Coming to me with $35,000 to start your real estate investment career is terrific. Let’s just see what we can do with that money.
How about we take it and split it in two? We’ll buy a couple of Waldo area homes, put 10% down, run mortgage payments (with escrows) of about $725 and we’ll get rents of about $775. Not great cash flow. In fact, pretty dead even. So why do I want to to that?
Currently your $35,000 is sitting in an IRA or CD or stock. Let’s give you the benefit of the doubt and say you are earning 8% on the money. That is a $2,800 gain for the year. Heck, I’ll take it if you don’t want it.
But now let’s look at that same $35,000 in the above scenario. Remember, there are 4 Benefits to investing in real estate (see side bar) and we are only going to talk about the appreciation factor here. Not Cash Flow Before Taxes because it’s minimal to nothing here. Not Principal Reduction even though that can really add up. Not Depreciation…trust me you’ll love me at tax time. We’re only going to discuss the Appreciation benefit.
With that $35,000 you should have leveraged yourself into about $200,000-$225,000 worth of real estate. So let us take the smaller number of $200,000. Historically, Kansas City real estate appreciates at about 5% a year. But I believe we’ll have another flatish year at 2%-3%. Again, let’s use the lower number of 2%. $200,000 x 2% means a $4,000 increase.
“Well Chris. That’s only $1,200 better than the return I was getting in the stock market.”
You are right. And couldn’t be more wrong. Remember, we are only calculating ONE of the 4 Benefits of owning residential investment property. Remember, we didn’t fully leverage your capital. And remember, we are in a flat year of real estate growth. What happens if it really takes off, again? (And quit talking to me about dips in the west and east. We didn’t get the growth they were getting so why do you think you’ll get those dips…ALL REAL ESTATE IS LOCAL!
Your thoughts?
Editor’s Note/May 26, 2008: According to the Office of Federal Housing Enterprise Oversight the Kansas City area had 2.7% appreciation in Kansas and 1.7% in Missouri. What did I say above?
BBQ Capital | Kansas City Real Estate Investing 
Great post, Chris, my financial advisor would have charged me an arm and a leg (and some additional fees) to hear knowledgeable information like that. Yeah, CD’s are safe but, nothing is like the potential of Real Estate. Plus, I don’t know of an 8% rate these days, unless you want your money tied up for a couple of years. And with the market how it is these days, who wants to tie up their money for longer than 6-months or so anyway? Not me. That is, unless it’s for my Roth IRA.
I work for Wallhogs (Wallhogs.com) and we have just begun printing some custom Wallhogs for some realtors for their advertising and marketing campaigns. Is this something that would work in your industry? I have just added you as a contact in mybloglog (scottalk), shoot me a message if you are interested.
Thanks,
Scott at Wallhogs
Scott,
The internet is really changing how the public can interact with their professional advisors. In the real estate industry there is a real struggle going on between those that want to keep the information private/proprietary and those that say “open it up” and let people make informed decisions.
Guess which way I lean? (I smell a blog post coming out of this.)
I’ve seen products like yours before and think they are great. I’ve bookmarked the site. While I cannot think of any real estate applications at this time I do have four kids and would love to be able to convert some photos for them. Thanks.
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