Monthly Archives: April 2008

April 14, 2008 · 9:01 am

Mechanic’s Liens Are A Wild Card In Kansas

I told you last week I had a closing crater because of a situation completely out of my control. Now that I’ve put the gun down I thought I would tell the tale of how anyone can become a problem in the state of Kansas and Missouri if they choose to be.

Less than two business hours before closing I received a phone call from the listing agent stating that we had a “serious problem.” I don’t like serious problems much. Especially when I’ve monitored the transaction very closely. You see, my buyers were purchasing a duplex in Overland Park, Kansas where the owner had very little margin for error in selling because he owed anybody whose anybody money. Seems his business hadn’t been going very smoothly and he needed to dump this property. The buyers negotiated a price that made sense to them and that the owner could “handle” which is to say he was going to have to bring a small amount of money to closing while foreclosure proceedings had been delayed by the bank.

One of the units had a tenant in there that had done some remodeling in lieu of rent. And the tenant had done a good job. Since there was no lease and since the waived rent was a greater amount than the work performed the seller did not believe there would be a problem in asking him to move out so that my clients could move in at closing. I watched with a wary eye.

But I have to say that everything was progressing nicely. The repairs were being done in their entirety and on time for closing. I made weekly calls to the seller’s agent making sure there were no ghosts in the closet that would come out. Heck, even the tenant who lived on the one side had moved out right on schedule so that after closing my buyers could move in.

Then the seller’s agent calls and says “We have a problem.”

Seems the tenant had forgotten the free rent for a year or more. Well, at least that’s what I’m told by both the seller’s agent and on a phone call from the seller who was apologizing sheepishly. The tenant just decided that things weren’t right and filed a mechanic’s lien on work he feels he was not properly compensated for. About $9,400 worth I’m told.

Let’s see. Rent of $725/mo multiplied by 13 months is $9,425. Hmmmm.

But the thing that really causes problems is the State of Kansas allows him to do this last minute. Without verification or proof anyone can file a mechanic’s lien on anything that they want to. Sure, in time this will all be sorted out and a legal finding will find for the seller or the tenant. The problem is that in the mean time the buyers have a truck full of furniture and a fistful of cash they were looking to unload on this duplex.

Scrambling set in and they found an apartment with a three month lease. Now we have to find them another property. So the former tenant had better be in the right because let me tell you the smell of lawsuits is in the air if this is found to be a frivolous lien… Let’s count who lost on all this;

Seller loses because now the bank decides to press forward with foreclosure.
Buyers lose because they don’t get the duplex they want, have lost monies spent on inspections, appraisals and travel not to mention the additional costs of leasing a short term apartment.
REALTORS lose because those commissions are gone. Well, I’ll help the buyers find something else but the work starts all over again. The seller’s agent is just out.
The tenant in the other side who is building a home and was planning on renting the place out for several more months will get notice to vacate now that the property is in foreclosure. They are also “friends” with the former tenant.
Bank loses because now they will have tens of thousands of dollars in legal costs to foreclose.

The former tenant. He gets to give everyone the finger without recourse unless there is a judge out there with a spine.

Now all of this is going on the assumption that I’ve received the full story. But the consequences of the matter are clear. And not to be taken lightly.

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Filed under Misc. Real Estate, Personal Real Estate Opinions

April 11, 2008 · 8:42 am

Even Dora The Explorer Knows You Need A Map

I love talking to real estate investors that talk about and think about their goals. People with goals are refreshing. They don’t get dragged off in different directions depending on which Investment Guru blows through and they aren’t offended when you have slightly different points of view. They’ve got their road map and they are gonna follow the directions. Dora would make and excellent real estate investor. Maybe even that monkey, Boots.

“Reasonable people can disagree.” That’s what Jay Bilas loves to say when comparing basketball teams.

The same is true for real estate investors and their properties in relationship to their plans.

Jeff Brown likes to talk about Purposeful Planning. And if you haven’t read yesterday’s post on the subject of Cash on Cash you should. Especially the comments. There is a mountain of gold in the comments made by Jeff, Christopher and Another Investor. Look at how each has his (her?) road map clearly before them and know what their next move is in relationship to their goals.

I love it.

