Category Archives: Real Estate Investing

I’m not an attorney or CPA but I was trying to explain passive loss to someone who is the other day concerning his real estate investments here in Kansas City. So I did a Google search and came up with this web page regarding the Passive Loss rule as it pertains to real estate investing.

Despite what the title of the page says you do not have to be a REALTOR to be a real estate professional. Enjoy.

Kansas City real estate investing is alive and well. And counter to the rest of the real estate market things are beginning to really heat up for the active real estate investor. In fact, I actually have more ready, willing and able buyers than I do properties I feel great about recommending.

But I believe that is changing. The properties side of the equation, anyway. You see as the high inventories begin to creep into the holiday season many sellers are beginning to get a little more flexible as far as their expectations are concerned. I’m seeing in the desperation of their agents.

“Motivated seller.”

“Make offer!”

“Owner may finance.”

These are all signs that the real estate agent and seller are feeling the pressure. (By the way, isn’t it odd that the National Association of REALTORS is running it’s a great time to sell commercials here in the Kansas City market? Really?) And when people feel pressure from within they tend to bend where they wouldn’t bend before.

The basics of real estate investing have never been more important than they are right now. I read a headline on Yahoo! that Countrywide Home Loans has announced a loss last quarter of $1.2 Billion. I read in the Kansas City Star that some analyst are expecting this real estate correction to last into 2009.

But the real estate market here in Kansas City has come to a standstill, overall. Yes, there are definitely some areas of town where appreciation is still happening. Population growth and housing demand don’t stop just because the credit crunch hits. But there are also many parts of town where days on market is soaring and prices are softening.

When I calculate returns for my real estate investment property here in Kansas City I am usually worried more about what my equity return is than any other issue concerning returns.

• Your down payment.
• Any difference between what it’s worth and what you paid for it.

A couple of years later (say the 5-8 year window I talk about for trading in/up your real estate investments here in Kansas City) you equity will be:

• The difference between what you sell it for minus what you owe (including your down payment).

So keep in mind you’ve had principal reduction going on (unless you went with an interest only loan, which could have been a good strategy depending on your situation) in conjunction with appreciation to raise that equity.

Here in Kansas City when you first purchase an investment property I would encourage you to make sure you are getting at least an 18%-22% return on your equity investment. But as you can probably figure out 6 years later that equity investment return will probably have been reduced by as much as 7%-10%.

Why? Because your accelerated depreciation has been exhausted on most facets of the personal property in the rental property and the percentage of net equity to value has steadily dropped, therefore lowering your leverage.

Knowing how you measure what a successful real estate investment property is provides you with the fist step in knowing whether or not that particular house is the right house for you and your investment property portfolio.

People love to show me the pro formas on the investment property they are trying to sell. And I look at them…with a wary eye.

What is a pro forma? It’s a set of numbers that project what a property should be getting/spending versus what it is getting/spending. It adjusts income and expense numbers to reflect true market rates. Or does it?

To me pro forma probably means “I’m lying to you.” Now, I hate to sound cynical. However, if an income property should be getting $850/mo in rents per side why is it only getting $725/mo per side in rents? Also, how can you say expenses will only be “Y” when it is an eighteen year old property with the original heating, air, roof and water heater. Don’t you believe there will be capital expenses to account for next year?

I know you can turn investment properties around. There is a lot of money to be made in doing so. But choosing the right property is a daunting task and it should not be based solely on what the seller’s pro forma is showing you. You need to research, fact check and look at the numbers with a cold, rational approach. Take off the rose colored glasses before you get yourself into trouble.

About two months ago I started saying that winter was going to be a great time to pick up good investment property here in the Johnson County, Kansas area. And I like it when a plan comes together.

It just seems to me that people keep missing the point. The question isn’t “Is that a good deal?” The question is “Where else could I put my money and would that be more or less profitable?”

• Different criteria.
• Different job incomes.
• Different credit scores.
• Differing ability to take advantage of passive loss.
• Different down payments.

Get the picture?

I am not advising here the infamous real estate investing technique of “paralysis by analysis.” I am saying that you need to know what’s on the market and how each of those properties would be expected to perform in order for you to answer the question “Is this a good deal?” about any one particular investment property.