house.
MOVING FORWARD
Listen, in my experience real estate is not as easily liquidated and carries more risk. However, it is easily leveraged by real estate investors with good credit and assets and you can harvest the equity out of this house 10 years in to create a second income property with similar numbers. Now the game has changed!
To be fair, stocks/mutual funds take less management, are easier to liquidate or buy/trade, and carry a whole let less risk.
And, let’s be clear, I own both rental property and mutual funds/stocks. My preference after I have maxed out my IRA (and that of my wife) each year is to put the money in to real estate. Just makes more sense to me. Why?
I could go on and on. I am not saying don’t invest in the market. I am saying, you should also be investing in real estate.
I have not done this for a while so it’s time to do it again. Let’s look at real estate investing versus the stock market. You may want to get comfortable and get out a calculator to follow along. Part 1 isn’t a short post. But when it comes to your retirement, shouldn’t you invest a few minutes to see whether you should leave that $35,000 in the stock market or to put it in rental housing?
OVERALL SCENARIO
Let’s say you are 45 years old with a plan to retire in September of 3034 at 65 years old. You are maxing out your IRA contributions every year (Roth or Traditional, I don’t care) and/or are using your employer’s retirement plan. Still, you have extra monies that you invest passively in the stock market in some mutual fund that isn’t giving you the results you are after or desire or heck, you just want to diversify.
In our scenario about to unfold you will need approximately $38,500 in cash to pay for the down payment and closing costs. The mortgage company will insist that this not deplete all your “on hand” cash so you’ll still need another $6,000-$8,000 in reserves easily accessible.
THE INCOME PROPERTY
First let’s look at the income property we are going to acquire. It’s a “typical” lower bell curve house in Johnson County, Kansas, a “better-off” suburb of Kansas City, Missouri. The house would most likely be in Overland Park or Olathe. Quite possibly it will be a 3-4 bedroom, 2-2.5 bath split level home with a 2 car garage in either the Shawnee Mission or Olathe School Districts. Good school districts. We’re also going to say, for the sake of this argument, that the home is a turn-key investment property that is professionally managed by us.
The negotiated purchase price will be $175,000 plus roughly $3,500 in closing costs since you will be leveraging with a 30 year mortgage at 5.75% with 20% down ($35,000) and, hypothetically speaking, closing on August 30, 2014 making your first payment due on October 1, 2014. Therefore, your house payments will be $817.00 for principal and interest only.
THE INCOME
A house such as described should rent for about $1,575 all day long with good demand and, in our current rental market, with less than 30 days of vacancy. That translates to a $18,900 a year in income. No. You do not get to spend all that! Because first, there is vacancy.
THE EXPENSES
Our Kansas City area property management company, KCPropertyManager.com has over 200 homes in our portfolio and we can tell you that on the Missouri side vacancies run about 7-8%. On the Kansas side, at least right now, vacancies are running closer to 3-4%.
But that is not all, we cannot forget about taxes, insurance, repairs, sinking fund (for future repairs like roofs, appliances, etc, and fees for utilities and professional property management as well as any other miscellaneous costs. Now, I can break all those down for you. However, as a Kansas City real estate agent who helps real estate investors every day, I can tell you that rental property expenses run anywhere from about 30-34% for self-managed homes to 35-40% for professionally managed homes. Sure, any particular year can be slightly better or worse, but those are the averages I’m finding here in Kansas City. (It’s also a function of what neighborhood you are in…but that’s a blog post for a whole other day.)
CASH FLOW BEFORE TAXES
I have written many times about the 4 Benefits of Real Estate Investing so you can go back to those posts to see the details. CFBT = NOI (net operating income) – Annual Debt Relief. For our example Kansas City rental property here the Cash Flow Before Taxes is roughly $1,536/yr. Or a whopping $128/mo. Vacation baby!
Uh, no. The cash for this particular house is enough to cover all the expenses and build a very modest reserve as time flows by. But you are not going to Europe for a month with the cash flow. We’re talking about Buy & Hold Retirement real estate investing here. Not cash flow hunting. If you want cash flow, we need to either put more money down or look over to the Missouri side at a lower price point. But then you’ll lose much of benefits 3 & 4 that are still to be discussed.
After 20 years of this your income property would have generated $30,720 of cash flow benefits (before taxes).
PRINCIPAL REDUCTION
Ah, yes. My favorite benefit of real estate investing. Each month your tenants pay their rent they are also paying down your mortgage! Your rent house, the one not kicking off very much cash flow, after twenty years has a principal reduction, courtesy of your tenants over the years, of $65,571.
That’s more than twice your cash flow. Now we’re getting somewhere.
TAX BENEFITS
This one may be tricky for me to extrapolate 20 years without spending my life writing about it. But the first year tax benefits should be about $350. As a reminder Tax Benefits are
NOI – Interest paid (per year) – Depreciation (per year).
Suffice it to say that with each passing year your CPA will make sure he is reducing your overall tax burden as much as current tax law will allow. You can always subtract the interest and there is a specific depreciation schedule that extends over 29.5 years.
For our purposes in this entire argument, I’m going to pretty much null this investment property benefit. Oh, make no mistake, it’s real but for the purposes of our argumentative experiment we’ll just consider it gravy.
