Category Archives: Real Estate Investing

February 13, 2009 · 9:29 am

Don’t Forget Reserves For Your Rental Properties

I’ve had several conversations this week by phone, in person and by email with people wanting to jump into the real estate investing arena here in Kansas City. And all have come to me with very little thought about what kind of reserves they will need for their would-be rental property. That’s why I’m here.

I don’t blame these people for being ready to go. Heck, when you do the math, all of the math, real estate shines. But you simply cannot forget that real estate is VERY ILLIQUID (no way illiquid is a word!) and you’ll have to ride out any rough patches you encounter with your cash on hand.

For instance, what if you have a great tenant for 10 months and all of the sudden she loses her job. This is happening right now to one of my investors. He has given her a month to get back on her feet and now we are going to move forward. So he’s already lost one month and we’re gonna lose another for getting the papers filed and another for getting the eviction done and another for getting rent-ready and finding a tenant. That’s four months, five on the outside, of no income. Take a $795/mo rental property that is kicking off about $75/mo and you have expended $3,600 of reserves right away. Then if it takes $1,500 to get the place painted and ready to go for the next tenant, well… istock_000003228685xsmall1

You must have a healthy reserve chest going into any investment. Remember, investment money is not money you need to buy groceries. I would even say it’s not even all the money you need for a small, modest vacation each year. It’s money you want to and need to set aside for your future. Keep your reserve funds in a money market account or an interest bearing checking account. I have one that pays 5.25% a month. That’s not a rental property return rate. But it let’s me sleep at night. 🙂

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Filed under Real Estate Investing

January 27, 2009 · 1:13 pm

State of the Kansas City Real Estate Market

Here you will see a copy of an email I sent out today regarding the Kansas City Real Estate market.

The Kansas City Real Estate Market

Wow. I’m not sure really where to begin. But there is so much mis-information out there I thought I would write this email and give you my views. Since we’ve had a relationship in the past, or even present, I thought you may weigh carefully what my analysis is of where we currently stand.

Yes. I’m Still In Business

In the past month I’ve received two calls asking me if I was still a real estate agent. My answer is “Absolutely.” I have worked too hard and built too much of a business to quit…barring a 1930’s depression. 🙂 In fact, 2008 wasn’t that bad a year for me. For the first time in my seven years of real estate I actually made slightly less than the year before. But it was only 1.3% less. So I’ll live. 2009 looks like it will be about like 2008. So I can handle that.

Some of you also know I’ve also opened a portrait studio with my wife. The studio has replaced her job and a great many times you can find me there as well, tucked in the back working on both photography and real estate. I started shooting professionally in 1992 and found I could never work it out of my system. For some of you that may be a turn-off that I do two things. But hopefully for most of you there is the realization that I do the both really well.

Is The Real Estate Market Going To Hell In A Hand Basket?

That depends on where you live and where the properties you own are located. The answer is far longer than any CNN or Channel 9 news story can tell you in two minutes worth of sound bites. Here is a quick run down of my thoughts;

Nationally – it’s not pretty. I know dozens and dozens of real estate agents that have had to leave the business. California, Arizona, Ohio, Las Vegas and Florida are the hardest hit. The Northeast isn’t doing so well, either. (And guess where the big media outlets are.)

Kansas – Wyandotte County has been hit hard. It’s super slow there regardless of where you are in the county. But the further east you go the worse it gets. Johnson County has weathered this storm quite nicely. The area from 63rd St to I -435, State Line Rd to I – 35 has done better than could be imagined. To be sure there are foreclosures there, too. But overall I can still point to neighborhoods where houses sell in 60 days or less for 97% of asking price.

Missouri – Brookside is doing pretty darned good. Some softness. Waldo is softer than it was but that allows for some fabulous buys. There are three potential rent homes I’m drooling over right now, in fact. Lee’s Summit has inventories that are higher than usual but I’ve seen some pretty good houses over there at good prices…but not give-away. Blue Springs seems to have slowed considerably.

Location, Location, Location – as is always the case the closer you are to employment and entertainment the better off your real estate has done. If you are looking to pick up bargains in Leawood and Brush Creek/The Plaza you won’t find what the news is showing. Conversely, the farther away you go the more softening you see. Places I’ve recommended before like Blue Springs and Raymore/Belton have softened to the point where you should only buy investment property if you have some cash to hold on. If you do have that cash, I say go for it as those areas will bounce right back when times turn around…whenever that may be.

Personal Residences – again, depending on where you are I don’t think you have too much to worry about. You can actually sell your house at or a little below market and move-up to make-up or exceed the difference. I can do the math for you if you like. You’d be amazed.

