Category Archives: Investment Property

July 12, 2012 · 12:20 am

Actual Cash on Cash Returns of a Kansas City Real Estate Investor

Here at Kansas City Real Estate Investing we get asked all the time, and rightfully so, for real life examples.  Real numbers.

“What is my return going to be if I go with you?”

Well here are some actual cash on cash returns of an Kansas City real estate investor.  Below is an email I sent to an income property investor who is actively in the Kansas City market buying, rehabbing and then renting property on a consistent basis.  You’ll be able to figure out the average all in costs with a calculator and just a few minutes of your time.

Some background:  This investor now holds 47 rental properties that we have had the pleasure to sell them, then manage the rehab and then manage the properties with suitable, qualified tenants.  We ran these numbers for the houses that had closed before the end of October of 2011 and thus were inhabited by real life tenants by January 1.

Also, while these homes are not in Mission Hills style neighborhoods they are perfectly safe, have good school districts and now have lots of sweat-equity.  I won’t let my clients buy – rehab – rent a house that I don’t want to manage.  And if my grandma wouldn’t spend the night there* (God rest her soul) then we don’t buy it.

Enjoy…and hopefully you’ll pick a few nuggets out of the brief synopsis.

* Phrase stolen from BawldGuy.

***     ***     ***     ***

So to get to the bottom of the question as to how much these houses are/are not making what I did was go back to the homes that we purchased last summer/fall that we had time to get rehabbed and rented before Christmas.  I took the close date and then gave about 60-75days (or so) for rehab and lease out and to basically let all the rehab expenses fall off and just get to the expenses you would have if you had bought turn key. 
 
Attached is a .pdf of the raw data if you would like read.  But here is a breakdown that may be helpful.
 
There are 15 properties in question.  Of those, 4 turned out to have some post-inhabited major repairs…either things we should have done before occupancy or things we had no way of knowing.  (See more details in the raw, scribbled data.)  Also realize that on the raw sheets I put approx how many months the homes are being evaluated from.   No insurance or taxes are included.  But literally everything else is.
 
All 15 homes had an income of $109,083 with expenses at $40,887 which is 37.5% of income. 
 
If we lose the 4 homes with the more major repairs (new ac, new plumbing, etc.) we had 11 homes with income of $82,321 and expenses of $23,947 which is, of course, 29.1% of income. 
 
There are variables here that are hard to pinpoint.  We cannot know EXACTLY what the numbers are until all rehab expenses are pared off and I cannot know that without a forensic examination of each and every property.  So I tried to accomplish it by just taking the close date and adding a couple months as mentioned above.
 
So sometimes the lease out fees may not be totally included.  But in most cases it’s close. 
 
Adding in pro-rated insurance and taxes and I think we’re pretty close to (or possibly under) the 35% I like to shoot for…at least on the houses that didn’t have something major come up on.  With those extra four houses included we’re probably more like around 40%-41% range. 
 
I hope this helps.  I’m happy it showed pretty much what I promised/expected.  🙂  But positive or negative I’d love to hear your thoughts.  
 
If we want to take the scenario farther…and I do…let’s figure a pro-rated return of all 15 homes.  I’d say the average is about 9 months.
 
109,083 – 40887 = 68,196 / 9 months =7,577/mo x 12 = 90,928
 
If you take the CAPEX Column R from our KC Portfolio Master then you’ll see your all in price for those homes is $648,747.
 
$90,928 / $648,747 = 14.0% cash on cash return
 
Not too shabby.
 
But again, this just can’t be exact with some of the educated guess work I’ve had to do.  So plus or minus 1% is probably safe to say.
 
And we haven’t even talked about the hidden equity in all of these homes now….
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Filed under 4 Benefits of Real Estate Investing, Investment Property, Kansas City, Real Estate Investing, Real Estate Investor Interview

January 4, 2012 · 5:58 pm

Not Making This Up

We offered a few times on a house in Raytown, MO that was over priced, but then most foreclosure properties are at first.  In each of the rounds of bidding (three…each time the price changed downward) we offered and held firm at $30,000 with a cash closing about 10 days after acceptance.

The latest round we were to close on December 28.

So, in essence, the bank would have had $30,000 in cash on December 28, 2011 and would have released all their liability with owning the property.

Well, they just lowered the price to $29,900 and the house is in limbo as they decide whether or not to send it to auction.  Can anyone, and I mean anyone, explain this to me?

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Filed under Investment Property, Kansas City Real Estate

August 10, 2011 · 7:37 pm

Buying, Rehabbing and Renting

Buying, rehabbing and renting is a great way to build a real estate portfolio.  We are finding that even with the unusual and tired hurdles that it takes to purchase these potential rental properties from the banks’ foreclosure inventory, or worse yet, HUD owned homes, (or perhaps because of) you can really set yourself up in a sweet equity + cash flow position.

