Category Archives: Personal Real Estate Opinions

I’ve been reading quite a bit lately and the blogs/newspaper articles that have been grabbing my attention all center around debt and consequences. And while this seemingly has nothing to do with real estate investing it does speak to the mindset of many of the people that you and I know. And the debt mindset has an effect on how much our money costs when we do borrow and filters down into every consumer item you and I touch.

(In the interest of full disclosure I am not now, nor have I ever been since the age of 18, debt free. Besides my houses I have a car payment and a couple of other miscellaneous debts. So I too am a part of the problem.)

Jeff Brown had an article yesterday talking about Social Security, the Boomer generation and the probable lack of funding for future generations. It’s a read definitely worth your time. And don’t forget to take a few minutes and go through the comments. You should also take the link jump over to Brian Brady’s blog and thoughts on the subject.

Then in today’s Opinion section of the Kansas City Star Lewis Diuguid has an op-ed piece that has some numbers I haven’t seen before;

• At the end of 2006 US residents owed $745 billion on general-purpose credit cards… up $34 billion from the previous year.
• The savings rate for 2006 was NEGATIVE 1%.
• 13% of all credit cards have balances of more than $25,000.
• The national debt now stands at $9,815 trillion.

Reading those numbers and knowing how our government works you cannot help but know that taxes will start going up to pay for a whole lot of people who chose cable television, SUV’s and lavish vacations over savings. (Not everyone, but a good many.)

Younger generations are headed for uncertain times in which they’ll be taxed to pay for their parents’ and grandparents’ retirements as well as having the additional burden of saving out of pocket for their own.

If the government continues to lower interest rates to prop up the ease of additional debt I’m really not sure with whom to be upset. The American population’s appetite for instant gratification has gotten us to a point were financial disaster looms for tens of millions. And with our own government so far in debt (can you conceptualize $10 trillion?) there is really no way they are going to be able to help. Not in a manner that doesn’t cost you and I a lot of cold hard cash…or maybe we’ll just pay our taxes with our credit cards.

The really great thing about the home buying process in the Kansas City area is the 10 inspection period allowed for in the standard Kansas City Regional Association of REALTORS contracts.

Recently I had an investor that had worked out a pretty sweet deal on a duplex in the Kansas City area. Sweet that is as far as we could tell.

Now I’m pretty experienced at spotting potential problems. Furnaces, basements, roofs, etc. Heck, I even know what a mud tube looks like and can spot suspect wood damage. But inspecting homes everyday is not my gig. That’s why I encourage the hiring of a reputable, professional termite guy. Especially here in the Kansas City area.

Getting back on story, I knew or suspected I knew, that the house had termites or had had termites. I even conveyed this to the buyer and showed him why I was suspicious. We kept that in mind on the offer and assumed a $1,000 or so in repairs.

Hold the phone. After the termite guy gets done inspecting it during the inspection period he shows me a tunnel I missed that spreads to basically everywhere in the house. He starts poking his screwdriver through floor joists all over the basement area and again on structural, load bearing tri-lams.

No matter how sweet our deal was, it wasn’t going to be enough to cover all this. And we were figuring the long term liability was too great EVEN IF we could get the seller to come down further.

I’ve seen extensive damage before. There is repairable. There is not repairable at a price that makes senses. This didn’t make sense. Best to move on. That’s the beauty of real estate inspections.

I was going to be cute or obnoxious here and say that the Fed dropping rates a half point doesn’t really have too much bearing on the long term real estate investor. But that simply would not be true, would it?

But my point would be made, all the same.

There are at least a dozen bloggers smarter than me on the subject of the Fed and it’s relationships to the overall economy. I’m just a Kansas Jayhawk who works with real estate investment property day in and day out.

Interest rates go up. Interest rates go down. Unemployment rates go up. Unemployment rates go down. Vacancies go up. Vacancies go down.

The point? That owning real estate investment property is not a short term deal. (Yes. Yes. I know flipping is. But I’m not talking about that.) It’s finding the RIGHT property that will meet your criteria today. Cash flow before taxes. Expected appreciation. Expected vacancies and rent rates, etc.

Here in Kansas City I really do not see any reason to worry. If you are buying for that 5-7 year trade-in window why get too worried about the daily fluctuations of interest rates? No. I’m not advocating careless disregard. But if you keep waiting for them to drop further you may miss a rental property that was worth thousands more.

Conversely, if you rush to buy an income property because you are terrified rates will go back up at the next meeting you may buy a rental property that would have been better left to someone else.

Follow these headlines carefully. But keep you eyes focused clearly on the goal. Then follow your plan.

I just answered an email from a real estate investor where the investor was more or less updating me as to his situation and asking about other opportunities in the Kansas City area marketplace. And I feel I’d like to share some basic beliefs that I have concerning his situation here. No names, of course.

It is my belief that real estate investing should work for you, not you working for your real estate investment properties. By that statement I mean that you should use maximum leverage to acquire your properties. Leverage to the point of cash flow, however. In very few cases would I ever recommend or okay purchasing an income property that you know will bring red ink every month.

