Monthly Archives: May 2007

May 14, 2007 · 11:56 am

Los Angeles v. Kansas City: Which City Is Better For Your Investment Dollar? Part 2

Yesterday I wrote a post comparing Kansas City income property to Los Angeles income property. Feel free to go back and read the article as it will help you to get a basis as to this discussion.

Where we left off was with Kansas City at a very slight advantage on cash flow…very slight…and a huge advantage over LA in the cash needed to invest category. I believe to get the said rental homes in LA to cash flow/break-even we needed to put down $294,995 while in KC the cash needed was $38,800.

I’m going to assume there are more investors out there with $40,000 than $300,000 in liquid investment capital. But if you have the capital you might be thinking..

“Chris. That’s well and good. But you know darn good and well that the Los Angeles housing market is always going to be more desirable and appreciate more rapidly than Kansas City.”

Of course, more desirable is always going to be open for discussion. But appreciation can definitely be measured. Kansas City has a historical appreciation rate of 5% over any given 10 years. Some years KC can be as high as 11%. Some years 1% – 2%. Los Angeles, on the other hand, can be prone to big surges and big drop offs. Timing the market in LA can lead to riches you will probably never reach in Kansas City.

How has timing the market worked out for you so far?

And that is only if you have the $300,000 to invest in the first place.

For our next measurement in the Kansas City versus Los Angeles investment property challenge I’m going to use the KC 5% historical appreciation rate for the City of Fountains. For the City of Angels, I am going to use a steady appreciation rate of 8.5%. I realize that LA is nowhere near that at the moment. But over most periods of time in history I can assume that LA’s appreciation rate will be at least half again as good as Kansas City’s.

We’ll use 5 years as our holding period of time before looking to cash out or using the tax code to exchange into other investment property or properties.

LOS ANGELES

The Los Angeles area duplex we looked at yesterday appreciating at 8.5% a year should now have a fair market value of right about $902,000. That is an increase of $302,000 to your asset sheet. (Not including, of course, the other 3 of the 4 Benefits of real estate investing or the sales costs.)

KANSAS CITY

The Kansas City (Olathe) area duplex we looked at yesterday appreciating at 5.0% a year should now have a fair market value of right about $247,500. That is an increase of $53,500 to your asset sheet. (Same exclusions as above.)

SO LA WINS. RIGHT?

Wait a minute before we start crowning LA king. We simply cannot forget that in Kansas City you had a cash savings of $256,195 on the initial down payment. With those remaining funds we can buy a minimum of 6 additional properties. Properly leveraged, perhaps even many more. But we’ll just keep it at a cash invested to cash invested ratio and we’ll save $23,395 that will go towards additional closing costs and taxes over the years.

So we’ll add 6 more rental duplexes to the Kansas City real estate investor’s portfolio. Now you have 7 properties appreciating $53,500 per property over the same 5 years for a total appreciation in Kansas City of $374,500.

Kansas City asset growth = $374,500
Los Angeles asset growth = $302,000

7 Comments

Filed under City Comparisons, Kansas City, Real Estate Investing

May 13, 2007 · 5:35 pm

Reading Worth Your Time: Time-Value of Money

How the Time-Value of Money Can Help You Sell Your House by the Real Estate Zebra.

Los Angeles v. Kansas City: Which City Is Better For Your Real Estate Investment Dollar?

A good deal of my clients come from the California, Washington and New York areas. And most of those come from the Los Angeles area. So I thought, for a little fun, I would point out to the folks here in Kansas City why the Los Angeles real estate investor likes this area for their dollar.

First, a few disclaimers. Finding LA comps to KC rental properties was not easy. After all, we in Kansas City have different style of architecture in our duplexes and let’s face it, our area is much, much smaller than the Los Angeles area. So when you are reading below just know that for the Los Angeles numbers I did the best I could in diligent research trying to find a two bedroom duplex that had a garage and was in a “nicer” part of the Los Angeles suburbs. After I found one on craigslist (why don’t more real estate agents in LA have user-friendly websites?) I then went to rentometer to find accurate rents.

So the long and the short of it is that I did the best I could on the Los Angeles numbers. If you feel I’m a little off here and there, feel free to adjust my findings accordingly. But I don’t think I’ll be too far off…

The goal is to get the rental homes in each city to “pay for themselves” when considering principal, interest, taxes, insurance and a 7.5% property management fee. No vacancies, reserves or other miscellaneous items have been figured in. So you know it’s not real world but it will get the point made.

LOS ANGELES

I found a duplex located on Vanowen Street in Lake Balboa, California. It appears to be in pretty good shape from the photos, has two bedrooms on each side, one car garage for each side (shared) and I don’t know how many bedrooms. My research showed rents would be in the $1,300 per side range. It is being offered at $599,995. So let’s do some math.

