Category Archives: Real Estate Investing

June 4, 2007 · 7:37 am

Young People of America: Invest In Real Estate

Young people are learning to invest in real estate. Young people today seem to be learning a lot faster than my generation. True, I’m only 42. So it’s not like I’m a geezer, yet. But when I am working with these 24, 25, 26 & 27 year old clients I feel like a proud papa.

– – –See this photo? Even with the movement towards financial security, this is about the right ratio of “people in the crowd” actually making the move towards owning income property. – – –

This won’t be a long blog post. It is really just a post to say how proud I am to help these kids get started. Rather than spend all their money on trips and single family homes that are too big for them at this time I’m seeing twenty-somethings purchase a duplex, rent out half and live in the other side.

The plan is nearly always the same: Live in one side and rent the other for about 2-3 years. Then, move on to the single family home (or another duplex) as an owner-occupant and keep the duplex as an investment property.

A few will be satisfied with that. And that is fine. Think about it. If they don’t do anything else, if they don’t buy another rental property. If they don’t 1031 exchange. If they don’t lease option, etc. When they are in their 50’s they’ll have a piece of property that is 100% paid for, cash flowing tremendously and can sell it to help fund their retirement.

Editor’s note: The above strategy is not recommended as a good long term strategy. But even that strategy is 1,000% better than what most people will do.

And another terrific thing is these young adults are still investing in their 401K’s and/or their IRAs. And even better, a few are taking on other income properties, as well.

So there is definite hope for the generation that follows mine. Self-reliance and entrepreneurship are alive and well in America. And that is a good thing.

1 Comment

Filed under Personal Real Estate Opinions, Real Estate Investing

June 1, 2007 · 10:23 am

Friday Meanderings

Here are some blog posts worth reading:

Investors vs. Speculators::Which One are You?

1031 Tax Deferred Exchanges-200% Rule

So You’ve Decided To Buy A Property With A Friend…

***

I ran into this guy the other day at the post office. If you like to Bar-b-q you are going to want to check out this site. And you know we Kansas Citians love to BBQ. American Barbecue Systems.
***

Isn’t it amazing how many different ways there are to say Bar-b-q. Let us list some:

BBQ
bar-b-q
barbecue

I guess it’s appropriate since there are so many ways to BBQ. Memphis thinks thinks they are the best. (And they are good.) Carolina thinks they are the best. (I don’t care for vinegar and cabbage on my sandwich, thank you.) Texas…well Texas has a Texas sized ego about everything. But here in Kansas City, we have a little of each of those. We’re the Constantinople of BBQ.

And remember, grilling isn’t BBQ. It’s grilling. BBQ is low and slow.

***

I’ve got a line on some pre-construction fourplexes out in Manhattan, KS if anyone wants any information.

***

I’m noticing the rental market get stronger and stronger. My prediction from about 18 months ago is coming to fruition as lending standards are tightening and foreclosed homeowners are moving back into the rental market. Add to that slowing building and we should be nearing the bottom of the real estate cycle, here in Kansas City at any rate, in the next 12-24 months. Then things should slowly start to edge back up.

But we’re not too bad now, relative to the rest of the country. At least our appreciation is 2%-3% instead of depreciation!

***

My son leaves for the South Pacific for 21 days on Tuesday. I’m so envious of his trip.

Commercial Loans: Residential Income Property Investing

Q: Why would you need a commercial loan when you are purchasing a residential income property? It just doesn’t seem to make sense.

A: Because the underwriting guidelines say that any residential property with 5 or more living units will require a commercial loan. That’s why.

Take this 5 unit apartment pictured to the left here. Because it is over 4 residential units underwriting guidelines will not allow a residential mortgage. That goes for any investment property 5 units and above.

You may now be asking yourself what are the main differences between a “regular” mortgage and a commercial loan. Well, I’m not going to hit every point but I’m going to highlight some of the biggies.

Residential investment property loans may allow you to put only 5%, 10% or 15% down. It is very unusual for that to happen with a commercial loan. In fact, 20% is almost a mandatory minimum with 25% being even better.
You can decide how profitable a residential mortgage purchase needs to be but if a bank is getting involved with a commercial loan they are looking more at the qualifications of the apartment being purchased than they are looking at you. The commercial banks have minimum standards for what cap rates should be for commercial loans they are underwriting.
Regular mortgage loans can be amortized over 15, 20 or 30 years. Commercial loans are almost always a 20 year am, maximum. Although I have seen a movement towards 25 years on some more expensive apartment complexes.
Your closing costs will be exponentially higher. Points are usually higher. Appraisals will definitely be higher.
Experience matters when qualifying for a commercial loan.

Right off the top you can see that you had better not be considering any residential income property that has more than 4 units until you have the cash, credit, experience and banker to do so.

That’s another great reason to begin your real estate investing career with easily manageable, easily affordable single family homes, duplexes and fourplexes. After you’ve been through a 1031 exchange cycle, or two, then you’ll have the cash available to go after the commercial properties.

Fun Fact: I’ve got a 26 year old right now who owns 7 investment properties. He’s on the fast track towards being a multi-millionaire who owns commercial properties by the time he’s 40-42 years old. Now that’s a way to build a retirement worth having.

2 Comments

Filed under Financing Options, Real Estate Investing

May 28, 2007 · 10:31 pm

Do You Have A Sinking Fund For Your Investments?

