Category Archives: Real Estate Investing

May 27, 2010 · 8:36 am

Net Operating Income Reprise

Net Operating Income or NOI. The basic building block of financial analysis for investment property or businesses. For the sake of our Kansas City real estate investors we’re gonna talk about NOI specific to owning rental property. I’ve talked about it before on many occasions. In fact, in September of 2007 I wrote Net Operating Income aka NOI on this very blog. That should show you two things; 1) It’s an important topic. 2) I’ve been doing this real estate investor blog thing for quite a while now.

Net Operating Income is simply your Gross Scheduled Rents minus your expected vacancies minus any expenses that it costs to run and maintain the rental property. Financing is not included. Why? Because everyone’s cost of financing is different. That’s why.

See not too complicated. Once you have your NOI you can then determine value.

For instance, you can find your debt coverage ratio by taking your NOI and dividing it by your debt service. Want to know if you’ll get the financing on that new rental property before even the underwriter gets it? Then have a strong debt coverage ration of at least 1.2 to 1.4. And in today’s financial world I’d keep it closer to the 1.4 if at all possible. Negative DCR? Don’t even think about it. But that’s a whole other blog for a whole other time.

For other definitions and explanations of NOI I invite you to visit Investopedia and/or Jeff Brown’s Bawldguy explanation which is a little more colorful.

Let’s Get Back To The Basics

With apologies to Waylon Jennings & Willie Nelson, it’s time for me to get back to the basics of my real estate love. Real estate investing. Now, while I won’t be discussing Luckenback, Texas, I will be discussing my home town area of Kansas City.

How Do I Know If The Rental Property I’m Buying Will Be Profitable?

Real estate investing in Kansas City is not very complicated. It can be treacherous to those that don’t heed to common sense. But it’s not too complicated. In a nutshell here is the basic formula for determining whether or not a rental property you are considering will be profitable or not;

Income (projected)
– Expenses (projected)
= Cash flow (positive or negative)

There! That’s it!

Income can take on many variables. There is income from rent, laundry, parking, late fees, etc.

Expenses can take on many more variables. There is, of course, the mortgage. There are also insurance, property management, maintenance, upkeep, legal and “future” expenses. (That is by no means a complete list of expenses.)

Learning how to project income and expenses is where the rubber meets the road. And once you know what the Net Operating Income of a property is you can then set a value.

Not sure how to determine and then work from Net Operating Income? Stay tuned.

2 Comments

Filed under Real Estate Investing, Uncategorized

May 21, 2010 · 8:34 am

Landlords Must Pay Tenant’s Bills? How About Their Driving, Too.

A couple posts back I did a short piece called Kansas City Real Estate Post Tax Credit and while the post it’s self was rather innocuous the comments were worth reading about the subject of landlords now being held responsible for bills usually under the purvey of tenants. You know, for such luxuries as water and sewage.

So I started doing a little looking into it and decided not to say anything until what happened happened. Seems there was a bit of a bro0-ha-ha about the fact that it had been passed and that landlords were responsible for the water bills whether or not the tenants paid them. The illustrious City Council of Kansas City, Missouri had passed the ordinance without, of course, having read or been told about the provision in a much larger matter. (Publicly elected officials not reading what they are voting for is an epidemic around this country. These laws are written in hundreds if not thousands of pages and no one wants to read them. Well, I’d say it’s part of your job…but that’s a whole other matter.)

Anywho, the Kansas City Star reports yesterday that KC changes water and sewer bill policy on rental dwellings.

Doesn’t anyone in the freaking country take responsibility for themselves anymore? When did so many people become a bunch of little pansies? And taxing? Please, don’t even get me started. We wouldn’t have to tax so much if people would just take responsibility for themselves. (Editorial Note: I am the father of a daughter with CP. I, better than most of you, understand fully that some people will never be able to fully support themselves. There are those who need our help and as a society we should feel morally obligated to do so. So don’t throw the exception to the rule at me.)

The whole matter that landlords should somehow be responsible for the bills of others is absolutely ridiculous. Apparently in Arizona this is already the case. (See comments from the above listed blog post.) Maybe we as landlords should also be responsible for the gas and electric. Wait, then we should be responsible for how many cars drive on the roads in front of our rental houses. Think I’m kidding?