$2,600/mo rent collected
– $ 195/mo property management
– $ 300/mo taxes
– $ 175/mo insurance
= $1,930/mo available for P&I

Making a cash investment (not including closing costs) of $294,995 would leave you with a $305,000 mortgage at 6.5% interest amortized over 30 years. That’s $1,928/mo. That’s $24 a year cash flow.

KANSAS CITY

On Friday I closed a duplex in Olathe, Kansas that was asking $199,950 that featured two bedrooms, one and one half baths and a private garage for each side. My Buyer payed $194,000 for the property. Both sides are rented with fresh one year leases totalling $1,475/mo.

$1,475/mo rent collected
– $ 110/mo property management
– $ 225/mo taxes
– $ 90/mo insurance
= $1,050/mo available for P&I

Making a cash investment (not including closing costs) of $38,800 (20%) would leave you with a $155,200 mortgage at 6.5% interest amortized over 30 years. That’s $981/mo. That’s $828 per year cash flow.

WHICH CITY WINS???

Early in the game it looks like Kansas City has taken the lead. By putting down only 13.2% of the money in Kansas City than you would in Los Angeles you have created break-even to very modest cash flow. In Kansas City you are committing much less money up front and committed to a bank for a much lower mortgage balance.

But we are only at half-time of this match. (Or the 7th inning stretch, whichever you prefer.) Tomorrow we’ll discuss appreciation. Who do you suppose will win that battle? You might be surprised.

Jump to Kansas City v Los Angeles Real Estate Investing Part II here.

1 Comment

Filed under City Comparisons, Real Estate Investing

May 13, 2007 · 10:02 am

Real Estate Investing Return Rates

When you invest in real estate you are expecting a return. Otherwise, why bother? Right?

What concerns me is the amount of potential clients I speak with who are ready and willing to rush headlong into purchasing an income house without having any idea as to what the returns will be. Or even what returns they expect to get from their real estate investing. It sounds trite, but if you don’t know what you are shooting for how do you know if you got it?

“I just want to make enough to cover my mortgages payments and to not have to put any of my own additional cash into the home to make it fly.”

As your chosen real estate investment counselor I have to say that I still don’t know what you mean.

Yes. I get what you mean. But really what is the goal we are trying to obtain? How many years do you have before you expect to retire? How much capital do you have for real estate investing at this point? What is your tolerance towards non-traditional 30 year loans? Are you after Growth or Income? How do you measure returns? Cap Rate? GRM? Cash on Cash? Overall return? What is the end amount of money we are trying to accomplish?

I’m not trying to over complicate this thing. Owning real estate for income purposes is really just like any other business. You need to understand, before beginning, what you will need to put into your business and what you expect to get from your business. This would be true if you were starting a flying school, a Quick Trip or a hamburger stand.

After getting these (and a few other) questions answered I can better help you to determine what needs to be done next.

4 Comments

Filed under Real Estate Investing

May 11, 2007 · 10:14 am

Should A Real Estate Investor Get Their Real Estate License?

I received a question by email the other day that I get asked about 6-8 times per year.

“Should I, as a real estate investor, get my real estate license?”

Let me just begin this post by saying that I am not a substitute for sound legal advice. (Does that make you think the answer could really matter?) When you get your real estate license there are certain legal obligations you have to fulfill. So before making a final decision feel free to contact your real estate attorney.

Advantages

Certainly, as a real estate agent you can get first crack at quite a few properties. Once you learn how the MLS system works you can set up searches that allow you to monitor for homes that fit your criteria.
People know you are “in the game.”
Access to Board approved real estate contracts.
You can save or earn a commission on deals that would otherwise go to the agent involved.

Disadvantages

As a state licensed real estate agent you are now held to a “higher” standard. You have laws to comply with and the Code of Ethics to follow.
You must notify any buyer and seller you are working with that you are a licensed real estate agent.
If it ever went this far, who do you think a jury would side with? The person who ended up selling their home at a deep discount or the licensed real estate agent who knew the true value of that home that was for sale?

Generally, I tend to recommend to people to NOT get their real estate license if they are going to be a full time real estate investor. I believe the liabilities and compliance issues outweigh the benefit of saving the occasional commission.

Having said all of that, there is absolutely nothing wrong with being a real estate agent who also owns investment property. For instance, the investment property I own is for my security and my benefit. It is not, at this time anyway, my primary source of income. It is my nest egg and wealth growing vehicle.

So ask yourself: What will my point of emphasis be if I get my license?

4 Comments

Filed under Misc. Real Estate, Real Estate Investing

May 8, 2007 · 11:24 am