Category Archives: Real Estate Investing

June 30, 2007 · 8:26 am

Real Estate Investing Equals A Retirement Worth Having

Are you one of the millions of Americans trying to figure out how you are going to have a Retirement Worth Having? Why not think about small time real estate investing?

I’m not talking about committing hundreds of thousands of dollar and every weekend of your time. I’m talking about owning one, two, five or maybe as many as ten homes for investment purposes. Too hard? Well, start with one. If that does it for you move on to another. When you reach your limit, you’ll know.

But here is what owning just one income property can do for you over the next fifteen years of your life. And if you think that is too long, how old are you and what is your life expectancy?

This example will not be all inclusive and I simply don’t want to write 10,000 words showing how I arrived at all of this. You are welcome to call or email for details.

Buy $175,000 duplex with 25% down at 7.12% interest. Monthly rents at $1,475. Now, I’m going to take into account 5% vacancies and other expenses like insurance, taxes and general maintenance. Also, there will be 5% risers on the income and property value figured in. Here we go;

Year 1 – Income of $17,700 minus expenses of $6,800 minus debt service of $10,608 equals $292 yearly income. House value still $175,000. (To account for slow growth this year and as a cushion. – Hey, I’m being ultra conservative here to make a point.)

Year 5 – Income of $22,500 minus expenses of $8,315 minus debt service of $10,608 equals $3,577 yearly income. House value is now $210,000.

Year 15 – Income off $34,500 minus expenses of $13,750 minus debt service of $10,608 equals $10,142 yearly income. House value is now $319,500.

Note: There were a couple years in there I did not count or did not count in full 5% risers. Again, just being conservative.

So let’s look carefully at this. And we are not going to discuss all the 4 Benefits that we know we have when investing in real estate. We are only going to consider the net equity of the house after 8% sales costs. (You know, the real estate agent, title company and the like.) We’re not even considering the cash flow you had and can see for yourself. Because you probably spent that on your kids’ education or a BMW or another rental property.

House value is now $319,500 minus the $25,560 in sales fees minus the remaining loan balance of $97,600 equals $196,340.

Chris, what about capital gains taxes? What about state capital gains taxes? What about, what about, what about?

To be fair, cap gains taxes are 15% for the feds and vary state to state. But you want to count those? Okay. But to get the details you also need to go back and adjust your yearly income by adding in depreciation. Ah, oh. Now we have depreciation recapture to worry about.

Listen, there are a lot of things going on here. This is an overly simplistic way to get you to stop and think about your Retirement Worth Having and how real estate investing can be a valuable tool in the box. Obviously, you are going to need to work with a professional to counsel you through the landmines and pitfalls to maximize your benefits.

Just stop though, for a minute, and think about the retirement you want to have. How will it look? Where will it be? What amount of money do you need to make that happen? Would another $196,000 help?

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Filed under Real Estate Investing, Retirement Worth Having

June 26, 2007 · 6:47 am

When Real Estate Agent & Rehab Investor Meet There Will Be Frustration

An ongoing conversation in the field of real estate investing is the working relationship between the real estate agent and the rehab investor. Or flipper as some of you would say. Christopher Smith of Equity Scout wrote an article titled Realtors and Investors :: Are you speaking the same language?

First, let me just say that Christopher Smith is probably one of the best bloggers out there on his subject. I love his stuff and the thinking he makes me do. Christopher is an investor. I am an agent. So I answered the post with my own titled Real Estate Investor vs. Real Estate Agent: What’s A Quality Investment Property? In a great many ways I think my post supported his.

Last night I received yet another comment on the post. A recurring theme in the ongoing relationship between agent and rehabber. Frustration.

Rehabber’s Point of View ( I believe)

The rehabber needs properties with enough margin between the ARV (after repair value) and the acquisition costs for him to successfully rehab the house AND cover his acquisition costs AND cover his carrying costs AND to make a profit.

Real Estate Agent’s Point of View

Many newer rehabbers will try to rely on real estate agents to find them. Good luck. I’ve said a million times over the phone that there is not a search I can do for houses that are for sale for 45%, 50% or 60% of ARV. If, on occasion, I stumble across one that the listing agent wasn’t smart enough to buy for himself I will either move on it myself or reward one of the rehabbers already on my list.

The rehabber turns to the agents because if he can get the agent to find these homes for him (rather than doing what successful rehabbers do and that is find the houses themselves through obituaries and NODs) then his job is easier.

The agent (the newer ones anyway) like the idea of working with these rehabbers because they will sell 8-10 houses a year to them, guaranteed!

Well, probably not. The agent will spend hours upon hours searching through the MLS and previewing homes they THINK will work because they do not fully understand the business of rehabbing. Then they will take the rehabber out on tour.