REAL LIFE EXAMPLE
On May 25 of this year we closed on a 3 bedroom, 2 bath ranch foreclosure property.  Our first contractor fell thru and we had our other contractors on other houses so we didn’t even get started on this house until nearly 2 1/2 weeks later!  Yet, it’s a great buy.  It sure didn’t look like it when we first walked in.  It needed everything.  The carpet smelled and the kitchen was a greasy wreck.  Broken bathroom tiles and leaky water pipes and gutters falling and on and on and on.

Purchase Price (including all closing costs and my buyer’s fee)
$30,473.00

Rehab Price (including all mentioned, my oversight fee and more)
$16,199.32

Total invested is $46,672.32

We had a tenant move in on July 27 for $875/mo after having put the house on the market on July 14.

This was a cash sale.  So let’s figure and investment return.

Expenses wise, we’ll add in $60/mo for property management, a lease-out fee of $437.50 (they get a discount because of the dozens of properties we work with them on), property taxes of $1,290/yr and insurance of $800/yr, $1,000 for future repairs and $200 for misc and we’ll come up with a year’s worth of expenses at about $4,450.

Income on this property for the next year will be $875/mo with no vacancy since we’re starting this clock on the day it’s leased and our previous vacancy time was built in to the rehab.

So, Gross Operating Income is $10,500
Total Operating Expenses is $4,450
Do a little math and you find that your Net Operating Income is $6,050.

There is no debt service (cash buy) so the Cash Flow Before Tax is $6,050.
There is no Principal Reduction
Tax benes help.  $6,050 – depreciation of approx $2,150

You can learn more about the 4 Benefits of Real Estate Investing here.

Therefore:

Cash on Cash return is 13%

Two important items to note;

  1. This is an all cash sale and rehab for this income property.  No leverage was used.  Therefore I didn’t calculate other ways of measuring return as Cash on Cash is the primary focus here.
  2. We haven’t spoken about “mine-able equity” down the road.  Within the previous 12 months two homes have sold that have pretty much the same floor plan and are in pretty much the same condition as the house we have (post rehab, of course).  One sold for $70,000 back in July and one sold for $82,500 back in May.  That means there is, at minimum, an additional $23,300 equity gain on the money!!!  No, you can’t get it out immediately or easily.  But it is there and it is real.

Want to talk about what we can do for your real estate portfolio here in Kansas City whether it be for buying, rehabbing or property management?  Feel free to give us a call.  We’d love to talk about it.

913.568.1579

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Filed under Investment Property, Real Estate Investing

July 13, 2011 · 7:21 am

Understanding Your REI Goals

Owning real estate investments is a tool.  Just like working a job is a tool.  Owning your small part of a mutual fund is a tool.  And even employer matching is a tool.  You need to have a full understanding of your real estate investing goals to make the most out of the tool.

Cash or Growth?
I can hear you now.  “What growth?”  So let us discuss that first.  Growth happens in an economy.   You can’t stop it.  Check the history of this blog and you will see that when things were steam rolling up and up and up I also said slow downs happen in an economy.  You can’t stop recessions, either.  (Remember the “new economy” of the tech age?  We were going to be recession proof!  The kids in their twenties then are now in their thirties looking around and asking “What happened?” “Uh, life.”)

Growth is going to happen.  Sooner or later.  Have you checked out the length of mortgages lately?  Most are still either 15 or 30 years.  What was  you life like in 1996?  Has it changed?  How about 1981?  Jeez, in ’81 we were in a recession about to hit a huge economic boom in the mid ’80s only to have the S&L crisis of the early ’90s only to be followed by one of the longest, biggest economic growth periods our country has known with a couple minor fall backs in there before we got to the big bust of the mid to late 2000’s.  See, economies expand and retract.

Buying real estate now, so long as you can truly afford it and be able to absorb any more minor set backs, is an investment of a lifetime.  Never have you had so much harvestable equity waiting for you in the future.  (1 year?  3?  10?  I don’t know, either.)  And with the lower prices and higher rent demands you by extension get better cash flow!

ALWAYS keep an eye on growth when purchasing income property.  Even when the aim is cash.  (This post is long enough.  I’ll talk more about cash on the next post.)   Look for neighborhoods that people are taking care of.  Where young people are moving in and fixing up the older generation’s previously well-cared for homes.   Schools are important!  So are perceptions.  All these things, and more, matter.

But don’t chase trendy growth.  That’s getting in to speculation.  We all saw how that worked out.  Tried and true neighborhoods is what I like.  Or, if all else fails, follow the jobs!

 

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Filed under Investment Property

July 5, 2011 · 6:17 pm

Owning and Operating Investment Property in Kansas City

Owning and operating investment property in Kansas City really isn’t all that difficult.  What I do isn’t rocket science.  It’s just applying tried and true real estate investment principles along with a generous helping of knowing how Kansas Citians buy, rent and sell houses.

You don’t have to be from the KC area to own rental property here.   Regardless of where you are from there are differing ways you can own income property.

