Category Archives: Real Estate Investing

May 30, 2007 · 8:54 am

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.

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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?

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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?”

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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.

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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. ***

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May 22, 2007 · 9:39 pm

Reasonable Minds Can Disagree

Those of you that know me well know how much I am into college basketball. Long before the first tip-off of any given season I have worked myself into a frenzy preparing for and analyzing the upcoming season for not only my beloved Kansas Jayhawks but for the all the great teams of college basketball.

And concerning basketball, ESPN commentator/analyst Jay Bilas has a saying when he is discussing this great game and the athletes who play it with someone of a differing opinion.

“Reasonable minds can disagree.”

That’s a lot better than the “%*@# you!” that can get thrown around by less educated and far less diplomatic people.

Who To Listen To When Investing In Real Estate

I received a very complementary email from a gentleman in Los Angeles the other day. The long and the short of the email was giving me compliments on this blog and also to say that he was investing in a manner here in Kansas City that did not necessarily go along with everything I seem to espouse.

And isn’t that great?

When I counsel newer or would be investors one of the common discouragements that they have to fight through is the so many different philosophies and beliefs about real estate investing. This guy says this. That guy says that. And, Chris, you say something altogether different.

The thing every income property owner in America needs to understand is that there is no one way to invest in real estate. For almost every rule one investor has about what not to do, or what price range to be in, there is someone “breaking” that rule making money doing the exact thing this guy never would do!

So what is the point of this entire post?

I have a proven track record for helping people to build wealth through buying and holding income property for the medium to long term. I have also assisted, on a selected basis, with helping people to purchase rehab type properties, improve them and then sell them for a handsome profit.

Therein lies my area of expertise. But to sit here and demean other forms of real estate investing is not my goal or intent. I have very good friends here in Kansas City and in Washington, DC that make money doing things inside the real estate investment field that make me uncomfortable within my personal feelings. So I don’t do them. They aren’t wrong. It just doesn’t fit what I do.

If you are now asking yourself if I think everything within the field of real estate investing is okay…I do not. I still have strong feelings about taking counsel from gurus who don’t know your personal situation and won’t be around to help you when the stuff hits the fan. And I can name other pet peeves if you want me to respond to a specific email.

Just always know this. I am here to help you develop a retirement worth having. So always take my comments as constructive and mix them around in the bowl with your personal goals and convictions and see if my ideas blend. If they do…I’d love to work with you.

I hope, with all sincerity, that this helps.

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May 21, 2007 · 10:13 am

Recipe for Disaster: A Quick Way to Burnout of Real Estate Investing

Every once in a while I get a desperation call from a real estate investor who has “just about had it”. Maybe the tenants are not paying on time. Or at all. Maybe the property has just been torn up again. Maybe the local housing authority has given a long list of inspection items that need to be repaired.

And I want to share with you what a very large majority of these callers all have in common:

They almost all own lower priced properties that attract lower paying clients.

Generally, an investor just getting started out will have to wrestle with whether or not they are looking for Growth or Cash Flow. And the would be income property owner that is strictly looking for cash will almost always end up drifting down into the lower price ranges of Kansas City. I’m talking about the homes priced in the $30s, the $40s and the $50,000 price ranges.

(Of course, they may also not be able to afford any more at this particular time. So you may be “forced” into this situation rather than be patient and accumulate more savings.)

Yes, it is true that homes for sale in those price ranges are very much more affordable. (Is that proper English?) It is also true that if you can pick up a rental house for $45,000 and rent it out for $500 a month that you will instantly be in a cash flowing position!

If you can collect the rent.

This is not a condemnation on every tenant only able to afford $300 to $600 a month for rent. Most tenants in that price range are good, hardworking and responsible people. It’s the ones that are not that get you in trouble. How good does that cash flow look when you have an eviction every 12 – 16 months? What about the cost of clean-up after a less than desirable person has finally vacated the property?

Turnover, for whatever reason, just seems to be a lot higher.

There are many real estate investors out there that focus on these lower priced homes as a strategy. And that strategy has served them well. But by in large, the calls I get suffering from Investor Burnout are almost always in the market described above.

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