Category Archives: 4 Benefits of Real Estate Investing

February 28, 2007 · 10:41 am

Investment Real Estate In Kansas City: Don’t Stop

Chicken Little loved to say the sky was falling. And if you read all of the newspapers you will see that they like to do the same when speaking of real estate. The media loves all the fodder regarding stagnant growth, reverse growth, minimal growth, large inventories, etc. But, and you need to listen here, it really doesn’t make too much of a difference if you own investment property, especially here in the Kansas City area, and you own it for the long haul.

If you’ve read my blog for any length of time you know I’m not a big proponent of Buy & Sell strategies. Buy & Hold income property is a whole other subject. Inman News is a great portal to keep up on real estate news. And today I read an article on Inman that reported that the home-price index fell 0.7% in the fourth quarter while rising 0.4% compared to the same period of time the previous year. A mixed signal but relatively flat, none-the-less.

However, (read the article) it goes on to speak of growth since 2000. Detroit is the worst city on the index with a rise of 19.51% since 2000 and Miami had the highest rise at 180.87%!

We can assume that Detroit will not face the correction that Miami will. (We don’t know, but it’s an educated guess.) And neither will Kansas City. But lets say Kansas City appreciated somewhere along the lines of Denver at 37% and Dallas at 23%. (I’ll use the 25% number since I believe we aren’t Denver but a little nicer than Dallas…oh, I can see the angry emails now.)

Example: Paid $150,000 for duplex in 2000. Appreciated 25% over the 6 years and now has a market value of $187,500. For the sake of argument, we can say that it really appreciated 27% but over the last year dropped 1%. Doesn’t really matter. The point is your equity grew on appreciation alone by $37,500. Your remaining principal is now $111,230 (or so assuming you put 20% down at 7.0% back in February of 2000) so your tenants paid your loan down an additional $8,770 on your investment property. That’s total equity growth of $46,270.

Therefore, your initial $30,000 cash investment is now worth $76,270. A 254% increase. Are you getting that? You had 25% appreciation on the property but because of leverage you had a 254% increase in your money. How are your stocks/bonds doing?

And I have not even mentioned Cash Flow Before Taxes or Depreciation. Two more of the 4 benefits when owning investment real estate.

4 Comments

Filed under 4 Benefits of Real Estate Investing, Kansas City Real Estate, Misc. Real Estate

February 7, 2007 · 8:46 am

Principal Reduction – The Sweetest Benefit of Investment Property

As we have discussed before, there are four main benefits when you own investment property that add up to one big benefit in the end…security for you and your family. Again, the Big 4 are Cash Flow Before Taxes, Principal Reduction, Depreciation and Appreciation.

But let us talk, just for this post, about Principal Reduction. Assuming you have purchased the right property (not the one mentioned here or here) your other three benefits are kicking in. But PR is my favorite. Not necessarily the biggest return…but my favorite. Why? BECAUSE SOMEBODY ELSE IS BUYING YOU A HOUSE IN YOUR NAME!!!

Think about this. Every month someone scribbles a check to you for rent. Inside of that check is your interest due, your extra cash, your expenses AND an amount that is designated towards your principal. Not a great amount at first, but pay down they do…for you! (Unless, of course, you’ve gone with a negative am loan…which I’m not too crazy about for our market here in Kansas City. I see cause for them on the coasts…but not here…in most cases…of course everything is a case by case basis…have I covered all my bases yet?)

Month after month, lease after lease these people (we’ll call them tenants) are going to work, earning money and helping you to purchase a house so that when you are older you can retire in comfort. Personally, I think it’s awfully nice of these tenants to do this and that is why I don’t mind the occasionally call from them about this or that.

What are your thoughts on the subject, Hobson?

3 Comments

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

January 29, 2007 · 11:06 am

Net Operating Income – Formula for Success

When determining whether or not to pull the trigger on a property for income purposes it is important to know the actual Net Operating Income. The basic formula is this;

Gross Operating Income – Operating Expenses = NOI

TIP #1: When determining the GOI allow for a fair, historical vacancy rate and walk the neighborhood to be sure the rents being paid on this property are in line with other properties in the neighborhood.

TIP #2: Operating expenses are crucial to this formula. Account for everything. You may even ask for the seller’s Schedule E right up front to fish out the actual numbers.

Almost every reliable real estate caluculation for investment properties involves the NOI. Make sure you get it right!

For more details on figuring expenses feel free to email me or post a comment.

1 Comment

Filed under 4 Benefits of Real Estate Investing, Kansas City Real Estate, Real Estate Investing

January 27, 2006 · 5:06 pm

Net Operating Income – Cash Flow Before Taxes

Gross Scheduled Rents
minus
Vacancy (5%-6% usually used)
minus
Property Taxes
minus
insurance
minus
General Expenses (repairs, sinking fund, leasing)
equals
Net Operating Income
minus
Annual Debt Service
equals
Cash Flow Before Taxes

Appreciation + Paydown = Big Equity

There are four benefits to owning investment real estate.

1. Cash flow before taxes.
2. Mortgage paydown by OTHER people.
3. Appreciation.
4. Depreciation.

Let us ignore, for the moment, benefits 1 & 4. And let’s assume the following;

Purchase cost of a property is $150,000.
You put 10% down.
Interest rate equals 7%.

Let’s also assume an annual appreciation rate of 5%. (Historically some years have been higher. Some years have been lower. But let’s assume 5% is your market area’s average.)

After 5 years of 5% appreciation the market value of that property should be about $191,400.

Also, after 5 years of your tenants (OTHER people) paying your mortgage down the remaining balance should be about $127,078.

So in 5 years your equity has increased from $15,000 (initial cash invested) to $64,322 ($191,400 – $127,078). That is about a 428% increase in your investment in 5 years! More than a little better than that IRA I have with mutual funds.

At another time I’ll discuss how the added benefits of items 1 & 4 adjust these numbers.