Sinking Fund: noun – fund accumulated and set aside by a corporation or government agency for the purpose of periodically redeeming bonds, debentures, and preferred stocks. The fund is accumulated from earnings, and payments into the fund may be based on either a fixed percentage of the outstanding debt or a fixed percentage of profits. Sinking funds are administered separately from…

Source: Encyclopedia Britannica

I use the term Sinking Fund a little bit differently. But the end results are the same.

If I am your agent during a transaction I will look for things that are going to cost you money down the road. Example: Sure, it’s a great duplex with healthy cash flow, a new furnace and air, good structural soundness and a good many updates.

But did you notice that roof?

Your insurance agent, your inspector and I all agree that the roof has a shelf life of somewhere between 5-8 years left before it will need replacing. What do we think that is going to cost? Let’s say for our example to replace that roof today would run right about $5,500. That’s a complete tear-off and replacement. So let’s just say that will easily be $6,000 grand in 6 years.

So here’s what you do. $6,000 divided by 72 months is $83.33 per month. Now figure out how much of that monthly fee you want your property to pay for. All of it? Okay, take the cash flow you figured you were getting and subtract the $83.33 per month from it. Does the property still look good to you?

The point of this exercise is to get you to understand that unless you wish to be a slum lord and bleed the property dry (making sure you won’t get top dollar when it is time to sell) you are going to have maintenance along the way that you need to account for.

And for me, well, I would rather have my rental homes pay for themselves. Rather than me writing a $6,000 check from my personal funds. Know what I mean?

2 Comments

Filed under Real Estate Investing

May 25, 2007 · 7:56 am

Shoulda, Coulda, Woulda: The Investment Property That Got Away

I want to hear from you about the “one that got away.” The rental house you shoulda bought. The income property you coulda kept. If you only woulda sold that investment property before all heck broke loose.

Pictured above is my old neighbor’s house. He sold his a month after me for $3,500 more than I had sold mine. Six years later it is for sale for $193,000 more than he sold if for! If you look at the chocolate brown house to the right…that was mine.

MY LAMENT

I like to keep track of my old neighborhood in Germantown, Maryland. In late 1998 I bought a townhouse for $109,000 during one of Washington, DC’s housing corrections in the Stoneridge subdivision of Germantown. When my life changed in 2001 and my wife and I decided to get out of DC to return to the Heartland I really wrestled as to whether to keep the house as a rental or to sell it and take my gains with me to help get me started in my new life.

To keep the house as an investment had upside. It was, after all, the Washington area and therefore real estate always does better there than just about every city in the country. Good jobs, great growth and everything. But the thing that kept coming back to me is that I might need those funds to help me re-establish myself and that 1,100 miles was a long way to be from a rental property that I owned.

So I put the house up for sale. I sold it in 4 days for $142,750. No house in our neighborhood had ever sold for that much and getting the appraiser to get on board was a challenge. But we did, I made $33,750 (before selling expenses) in just under 3 years. I was pretty proud of myself.

But I just had a nagging feeling about selling that house.

Even after the current housing correction that neighborhood is still selling in the $330,000 – $345,000 price range. At one point I believe it had gotten up to the $380’s or slightly better. If I had kept that house and sold it during the peak (and I had a good feeling that was the peak for this go around of the housing cycle) I would have made an additional $232,000. That would have been $29,500 a year equity growth without even counting principal reduction, depreciation and cash flow before taxes.

Errrrr.

What is your story on the “one that got away?”

2 Comments

Filed under Real Estate Investing

May 24, 2007 · 7:24 am

Do It Yourself Real Estate Investing

I have a confession. Regardless of the task the first thought that comes to my mind is “Hey, I can do that myself and save money!”

For the record, I’m usually wrong.

Take some wood rot and termite damage I needed to repair on my garage door frame. I went out, bought myself a reciprocating saw and tore into the house. After all, when I watch my contractors do it for my client houses they make it look so easy. Now it looks like a butcher got a hold of it! Then I tried fitting in the wood pieces to get ready for the trim pieces.

To make a long story short, I have a guy that does wood rot repairs for a living coming out next week to clean up my mess. He could barely contain his laughter when he walked up on the job I had been doing. And rightfully so, I might add.

*** *** *** *** ***

Sometimes people will take the time to read some blogs, read some books and attend a seminar or two to learn real estate investing. They say to themselves “Hey, I can do that and save myself some money!”

And I don’t blame them for feeling that way. But if they get something wrong, the consequences can be long lasting and disastrous. It is very hard work keeping up with neighborhood trends, rent values, tax codes and income property financing. Knowing what sells and what wont is as much an art as a science. Seeing where growth will occur is a skill that needs constant practice and fine tuning.

I know and understand the base feeling of wanting to accomplish something yourself to both establish your independence and to save/make money. But when it comes to purchasing and/or selling Kansas City income property I hope that you will call a professional.

1 Comment

Filed under Real Estate Investing

May 23, 2007 · 7:01 am

Own Real Estate Within Your Self Directed IRA

Are you using a self directed IRA to purchase real estate investment property?

If not, you really need to hunker down and wade through this posting. It could be the difference between retirement and a retirement worth having.

Understanding Your Investment Dollar

Most people in America today have no real understanding of their financial situation. That’s not insulting you. It’s just the truth. And here is a perfect example.

Example: A fresh out of college graduate takes on his first job and immediately begins making more money than he has ever had before. He feels kinda guilty about spending all that money on just cars, music and entertainment so he pays heed to the guy sitting next to him in the office and sets up an IRA. Immediately he begins contributing to the IRA and maxes out his contributions each and every year. (Which for 2007 is $4,000.)

*** To finish reading this article click here. ***

3 Comments

Filed under Financing Options, Real Estate Investing