The rehabber gets frustrated because the agent isn’t understanding him and not showing him properties that he can make a profit on. Not when the pencil and paper meet. (Or worse, he doesn’t do the pencil and paper and is a candidate for the next NOD.)

The agent, after showing 20 houses and many sleepless nights covering the MLS, finally says “I’m not working with investors because they are never happy and never buy anything.”

The rehabber says “Agents don’t want to work with us because all they care about is a quick commission.”

Neither side is fully right. Neither side is fully wrong.

For me and my business, I work with mostly Buy & Hold real estate investors. I do have a couple of clients that rehab properties. And like I said earlier, I have a hard enough time finding them enough to keep them satisfied throughout the year. And by satisfied I mean I find them 1-2 a year. I do that for a couple different people. That’s about it. And I KNOW what a rehabber needs. There just aren’t many out there.

The relationship between real estate agent and rehabber can work. But both sides need to fully understand each other, their motivations, their criteria and the results they expect.

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Filed under Real Estate Investing

June 25, 2007 · 6:35 am

Real Estate Investing Q&A : Personal Stories

Today I would like to fully introduce you to a real estate investor client of mine even though modesty on his part has restricted me giving you his full name. I have worked for Al S. for a little longer than a year now.

When you read his answers to these real estate investing questions please notice that his whole economic picture today is more comfortable than most people’s. And he didn’t own hundreds of income properties. In fact, he owned fewer than ten rental homes.

Q: How long have you been investing in real estate? 50 years.

Q: What made you purchase your first house? Upon being discharged from Air Force after the Korean War I got married and used the GI Bill to buy a duplex and lived in one side. The tenant advised me that I should not buy the place because it was a dump and not worth the price they were asking. Well, he bought the dump for me with his rent payments and I moved up to a nicer dump while he remained living there paying rent for many more years.

Q: Did you know what you were doing or did you just jump in? Owning rental income property runs in my family. My dad supplemented his seasonal job with income from rental property income. My brother and sister also became involved in rental properties. Both of them have been more aggressive investors than I. My sister owned a city block of rentals in New York and my brother owned several nice Westchester New York properties. Both have since divested their holdings to spend more time traveling.I am also in the process of doing the same.

Q: What has been your biggest headache over the years? Not buying more properties. Like the saying goes “Get lots when your young”.

Q: Were there months you were worried you would not have enough money? Fortunately by picking good properties and selecting good tenants the cash flow was usually enough to cover expenses. There was one occasion when a property I purchase with owner financing at 7% had a 5 year balloon payment due. Refinancing rates had climbed to 19 % at the time the balloon payment was due. The rental income would not support such an interest rate so my offer was to let the former owner take the property back. He thought that he would prefer to continue collecting 7% for another 5 years as better deal for both of us. When the next balloon date arrived, interest rates returned to a reasonable level allowing me to refinance through a bank.

Q: Name your biggest reward over the years of your investing. Good cash flow; good appreciation; good tax shelter to save income taxes on my day job ; plus providing a goods service to good people in need of a good place to live.

Q: Did you realize what your income properties would be worth some day? There was always the fear that property values might drop as well as the wish that they would go up, up and away. Just like any other risk-reward adventure there is excitement in taking the risk. Real Estate has been one of my better investments from both a financial as well as a feeling of personal accomplishment. My other investments, such as stocks, have had some financial results but lacked the personal feeling of accomplishment because the results were the actions of others. Owning,managing and controlling an entire investment, like a real estate investment, is an entrepreneurial adventure.

Q: You chose to just liquidate your properties. Why did you decide to not utilize the IRC 1031 tax deferred exchange? 1031 exchanges are a good tool to use to make full utilization of sales proceeds by delaying the tax consequences to a later date. But like the saying goes “you can pay Uncle Sam now or pay uncle Sam later, but you will pay Uncle Sam.” I chose to pay Uncle Sam now and taking what was left over to enjoy traveling and eating good meals while I am young enough to do so.

Kansas City, Missouri Rental Licensing

I received this email from KCRAR. That’s Kansas City Regional Association of REALTORS. I am in full agreement that we do not want, nor do we need rental licensing in Kansas City, MO for investment property owners and/or their rental properties.

Now, I’m not for slum lords, either. So as you read this be sure to understand that most of my clients keep clean and relatively updated units in operation and available to their tenants. There are already measures that could be put in force to make sure tenant living quarters are safe and clean. Use those.

And before KCMO decides to go after the landlords, why don’t they first go after themselves. I’ve never seen a more disorganized and incompetent housing authority in all my life as the experiences I’ve had with the Kansas City Housing Authority. I guess they want landlords to do what they cannot. Hmmmmm.