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Filed under Personal Real Estate Opinions

April 10, 2008 · 9:28 am

Cash On Cash And Why You May Not Wish To Worry About It

10% Cash On Cash is the Holy Grail to a lot of real estate investors. I just had the conversation again with someone in their very early thirties telling me why they needed a 10% Cash On Cash return. That’s what his father had said he absolutely had to be sure of before buying an income property. And if I was his father’s counselor I may or may not agree depending on his situation. But for this younger man with great income, a solid future and a desire to build assets, I couldn’t disagree more strongly.

REALTOR DISCLAIMER
Remember, as a professional real estate agent that works everyday with real estate investment property I have access to not only my own personal experiences but the personal experiences of people that, in total, own hundreds of rental homes. I make it my business to talk to them and to tap their wisdom. From those experiences I offer my advice after getting knowledgeable with each individual’s situation. But ultimately, your decision is your decision. I work for you. Not the other way around. Now, I may have you sign a disclaimer…. 🙂

Listen to this very carefully. To the extent that you chase Cash on Cash returns you retard your capital growth. It’s really that simple. Why?

Cash flow investment property with little to nothing down, at least here in the Kansas City area, tends to be in areas and neighborhoods that don’t appreciate very well in relationship to their surrounding communities.
For income properties that will appreciate at par or above, you will need to put more money down, i.e. 20% versus 10%, to get the higher Cash Flow Before Taxes to benefit your Cash On Cash returns.

Take for example a Blue Springs, MO duplex I’ve been keeping my eye on. This particular rental property is about 40 years old (give or take) but has been nicely cared for, has a brick exterior with a newer roof, windows, carpeting, ceramic tile and more. I’m sure the purchase price will be somewhere around $136,500 with the seller’s paying 2% closing costs. Rents are $1,175/mo and it’s 100% occupied in a nice little quiet neighborhood that stays rented with quality tenants.

Without showing you all my calculations here I can tell you that with 10% down on this property your cash flow is about $53 a year after all expenses calculated. (And yes, I mean all.) That translates to a 0.4% Cash On Cash return. That’s right there with having a passbook savings account at Capitol Federal Savings. Not good. But wait, there’s more! (Apologies to Ronco.) When you calculate Cash Flow Before Taxes, Principal Reduction and Depreciation your capital growth on your investment is 13.9%.

Using the same income and expenses with 20% down, the corresponding lower interests rates and no PMI the Cash Flow Before Taxes jumps to $1,457 a year. That’s a Cash On Cash return of 5.2%. Now we’re getting better, right? Well, no. Not really. Because your capital growth has dropped from 13.9% with 10% down to this scenario at 10.6% capital growth.

Note: No appreciation was used in the work-up of these numbers. But what if it had?

Well, not only would your capital growth be better but you’d have two rental properties working for you where as before, with 20% down and better Cash On Cash you only have one rental property working for you.

Are you following me here?

Heck, even if you are not believe me! Or call me, come in an we’ll sit down and work-up a real property and by the time we’re done you’ll be able to teach me all about it. Again, depending on your stage in life, investment goals, long term plans and available cash reserves this may not be the best strategy. But for many, many, many people this argument will hold very true.

11 Comments

Filed under 4 Benefits of Real Estate Investing, Investment Property, Real Estate Investing

April 9, 2008 · 5:21 am

KC REI, Rants, Thank You’s and Stuff

– I’m dealing with a closing snafu to top all closing snafus. I was fully prepared for a “situation” on the closing of this Overland Park investment property. And I covered all the angles. Followed up. Checked in regularly with the selling agent for my buyers. And still the closing cratered because of a wild card that I simply cannot control. When I have a couple days distance behind me I’ll write about the details for you. Because right now all my adjectives and descriptions are unprintable for a family blog. And man, do I feel for the buyers.

– Many of you may have figured out that I’m a sports fan. Specifically, I love my Kansas Jayhawk basketball. What a year the University of Kansas has had. Won the Orange Bowl. Won the NCAA tournament and brought to the Kansas City area the first national championship this city has seen since the Kansas City Wizards won the MLS Cup in 2000. But for those of you that don’t consider soccer a sport you have to go all the way back to 1988 for the previous championship which again was the KU Jayhawk basketball team. Hey Kansas City Royals and Kansas City Chiefs, it might be nice if you could contribute a little, too.

– I’m flabbergasted at the lack of quality investment property available right this minute in Johnson County, Kansas. There are a total of 36 duplexes currently on the market and only two have any hope of getting my “thumbs up” at this time. Dear Sellers, from what I’ve seen your investment properties are over-priced and under cared-for. Why should buyers pay top dollar for a property with shaky tenants, 22 year old roofs, furnaces leaking carbon monoxide and enough wood rot to keep a carpenter busy for a week?