Buy Turn Key Rental Property
You can buy rental property that is turn key which is a popular choice amongst the busy, working professional.    We simply find you a property that is already rent-ready….maybe even with tenants in it…that will get you the returns you are looking for.

Buy Rehab and Rent Property
Just like it sounds.  We look for bank foreclosures or otherwise undervalued homes and then fix them up.  If we do our job you will be sitting on a sweet equity position that I like to call “harvestable equity.”   Meaning that if the neighborhood is going for $90,000 to $100,000 you should have bought and rehabbed and have an “all in” investment of no more than $65,000.   Think it can’t be done?  I do it every week.  Usually better than those numbers.

Harvestable Equity
This is different than “flipping.”   You remember how popular flipping was, right?  I was never really much on board.  Sure, there were a few properties here in KC that worked.  But there were many more that sucked people in and then they couldn’t sell at a decent profit.   The numbers I’m talking about get pretty thin when you deduct sales fees…especially if using a realtor.    No, I’m talking about waiting to “harvest” the equity until the market turns around.  (Next year?  3 years?  Twenty?)  The equity is there and it’s real.  Then you bide your time renting the income property that is generating a healthy cash flow before taxes and in the mean time go ahead and take the depreciation  Trust me, this all adds up to a very nice rate of retun.  I can map it for you if you like.

To Manage or Not to Manage?
Property management can be expensive when you are running thin margins.  If you are running great margins then why not?  If you are a busy professional investing in real estate to secure a retirement worth having, you probably want professional property management.  If you are someone buying cash flow real estate to replace job income you probably want to manage the rent houses on your own to maximize your returns and get closer to your dream of quitting your job.  This won’t be easy mind you…but can be done over years of accumulation.

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Filed under Investment Property, Kansas City Real Estate

June 19, 2011 · 8:27 am

Bank Owned Homes

Let’s face it, if you are a real estate investor in today’s market there is a great chance you will be buying a bank owned home. And there are some key differences you need to understand;

  • Banks really, really don’t care.  The file is handled by an asset manager that makes $14/hr either way.
  • Bank addendums are tedious and written to their total favor.  My favorite is the $175.00 re-key fee so many charge for horrible locks.
  • You may be responsible for turning on the utilities for inspections.  Which means deposits and waiting around 4 hours for the water company to come turn the water on.  If I’m doing it, expect to pay for my time.
  • Now some banks are requiring actual copies of actual cashier’s checks just for the offer!  Outrageous.

I could go on and on.  But the bottom line is there are a different set of obstacles for purchasing a bank owned home.  On the other hand, there can be great equity to be had if you know what you are looking for and what to buy.

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May 12, 2011 · 9:21 am

Buying Foreclosure Real Estate

Buying foreclosure real estate can be a real hassle.  Just viewing the properties can be dirty and a health risk and getting the right combo codes to the key boxes is sometimes comical.  Then there are the offers.  Some require supplemental bank documents before they’ll look at your offer and others won’t.

I sell about 30-40 foreclosure properties each and every year to clients looking to make money investing in real estate here in Kansas City.  Money is there to be made.  No doubt about it.  But make no mistake, there are tons of papers to sign and the bank addendums are only written to the favor of the seller.  If you don’t like it, tough.  You can walk away.  You can bitch and moan.  But there is not much else you can do…besides sign and close.

Right now, to make money in real estate investing in Kansas City you have to have two minds simultaneously.

  1. You must buy rental property that will rent, stay rented and provide healthy cash flow.
  2. You must buy property with “havestable equity.”

Cash Flow
Do you believe you can be “all in” on rental property that rents for about twice your investment?  (So to speak.)  I mean you can buy a house for $25,000 and then invest another $15,000 in repairs/updates and then rent for somewhere between $795 and $850.  And yes, vacancies are at or below 6%.

True enough these aren’t “A” neighborhoods, or even “B.”   But they are safe neighborhoods.

These homes are challenging and competitive to find.  But they exist.

All day long I can find you single family homes that you can be “all in” for about $60,000 – $65,000 and rents would still be about $795 to $850.

Harvestable Equity
My term.  Don’t google it.   🙂

Basically what I’m saying here is that your “all in” price is somewhere 15% or more south of the ARV.  In other words, you have value sitting there waiting to be harvested when you sell the house when the market improves.  Is that a year from now?  Two?  Ten?  I don’t know either.  But the harvestable equity I speak of is based on today’s comps.  I’ll show them to you when we are negotiating and you make your own judgements.

I Charge Extra
So there are no surprises you need to understand I have commission surcharges.  Every once in a while someone moans and groans that I add on a fee of $375.00 for each closing to whatever commission I earn.  Really?  I’m using my years of expertise to identify properties that will make you ~$300/mo cash flow and ~$25,000 to $50,000 in extra equity and you want to argue with me for making money?

It’s the only way I can make a decent living with houses that are selling for less than $90,000.   Just so we know, that’s the fee if we work together.

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Filed under HUD homes, Investment Property