The Kansas City, Missouri City Council is considering a proposal to create a rental licensing program for landlords in KCMO, including registration fees, inspection requirements, and other costly and cumbersome regulations. KCRAR opposes such programs, as we believe they unfairly target investment property owners, do very little to address the problem of blight in neighborhoods, discourage investment in rental properties, and increase the cost of housing to lower income tenants who are most at risk of losing their shelter.

Please help us fight this proposal by contacting members of the Kansas City MO Public Safety and Neighborhood Committee and adding your voice to our opposition.

Thank you.

Send a letter to the following decision maker(s):

Council Member Cathy Jolly

Council Member Cindy Circo

Council Member John Sharp

Council Member Melba Curls

Council Member Sharon Sanders Brooks

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Filed under Kansas City, Personal Real Estate Opinions, Real Estate Investing

June 22, 2007 · 8:04 am

Learning From The Past: Moving Forward

Real estate investing can be a humbling business. Stray to far from sound economic guidelines and sooner or later, it seems, you will pay the price. Then what do you do?

Another real estate agent from Nebraska and I were speaking through email last week. He had been burned big time by his real estate investing endeavours earlier in his life. When the Carter/Reagan years hit he lost everything…including his word as he had to file for bankruptcy.

In his early years it came easy and he continued to expand his parameters on what risk he would take on. When inflation shot to 18% he was doomed.

He wallowed in doubt and self pity for a while. Then took a hard look around. He was 41 years old without any formal secondary education and just a real estate license. There were no high paying surgeon jobs out there for people without medical degrees and the same was true with most professions he thought about.

Finally, he set back on the bath of building wealth through real estate. “A common man’s

vehicle” I think he said. It was tough. Every time he gathered a little money he would buy something else. This time however every property had to pencil. And pencil with conservative numbers.

No overnight success stories. Just 22 years more of hard work, balancing acts, tough choices and self-denial. And yet, here he sits. A millionaire again.

We all get slapped in the face once in a while. What are you going to do about it? Quit?

A former United State Marine once told me, while I was wallowing in my own self pity, “FIDO, man.”

Forget It. Drive On.

I’m Confused

I have to say I’m a little confused. I keep hearing on the television and some other real estate agents that the housing market is slowing down. Why am I getting busier? Oh, I’m not complaining. No, no, no. I’m just saying that it seems to getting busier, at least for me.

***

A fellow agent of mine let me know she has a developer out in Shawnee that is going to be releasing 95 (I think that was the number) build able lots this weekend. If you are a builder or investor interested in such a project, let me know.

***

If you are looking for homes that can be purchased at 50% of ARV, please no more calls. I have enough people on my list unhappy with me as it is. Folks, these properties don’t grow on trees. Now if you are looking for Rehab & Hold properties or rental homes or longer term investment properties…opportunities abound. Buy & Hold real estate investing is where to go, now. The short term gains are tougher to find.

Depreciation And Your Rental Property

Yesterday over at my other blog on ActiveRain I authored a post titled How Are Your Current Real Estate Investments Going? To get background for this post it might be wise and go and read that post.

But the gist of the post was that if you’ve owned the same income property in Kansas City for 7 years or longer you are probably no longer maximizing your returns the way you should be. That in fact;

You are no longer maximizing your leverage
If you are properly bifurcating your depreciation you have already exhausted your personal property portion (with the exception of new personal property added)

Leverage was discussed there. We’ll talk about your depreciation here.

Depreciation

Bifurcate is just a $10 word for cost segregation. There are actually 4 ways you can segregate your depreciation on your investment property;

Land (which of course doesn’t depreciate)
Personal Property (over 5 years)
Land Improvements (over 15 years)
Building (over 27.5 years)

Most people are probably only utilizing #1 & #4. They are overlooking (or your accountant is) #2 & #3. But if you are maximizing your depreciation you can see that by year 7 you have already exhausted all your beginning personal property depreciation and 1/2 of your land improvements.

Why is that a big deal? Because if you have broken out your costs you will probably find that personal property depreciation accounts for between 40% – 50% of your yearly depreciation total. At least at first.

Now as you change carpet, appliances, lighting fixtures and the like you can start a new 5 year schedule on those items. But about 1/2 of your beginning depreciation number is now gone. It’s not coming back.

In addition, you are also 25% of the way through your building depreciation. That investment property that used to give you overall returns of 22%-24% is now generating overall returns of 13%-15%. And it will continue to slide down from there. No matter how much your cash flow continues to build. (Well, there might be exceptions that I haven’t seen.)

It could be that you just don’t want to change houses or there are sentimental reasons you don’t want to exchange or you are just happy with the money you have. But if you are still in the growth phase and you are looking to maximize that Retirement Worth Having, you may wish to consider sitting down with knowledgeable investment real estate agent or tax planner and figure out what to do next.

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