APPRECIATION
Did you live through 2007-2011? Here in Kansas City it was more like 2008 – 2012 when all you east and west coast readers caused our money supply to just stop! So appreciation is not a God given right when you own real estate of any kind. We learned that up close and personal. Right?
Historically, however, we know that real estate tends to be a great hedge against inflation. Here in Kansas City in Johnson County, Kansas real estate prices tend to float just above inflation. For our argument here, we’re going to say that our economy for the next 20 years will be pretty much like it is today. (Quit laughing. I cannot tell the future any better than you can. I know darned good and well there will be rises, dips and the unforeseen.)
So, with all that said, let’s say that the income property in question appreciates at 3% per year. That would be a fair slow growth number for the Kansas City area. (Check out the last 10 years on average.) After twenty years, our rent house that you purchased for $175,000 would now be valued at $316,000. That’s a gain of $141,000.
TOTAL BENEFITS AFTER 20 YEARS
Cash Flow Before Taxes $30,720
Principal Reduction $65,571
Tax Benefits n/a
Appreciation $141,000
Total Benefits $237,291
I HEAR YOU!
I already know some of your objections. So let’s do it. (Even while conveniently forgetting that rents quite likely go up over the years…but we’ll not even count that…just like the tax benefits.)
Additional repairs. My calculated expenses ratio accounts for the property to pay for most of is own obsolescence and make-ready turn overs. But housing can take hits planned or otherwise. So let’s subtract an additional $8,000 for a roof, $4,500 for heating and a/c, $800 for a water heater and $5,500 to fix a bunch of wood rot and get a good paint job. That’s a total of $18,800. Heck, let’s throw another 10% on top of that and make it $20,680.
Sales costs. Well now, this could get complicated. Are you going to sell outright, pay the capital gains and the depreciation re-capture? Not advised. Are you going to refinance and pull the money out to do other things like vacation, re-invest in other housing or stocks? 1031 Tax Deffered Exchange? Or, are you going to let it go and form trust wherein you can leave this property to your kids or heirs, capital gains tax free, upon your passing? These are all scenarios that may very well be different 20 years from now than they are today. So I am not going to figure in sales costs…but not to worry. I won’t figure in sales costs on the stocks and/or mutual funds, either.
THEREFORE
If you take your Total Benefits – Additional Repairs you have an Adjust Benefits Total of $216,611 after 20 years of ownership of this investment property.
Chris Lengquist
Keller Williams Realty
Diamond Partners, Inc
13671 S Murlen Road
Olathe, KS 66062
913-568-1579
Because I work with a lot of professionals in other fields, I find the desire for turn-key real estate investments in Kansas City to be pretty high. Creating an income property portfolio with as little day to day involvement is what I do for people. After all, not only do I help real estate investors find a home that is a good fit for the their current and future goals, I have a team of property manager that take care of the home for the owners.
Now, full disclosure. Owning income property is not a license to print money! You should expect good returns on your REI. But let’s be honest. Anyone that is promising 15%, 20% or even higher ROI is probably either bad at math, dishonest, ignorant or putting you in to homes you will not be proud to find out you own and in fact will put you in the “slum lord” category. I am NOT saying that there isn’t a segment of owning low price/higher yield rental properties that doesn’t make sense. I have an active client that has just such a strategy.
But the investor that I speak of is single, young and spends most of his free hours from work managing his own properties. With lower priced rentals that’s about the only way to make them work. They take a lot of day to day involvement. And the stories I could tell of his travels!!! (I should do a whole blog series of stories he tells.)
If you are a higher earning working professional looking for an investment vehicle that hedges against inflation, generates modest cash flow and has the full 4 Benefits of Real Estate Investing working for you then I would consider Kansas City as a destination for at least part of your investment portfolio. Kansas City is in the middle of the country both geographically and economically. We can discuss that another time.
And I’m here in Kansas City. I can help you plan your future. I can help you choose the right houses. And I can help manage those houses to maximize both current cash flow and future equity.
Give me a call today. 913-568-1579
Filed under Kansas City Real Estate, Real Estate Investing
Rental property in Kansas City is changing…economics wise. Let me tell you what I’m seeing from three different prospectives.
TENANT PROSPECTIVE
On the Kansas side if you are a tenant you have choices but you also have to act quickly. In Johnson County we, as property managers, cannot rent houses fast enough. I would LOVE to have more 3-4 bedroom, 2 bath homes for rent. Rents are up and competition is up which means a lot of frustrated renters.
On the Missouri side we are seeing rental inventories rise. Therefore you have a little more time to make a decision on your next home and rents are beginning to hold steady. No more inflation on rental prices do I see in the near future.
OWNER/MANAGER PROSPECTIVE
Tenant selection for the last couple years has been easier than in previous years. You have multiple candidates and even though credit history may have been bad you had recovering income. Managing houses in the lower price range ($0-$700/mo) remains the biggest challenge because of the tenants that inhabit that space. The medium range rents ($700 – $1,000) have been performing very well and the quality of tenants has been way up. The high range rents ($1,000 and up) have also done remarkably well in this economy.
But watch your maintenance. Don’t create a deferred maintenance situation you will later regret.
BUYER OF RENTAL PROPERTY
Quit arguing with your realtor and keep a cool head. I am noticing two kinds of investment property buyers right now and they are both driving me a little crazy. 🙂
Just a few of my thoughts for now.
Filed under Investment Property, Kansas City Real Estate
Kansas City Investment Property and Property Management 