Monthly Archives: January 2006

This is where the rubber meets the road.

My first question is personal property or investment property?

Personal Property – My advice here is work with an experienced REALTOR with a proven track record. Why? Because there is a little bit of art mixed with science here. It is extremely rare that a particular property will exactly match a neighboring property. And even if it did the negotiation skills of the Buyer and/or Seller would probably be different. Having said that, personal properties are mostly priced using a comparison model. It is helpful to know how your house compares to the other houses in your neighborhood. More bedrooms? Less baths? Are the mechanicals new or 15 years old? All of these are factors. So is the season of the year and motivation to sell.

Sit down with your real estate agent and go over the numbers for the last 12 months. Look for trends and be honest when comparing your home to your neighbors. Look at the home from a Buyer’s eye. (You may be very proud of the new roof and furnace. And the Buyer does notice that. But the Buyer also expected the house to have a dry inside and heat in the winter.)

Investment Property – I’ve said it before and continue to stand on my soap box. When buying income property the price should be based on the cash flow that property will produce. What should that be? I cannot answer that. It depends on your goals. If you are an investor looking for a 15% cash on cash return you will have an entirely different approach to the value as an investor looking for any home that will have an 8% cap rate.

Before you go out and look at properties I would advise you sitting down with an informed real estate agent and determine what your goals are for your money before you invest in rental properties. Yes, you have to take comparisons into account. But don’t base your bid on those alone.

Let’ s do some simple math.

$100,000 of stocks appreciating at 6% will yield you $106,000 at the end of the year. Of course you have to have $100,000 invested to accomplish this. (Yes, I know you can get fancy, but that is the basics.)

$100,000 invested in real estate can give you $500,000 worth of real estate holdings. How? 20% down on 5 homes with a market value of $100,000 each equals $100,000 invested with a worth of $500,000. If each home appreciates 5% your $100,000 investment yields you $25,000 worth of appreciation.

Or how about you find properties that will cash flow with only 10% down. Now at 10% down on $100,000 properties each appreciating at 5% you have 10 properties for a total of $50,000 appreciation in one year! Are you getting the message?

Yes. The gains are tied up in the house and you would have to liquidate the holdings to have access to it. Or would you? You could refinance. Or sell a share of the house.

And, we haven’t even spoken of the other 3 benefits of owning investment real estate. What are they?

1. Cash flow before taxes.
2. Loan paydown by somebody else.
3. Depreciation.

Where do you want to invest for your retirement?

This is a shout out to any builders out there that would like to run some numbers and models on whether or not it would be feasible to build some traditional, infill housing. New Urbanism is something that has intrigued me for years and I would be extremely proud to be a part of such a project. A builder in Minneapolis is actually doing the kind of building that I believe Kansas City would benefit from. Take a look at the two links provided in this paragraph and come back and let me know if you or anyone else you know would have any interest.

As you may have seen in my bio I used to reside in Suburban Maryland/Washington, DC. A community was built within 5 miles of my home that is still outstanding today. Kentlands is the name of the neighborhood and it was built in Georgetown style with all the modern conveniences that spoil us. It is the perfect mix and match of housing for such a large project.

Building a Kentlands here in Kansas City may not be feasible because of the lack of popularity of townhouse living here in the heartland. But smaller, denser housing with eye appeal would fly off the market. I’m convinced of it.

I read daily of the impending housing bubble burst on the coasts. But what about here in the heartland? Are we in danger of our homes becoming less valuable than they are? Or can we count on the continued steady upward climb?

Like everyone else, the following comments are just my opinion. But let’s break a few things down;

1. My phone is still ringing like crazy. It is true that a lot of the calls are marginal credit risk buyers. But somehow the market has not yet exhausted all of these buyers. And when these buyers buy, or new buyers that are just entering the home ownership market buy, they allow the other levels to move up or down, depending on their desires.

2. It is also true that while my phone is still ringing the inventory is still expanding. And let me just say that some sellers seem to have an inflated view of their property’s worth. Is it bad counsel by a REALTOR or their own expectations? Hard to say. But as we step deeper and deeper into a buyer’s market it is more important than ever to do your homework and price your house right!

3. Investors make up as much as 24% of the overall residential market. What will they do in 2006? My guess is most will hold and many more will continue to buy as the market gets softer and more opportunities are to be found. But if they quit buying and start dumping homes on the market, look out! (This is the greatest fear on the coasts.) In KC, I just don’t see any reason that I would advise my clients to do that.

4. Foreclosures are rising. Slowly but surely. All this easy financing has created a homeownership class of people just getting by. If their rates jump on their ARMs, or if little Susie gets hospitalized they may lose their home. Any neighborhood can withstand a foreclosure or two. But any more than that and it could seriously affect your home’s value. The Charlotte Observer has done an excellent series on this subject.

One of the great things about living hear in the Kansas City area is it’s economic predictability. Seldom do we get great jumps in growth. And seldom do we crash hard. I own investment property and see no reason to sell. The market’s value seems to be right on track here. And I’m staying in.