Mission, Kansas considers road fee that would that would link properties, street use. This too, from the Kansas City Star. Imagine.

4 Comments

Filed under Legal Issues, Misc. Real Estate, Real Estate Investing

December 3, 2009 · 10:45 am

Why It’s About Single Family Homes

Real estate investing in Kansas City right now is all about the single family homes. There is more downward pressure, build-in equity and inventory of these properties.

Many of the multi-family investment property owners (duplexes, fourplexes and apartments) have either already failed and fallen into foreclosure or they are continuing to sail along. Why? Because while the value of a particular duplex may have dropped, say 5%, the rents still cover all the PITI and expenses if the investment property was purchased on proper fundamentals. Follow?

But the SFH seller may have lost a job or fallen ill or whatever and they need to either turn the keys in or sell at a steep discount.

Now, being Kansas City, we still haven’t suffered anywhere near what other parts of the country have. Thank God. But if I were a real estate investor I’d be looking more in the single family home market than multi-family homes.

13 Comments

Filed under Real Estate Investing

November 2, 2009 · 5:59 pm

Real Estate Investing’s 7 Deadly Sins

Real estate investing in Kansas City, California, Florida or wherever share these deadly sins;

Not understanding the income.
Not understanding the expenses.
Not understanding property management.
Not understanding Mr. Murphy.
Not understanding your financing.
Not understanding your reserves.
Thinking you understand.

4 Comments

Filed under Real Estate Investing

October 26, 2009 · 8:44 am

Honest To God, Fannie Mae Doesn’t Get It

I have ranted and railed against Fannie Mae and Freddie Mac here on this blog before. Not only do they put up barriers to a true real estate recovery by keeping real estate investors, actually qualified real estate investors, on the sideline but in addition they staff themselves with asset managers that just don’t seem to understand real estate. Seriously.

Read the link above to see previous self-defeating decisions they have made. But now I have a new story.

I represent a buyer who contracted a Fannie Mae owned duplex in the Kansas City area for $140,000. Based on comps we felt this was a bit high but that taking this position would ensure my buyer got the property for a good price wherein he could do the necessary repairs and still have room for cash flow.

Bank of America did an appraisal that came back at $120,000, because of a very recent fire sale that Fannie Mae had held a short distance from the property in question. So we submitted an amendment to the contract changing the sales price to $120,000. Fannie Mae would not sign, not that they ever got around to signing the original contract, but after about 5 days of communications decided to order their own appraisal.

How did their appraisal come back? $130,000. So they will sell the duplex for $130,000, right? No. Their answer is to ignore and reject my ready, willing and able buyers and to discuss a price reduction in the “future.” We are welcome to watch the Kansas City MLS and submit a new offer when that does, or doesn’t, happen.

How does Fannie Mae get away with just suspending the realities of our current real estate market which they helped to create? How does hanging on to another asset for a few additional months and then inevitably dropping the price to $130,000 help? People, your tax dollars are at work here. The machine is clogged up with “decision makers” located in NW Washington, DC and Dallas (I believe that’s the location of the asset manager) making decisions about whichever local market you live in. I would seriously doubt if this asset manager has any actual real estate sales or appraisal experience. But I’m quite certain the AM has a minimum of 2 weeks paid vacation, health care benefits, and leaves promptly at 4:59 pm each afternoon.

It’s bad enough that we are in this current real estate situation. It frustrates me to no end to know that it’s difficult to get out of it when I see the decisions being made by people who are supposed to know what is going on.

12 Comments

Filed under Kansas City Real Estate, Real Estate Investing, Social Issues, Uncategorized

August 31, 2009 · 1:37 pm

Things To Think About: Watch Your Money

I have spoken by phone or email with six different would-be or current real estate investors for the Kansas City real estate market. Here are some things to think about that run current to all;

Watch your money. Today you will need a minimum of 25% down for multi-family homes and usually 20% down for single family homes.
Watch your money. After you have enough for the down payment, closing costs, etc make sure you leave money for repairs, a start-up business account and an Emergency Fund of some size. (Individual counseling probably necessary here.)
Watch your money. Use market fundamentals when determining current worth and projected income/expenses.
Watch your location. Location. Location. Location.