Category Archives: Real Estate Investing

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.

Flying is a terrific way to get from Point A to Point B. And logic presumes that any airplane could do that for you. But is that true?

During the process of learning to fly an airplane I quickly learned that each and every airplane is different. Different checklists. Different performance levels. Different capacities, weights and balances.

The earliest pilots flew planes much like this Piper Cub still in use today. These planes would make them free from the Earth and allow them access to the skies in unprecedented fashion. They could travel farther, faster and more enjoyably than ever before.

Science moved forward in lock step with engineering. Compare the cockpit of the pictured Cub to the all glass cockpit of the Boeing 777.

Excuse me, Chris. But you are doing it again. May I remind you that this is a blog about real estate investing. We know you used to fly airplanes. Cool. We’re impressed. Whatever. Can you please get back on topic.

Alright. Sorry. But again I have to remind you that lessons in life are easily transferred. Today’s Boeing 777s fly on the exact same principles as yesterday’s Piper Cubs. But the 777s have learned from experience, improved on function and the result is superior performance.

Yes. Both planes can take you from Kansas City to Los Angeles. But one can get you there in 1/10th the time while allowing room for error and greater performance.

Today, many real estate investors are still using the real estate investing techniques of the Piper Cub. Twenty to twenty-five percent down. The one percent rule. Cash flow is king.

And while not discounting those, and many more, tried and true methods I want to point my finger upwards to show you the jet that is smoking you. It’s flying higher, faster, farther than you are and without the fuel stops that you have to make.

Consider other options to maximize your investments. Learn from the real estate investing principles that have been given to you and see what others are doing with them. Don’t know what I’m talking about? Then we need to talk.

I got a phone call today from a person wanting to know about real estate investing. In fact, she and her husband will probably read this post and know I am talking about them. 🙂

Anyway, the subject of buying a home and letting their mother live in it came up. Is that an investment rental property?

Maybe yes. Maybe no. The IRS, as I understand it, wouldn’t look too kindly on that situation. It’s not “arms length.” So if you are going to do something like that you had better check with your CPA first. One thing you could do is to make sure, and document, that your family member pays fair market rents for that housing unit.

Of course, if the IRS disallows the rental property as an investment you might be able to count it as a second home. Any thoughts chimed in here by CPAs would be most appreciated.