Let’s take a look at this situation and see what you would advise.

• Household income of $150,000/yr.
• Primary home with mortgage and price reflecting that kind of household income.
• One single family home as a rental property with about $200/mo positive cash flow. This property is in a solid growth area of about 5%-7% historically. Even this year I would expect 2%-4%.
• A downtown loft with negative cash flow of about $30/mo.
• Set to close on another downtown apartment this fall that will most likely bring break-even cash flow at best, probable negative cash flow to some small degree.
• The downtown housing market for condos is currently over-built, though not terribly so. I see great growth opportunity here as downtown Kansas City continues to update and rebuild. But we’re talking about a long term forecast for profit here. 6-8 year hold period to realize expected gains, in my opinion.
• One more condo in a very affluent KC suburb that breaks even.
• HELOC that is nearly tapped out.j
• Few cash reserves that I know of.

I’m not sure about you, but when I look at that I don’t see immediate danger, but I don’t necessarily like what I see, either.

My recommendation:

• Build a cash reserve!!! A few months vacancies will put the hurt on a situation like this. With the HELOC nearly tapped out there needs to be some liquid help somewhere. A minimum of 3 months of cash to cover all mortgages is what I’d shoot for before considering anything else.
• After the cash reserves are built, re-evaluate the market and current holdings. Most likely you’ll want to sit tight and collect the rents. Keep them rented!
• After the cash reserves are built, then you can save up more cash for your next investment properties. There are great opportunities in today’s market place. Go get one.

Listen, I’m a real estate agent recommending that this investor NOT buy at this time. Maybe they’ll go somewhere else and get someone to help them. But I don’t think it prudent.

Keep in mind, for this individual I’m recommending not buy. But for those who practice real estate investing and have cash and good credit, you can pick up some nice properties at this time. I have about 6 identified right now. Call me.

We are back to a place and time where your credit history matters. For some, that’s good news. For others…

There has been a lot of talk about Countrywide, failed lenders, the credit crunch and the liquidity crisis of the secondary mortgage market. But here is a fact, for those with a little cash and great credit the housing opportunity still exists.

We had about a 4-6 year run where people with marginal to bad credit histories could buy houses with little or nothing down. Heck, even real estate investors with scores as low as 660 could buy non-owner occupant homes with no money down. (How smart was that by the lenders?)

Heck, as long as they were giving money away I bought a rental property with a 100% loan. Though I’m not now whining that next year one of the loans adjusts when the ARM matures. I took the time to understand the loan I was getting.

But that has nothing to do with anything other than to say that your credit history is going to help you or hurt you for the next 12-18 months as the economy and the lenders adjust to the current lending standards.

When I was 21 years old I was newly married and had moved to Suburban Washington, DC. When I arrived I literally only had $78 to live on until my first paycheck from my new job. That’s kinda tough. As soon as I got paid and my wife had her first check we ran out and bought stuff to reward ourselves. On credit.

That was well and good until I realized that people had extended me more credit than I could handle. Those darned people! It got ugly. Bill collectors would call. My new wife would cry. Even my Dad called and told me that if I didn’t get this straightened out it would haunt me for years and years to come.

I took his advice. I got a second job. And ate a lot of Hamburger Helper. Though only after having paid a couple of the bills more than 30 days late. Everything got under control and two years later when one of our cars died I decided to go buy a new one. (Having learned that I should only get one I can afford.) They quoted me an interest rate but after having run my credit bumped it up.

Wow. My Dad was right. And I was mad. Not at the evil lenders. At me. I had gone through 15 years of education and had not learned thing about handling money. But was it “their” responsibility or was it mine to learn what I needed to know?

Most of the easy money is gone. But I keep telling my real estate investors that it shouldn’t concern them too much. At least on the acquisition side of things. After all, you should have reserves planned before going in to a new purchase. You should have at minimum a 5% down payment to even make most properties that I would recommend break even after ALL expenses. More likely, 10%.

With cash reserves, a 10% down payment, a solid credit history and steady employment you will have no problems finding a lender.

See, I can tell who watches the national news and/or cable news networks. They are constantly asking me about the real estate bubble bursting and how bad is the market?

Here I have actual proof of the Great Kansas City Housing Bubble Burst of 2007. From today’s Kansas City Star they report that sales are down on data reported for April – June compared with last year…

Check out these numbers if you want further proof!!!!

• Florida – down 41.3%
• Nevada – down 37.5%
• Arizona – down 23.4%
• Maryland – down 21.1%
• California – down 19.8%
• Kansas City area – down 0.7%

I don’t know about you but I was staggered by our numbers. I’ve been wrong. We are in a huge crisis here in the Kansas City area. Sell. Sell NOW! Slash prices by 15%-20%. But just get out! Live on the streets if you have to. But don’t take that chance.

What? We still have very modest appreciation? Darn. I was hoping for more headlines!