Investment Property – if you have followed advice you should have rents that are covering expenses. Now is not the time to sell these investment vehicles. I say hold. If you have cash (and job security…whatever that is today) you should definitely be looking to buy. Investment loans are much harder to come by today than they were a year ago. Don’t even call unless you can invest a minimum of 10%. 20%-25% may be the minimum depending on your other situations.

Outlook – I’m predicting more of the same here in Kansas City. I really don’t expect anything more than a soft bounce for Spring. Not quite sure how long that will last. With interest rates this morning at 5.125% I can only imagine that will help with the Spring sales. If your situation warrants, you may wish to consider refinancing your primary home. But don’t expect a return to the glory days of the real estate market in 2009. From what I’m reading it may be 2011-12 before we start to see a turn-around of some sort.

Is This Depressing News?

To me, it is what it is. I love a challenge. It allows us to figure out how to do things better. That’s what the banks need to do because they are screwing up their REO inventories with mismanagement and poor decisions. Everyone of us knows someone who is losing or has lost their job. Maybe their house is next. But we can all make it through. Of that I’ve no doubt.

Real estate wise my main concession is that I’m working with more primary home buyers and sellers than ever before. Investment property financing has gotten so cumbersome that it has ruled out a great many of otherwise qualified candidates. Throwing the baby out with the bathwater, as it were. Just this month I’ve had two referrals from some of you that have allowed me to help people buy their first home. And I thank you! Keep those coming. If you know of anyone that could use my professional real estate services, do not hesitate to contact me.

Whenever you have questions of any kind, don’t be afraid to pick up the phone. Sorry this email has been so long. But I thought You’d like to know what this real estate agent thinks.

Chris Lengquist

Keller Williams Realty
Diamond Partners, Inc

Olathe, KS

913.568.1579
listwithchris (at) kw.com

www.chrislengquist.com

www.bbqcapital.com

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Filed under Kansas City Real Estate, Real Estate Investing

January 26, 2009 · 9:10 am

Is Your Rental Property In The Murder Factory?

There was a point in the last real estate boom where I literally, without exaggeration, received 15-20 calls a week from California real estate investors looking to buy rental property in a part of Kansas City now referred to as The Murder Factory.

The Murder Factory is the 64130 zip code in Kansas City. And trust me, you can also throw in the 64132 zip code as well. To see where these zip codes are in the city click on this zip code appreciation link from a blog post I did last year regarding Kansas City real estate.

To get a full appreciation of what I’m saying you’ll need to visit the Kansas City Star’s article on The Murder Factory. Read both parts. Go ahead. I’ll wait. I’ll be here when you get back.

(The photo above was taken from the Kansas City Star. Click on link for full photo credits.

“What I’m going to do is buy these homes for $5,000 – $15,000, put in $3,000 – $5,000 in repairs and upgrades and then rent them to Section 8 tenants for $825/mo. Then I can sell it for $70,000. Will you be my real estate agent and help me find these?”

No.

I realize this is a family blog. But it was bullshit from the beginning and it still is. Today, I receive about 1-3 calls a week from people who bought these dogs begging me to help them sell them. Last week I had a call from a New York real estate investor who swore to me he was willing to let a few of his houses go for 35 cents on the dollar just to be rid of them.

Trust me. At that price he was still making a profit and leaving someone else with headaches unimaginable. This is not a Kansas City problem. It happened (still happens) all over the country. Heck, I still get calls today asking me to participate in this stuff.

If you are participating in this kind of activity in these kinds of neighborhoods then shame on you. You are continuing the raping of these people for your own personal gain. And I won’t be a party to it.

If you really want to help, be a part of these neighborhoods. Put the money into a house, find good tenants and then put some of that money back into the neighborhood. Spend your dollars at the local restaurant. Get your oil changed there. Be a part of something.

But if you are looking to just make a quick $5,000 – $15,000 you run a big gamble. It could backfire on you. You could end up another real estate investment casualty. You could end up hurt or dead. At the very least, you will have sold a piece of your soul.

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Filed under Investment Property, Kansas City, Kansas City neighborhoods, Kansas City Real Estate, Legal Issues, Real Estate Investing, Social Issues

January 1, 2009 · 11:51 am

Kansas City Real Estate: A Glimpse At The Current Market

I’m going to break for this post from talking about Kansas City real estate investment property and talk about a specific part of the Kansas City real estate market and that is Johnson County, Kansas. You see, a real estate investor client of mine who has purchased a few homes from me has asked me to help his son and fiance to buy their first home. They are looking for something that will give them the warm and fuzzies but also be a solid buy and a good investment. first-time-home-buyers

What they want is a home in the Overland Park/Leawood area of town priced between $175,000 and $200,000 with at least 3 bedrooms, 2 baths, 2 garages…you know the drill. Most of their money will be spent on the down payment, closing costs and move-in expenses so they don’t want or need a fixer. So what can we find them “under-valued?”