– Just because Johnson County investment property sellers seem to be a little delusional doesn’t mean there aren’t quality buys around the Kansas City area. I’m still very bullish on the Blue Springs & Raymore/Belton areas over in Missouri.

– Yesterday was my birthday. Any guesses as to how old?

– For you Wyandotte County/Kansas City, Kansas real estate investors I may have a property coming up that you will be interested in. Probably priced around $125,000 with rents at $675/side. This duplex is a three bedroom, two bath and one car garage. I know the property manager well (he referred me to the seller) and I can put you in touch with him for the rental history…when the time comes. Drop me an email if that sounds interesting.

– Dear WordPress, not impressed with your recent changes. No spellcheck. Your new way of adding photos is cumbersome and doesn’t work about 75% of the time which is why there are none for this post. And working out bugs before rolling out a new version of the editor would have been swell. Sorry readers.

– A special “thank you” needs to go out to all our readers. The readership of BBQ Capital : Kansas City Real Estate Investing keeps going up and up. It is both humbling and exciting. Always feel free to leave comments and I really encourage you to send me topics of which you’d like to see covered. After all, this blog is not only for me, it’s for you!

2 Comments

Filed under Investment Property, Kansas City, Kansas City Sports, Misc. Real Estate, Personal Real Estate Opinions

April 8, 2008 · 12:52 am

Kansas: Your 2008 National Champions!

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Filed under Uncategorized

April 5, 2008 · 10:55 pm

Kansas v North Carolina

Kansas 84 North Carolina 66

‘nough said.

Focus On Your Real Estate Investments

I promised to tell you a little bit more about the Landlords of Johnson County, Kansas meeting I went to on Wednesday. As mentioned previously there were three gentlemen there from the Bank of Blue Valley to talk about wealth planning, asset protection and the state of the current economy. All the while sharing with us how their bank could benefit each and every person in the room.

In the interest of full disclosure I am a Bank of Blue Valley customer. I think they do an excellent job. On my personal account I get 5.38% interest on any monies in the account under $25,000 so long as I just go about my daily/monthly business. (See Bank of Blue Valley for the details.) I fully endorse at least that program.

Anyway, after the gentlemen each told of their positions or affiliations with the bank they had a Q&A session. And I have to tell you that session didn’t go anything like I thought it would.

As I mentioned the other day there were probably about 75-80 people there. So let’s say there were about 50 different investment property owners. From what I could gather I think I could safely say those 50 Johnson County, Kansas real estate investors had to easily average 3 properties (or more) each. So let’s say we had over 150 income properties represented.

Continuing to set the stage I will tell you that 90% of the folks in that room had to be north of 55 years old. I spoke with some couples that had owned Kansas City investment property for decades. Just as an eduated guess I’d say that each property owner represented in that room easily had to have a net worth from real estate investing alone well above $500,000.

And yet, most of the Q&A session was dominated by talk about stocks and the stock market. What? It was all I could do to sit there for 45-50 minutes and not stand up an yell

WHAT ABOUT REAL ESTATE INVESTING???!!!???!!! YOU ALL MADE THE BULK OF YOUR MONEY THROUGH APPRECIATING ASSETS CALLED INCOME PROPERTY! ASK QUESTIONS ABOUT THE DISPOSITION OR CONTINUATION OF YOUR REAL ESTATE INVESTMENTS!

But you’d have been proud of me. I behaved myself and soaked up whatever information I could about the stock market and what others are doing. And I did learn. But I sat there fascinated by the complete lack of care people seemed to be treating their largest retirement assets.

Now I don’t know the personal cases of any of the people in that room. (Well, that’s not ture. There is one perspective buyer in that room that I didn’t know was attending.) But I would be absolutely flabbergasted if each of these people were on a pre-determined course to navigate the tax implications of their real estate holdings.

I would advise anyone to simply not lose focus of their Kansas City real estate investments. It’s great to have diversification. I too have IRA & 401K plans in our family. And yes, there have been times when dealing with the tenants was exhausing. Yes, there have been times when I didn’t know if I’d have enough money to cover the vacancy. And yes, there have been times when I thought I should quit all forms of real estate and become the drive-thru guy at the local burger joint. But real estate has been/continues to be where my money has performed the best. How about you?

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Filed under Personal Real Estate Opinions