Category Archives: 4 Benefits of Real Estate Investing

It seems it’s been a while since I discussed, or re-discussed more-rather, the basics  of real estate investing in Kansas City.  Maybe it’s because the market has been so darned fluid this last year.  But a funny thing has happened on the way to the Great Kansas City Real Estate Collapse.  It just never happened.

Now to be sure, as I write this, our market is still very fluid and quite weird.  On the one hand the market is red-hot.  My clients have been out-bid on 5 of the last 7 offers we’ve written.  Now these are all properties at the $135,000 price point or below.  And the lower you go the hotter the market.  And when markets heat up, real estate investor usually make bad decisions.

The point of ALL real estate investing, it seems to me, is to have more at the end than you did at the beginning.  And that “more” needs to be more than you could have gotten in other investment vehicles.  Why?  Because owning rental property, even when you use a property manager, is much more labor intensive than owning stocks/bonds/mutual funds.  Your capital isn’t as liquid.  Your ongoing need for reinvestment more possible and real.

When I speak of invesing in real estate I’m thinking of the following;

• Buy & Live – A great way to start especially with limited capital.  You buy a home to live in that would also be suitable for rental later down the road.  you live there a year or two and then buy another home.  You keep this home and rent it out.  Now you have two homes, one a rental, and both on owner-occupied mortgages and their corresponding down payments.  If you are in your twenties, this is a fabulous way to start.
• Buy & Hold…appropriately – Buy a house that will be a rental property.  If you have a good solid income, 20% to 25% to put down ( a necessary in this currently lending environment) and enough reserves so that I can sleep at night this is the way to go.  When I say Hold I don’t necessarily mean for the rest of your life.  In KC I think 5-8 years is about the sweet spot.  That’s taken on a case by case basis.  Then you turn that property in for one or two other properties to start the cycle over again.
• Buy, Rehab & Rent – This can be very lucrative if you have two things; 1) Cash to make the down payment, cash for reserves and cash for repairs (construction loans are few and far between right now) and 2) Time on your hands.  Someone has to supervise the rehab.  True, you can farm it out but then profits are slashed further and you really have to find the rare property that meets the financial requirements.  But through this method you can end up with the most sweat-equity.

Through the years I’ve written about the 4 Benefits To Real Estate Investing and if you go over to the Categories section of this blog you can search and click on that subject to bring up literally years of posts and comments on the subjects.  Over the next week I promise to re-visit how to pencil a house to see if the numbers work. Keeping in mind the “numbers working” is a subjective value that can change from investor to investor.

For those of you who are considering house flipping as real estate investment I suggest you walk on over to BawldGuy’s Treadmill post.  There you can read his excellent dissertation on the subject and my comments, as well.  You do need to be forewarned that you may not like what you read.  And anyone that considers house flipping in Kansas City had really better know what they are doing.  Our numbers in KC are much tougher than other regions because of the lack of explosive appreciation that is possible in other places.

Kansas City real estate investing is for those that can live with and/or like a “slow and steady wins the race” philosophy.  I’ve never advocated that an out-of-state real estate investor should have all of his/her portfolio here.  But I do very much believe that a portion of your real estate investment holdings should be here.  You’ll see why if you poke around this blog.

Okay.  This is not going to be a long post.  I just wanted you to know that I picked up my taxes from my “tax guy” yesterday and had a pleasant surprise.  And a big part of that surprise was the rental property factor.  It can be like “found money.”

Depreciation is your friend when you own investment property.  I have written about Depreciation and Your Rental Property before and everything I have to say about it can be found at that link. 

Let’s say this one  more time:

“There are 4 basic benefits to owning investment property.”

1. Cash Flow Before Taxes
2. Principal Reduction
3. Tax Benefits (Depreciation included)
4. Appreciation

Just go to the categories section on the right side of this real estate investing blog and you can look up the tag: 4 Benefits of Real Estate Investing.  You can read those links and you’ll learn what you need to learn.

As promised I’m bringing you an analysis of both a single family home and a multi-family home used as investment properties here in Olathe, Kansas. 

The question presented to me was “isn’t it better to own two single family homes at $115,000 each instead of a duplex at $230,000?”   Both have advantages/disadvantages over the other.  See this January 14, 2006 posting about Multi-Family vs. Single Family.

So what I did was I found a duplex currently for sale in Olathe priced at about $187,000 and a single family home priced at $99,000.  I used these two because they are currently for sale and have both been investment properties within the last five years so I know about what the rents are/should be. 

The results?  Well, I may have to tell you it’s a toss-up…or even that the SFH wins.  Despite my normal belief.  But keep in mind a few things when looking at the numbers below;

• Financing is the sticky wicket right now.  It’s easier and less expensive to get financing on a SFH investment property right now than a multi-family home.  And that is not to be discounted!  Though when prices drop under $100,000 interest rates go back up a bit.  Financing is just a drag…
• These two properties are in Olathe, Kansas.  Not exactly the least expensive place to purchase investment property.  Though you can always count on appreciation.  (Yes, I used the “A” word.) 
• The return numbers were a little lower than I expected.  Rents have softened a bit in the last six months, financing has become more expensive and it seems every property needs a little more work.
• What is not shown is that the single family homes can be purchased at steep discounts making the marginal returns far better when the economy turns.  Themultis are still over-valued.
• You can add a minimum of 50% to these return numbers by purchasing in Blue Springs, MO or other similar market areas.

Single Family Home

Purchase price would be $95,000 with $3,000 in closing for a total purchase cost of $98,000.
Total capital invested: $26,750
GOI: $8,742
Total Operating Expenses: $3,425 (includes property management!)
NOI: $5,317

Based on those numbers we actually have a NEGATIVE cash flow of about $287/yr.

Adding the Four Benefits of Real Estate Investing together and we end up with a Return on Investment WITHOUT Appreciation of about 4.0%.  Aren’t you excited?  Do your own property management and the return rate jumps to about 6.8%.  These are not numbers to get too excited about.  But I just checked my stock portfolio (such as it is) and I’m down 64.44% for the year.  So I’ll take this over that any day.  🙂

Multi-Family Home

Purchase price would be $180,000 with $4,000 in additional closing costs for a total purchase cost of $184,000.
Total capital invested: $49,000
GOI: $16,530
Total Operating Expenses: $5,925 (includes property management)
NOI: $10,605

Based on those numbers we have a cash flow before taxes of $93 for the year. 

Again, taking the 4 Benefits without appreciation your return on investment looks to be 5.1%.  Without property management you could bump that to 7.9%.   Keep in mind that I am not finding the same kind of values in multi-family homes that I’m finding in single family homes.

So Single Family Homes win, right?  Well, I’m leaning that way.