Let’s break for a moment and talk about mindset. With all the bad news thrown our way day after day after day (by the way, go back and read my posts from a couple years back…you’ll see I never bought in to the whole “boom” thing for KC, either) you’d think you could pick up houses on the cheap all day every day. So what exactly does “under value” mean?

In my humble opinion Johnson County, Kansas is, has been and will continue to be the economic engine of Kansas City. Oh, I know KC has more population and business headquarters and all that. But the money and exec types have always ventured over to the Kansas side. (Calm down Missouri. I didn’t say all the money and execs and I didn’t say we were better than you.) 😉 Although our football team beat your football team…

Real estate values in the Kansas suburbs simply have not dropped the way people have seen real estate values drop as little as a few miles away on the Missouri side of the line. There are only 45 homes available that meet the criteria of these new buyers and really only 9 of them look all that appealing. Days on market? Looks like about 122 is the average…throwing out one on the market for about 2 years.

A closer look reveals some more interesting thoughts about our current real estate market in Johnson County, KS…or at least this part of JoCo. In the last 6 months (that’s what appraisers are looking at, right?) the average days on market for homes in that price range has been 73 for the solds. Average asking price has been $187,421 with average sales price right at $181,738. That’s still 97% of asking price!

Does that sound like a depressed real estate market to you? No. Houses are not selling in a week or two any more. No. You can’t just ask whatever you want price wise, either. But ask yourself this the next time you are hearing all the bad real estate news: What does this have to do with me and my current situation? Maybe everything. Maybe nothing. That’s why you need professional help when trying to decide.

One last note. And this will concern Kansas City real estate investing. I’ve been accused of being a snob when it comes to helping people buy residential investment property. But if you’ll look at the rental properties I’ve sold to my buyers over the last few years I’d put their current values next to any current values in the country. Some have actually appreciated even as we stand today. Others are even and a few are actually a little depressed. But in all cases rent covers the costs as we initially calculated. So even the depressed houses have the wherewithal to ride this storm out.

Analysis Time

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.

04_oscar 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.

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

December 6, 2008 · 11:39 am

Duplex vs. Single Family Home: Which Is The Better Investment Property?

Just got the call. The usual call about why you would want a $230,000 duplex rather than two $115,000 single family homes. Maybe you would maybe you wouldn’t. Once again;

Single Family Home Advantages

Single family homes appreciate better than duplexes, by in large. They attract a better class of tenant, by in large. And they are more understandable to most people.

Duplex Advantages

Real quick there are two. The first is that if half is empty the other half is still bringing in income. That’s super important for an investment property. The second is that the rents to price ratio is usually a little better in a duplex than a single family home.

There are other subtleties. But those are the big differences. Next we’ll do an analysis of both situations. Stay tuned!

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Filed under Real Estate Investing

November 9, 2008 · 1:59 pm

Buying Investment Property In The Winter

In the last few days I’ve had a California real estate investor close on two houses he has purchased here in Kansas City. Both are in the Waldo neighborhood which is a pretty reliable, older neighborhood in Kansas City that is convenient to a lot of the things tenants like. But closing on a house, especially two, in November has it’s challenges.

For instance, both properties need some maintenance to get up to rental standards. One of the properties will take about 8 days and $5,000 while the other more like 5 days and $3,500. Then we’ll pop a For Rent sign outside. Now how is that gonna go?

Thanksgiving is just a couple of weeks away now. Then Christmas and New Year’s are just around the corner. There are holiday parties, stress to meet the bills for Christmas, etc.

So when we bought these houses we took into account a few things;

That these houses needed maintenance. The purchase price had to cover the repairs plus a little something something for the owner for taking the trouble.
These houses would have to make sense, financially of course, before committing to buy.
These houses are expected to be vacant until February.

Notice I said “expected to be vacant.” If we get it rented in November or December or January, well, GREAT! But when doing the numbers we just assumed no renters until February. And that could even be March. You never know, but I doubt it.

So as you might imagine these were two pretty sweet buys to pay for repairs, add in instant equity and to compensate for no rent for three months.

That is how you buy investment property in Kansas City in the winter time. 😉

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Filed under Property Management, Real Estate Investing