Category Archives: Real Estate Investing

November 5, 2012 · 8:35 am

The Worm Has Turned – Sorry Real Estate Investors

Well, the worm has definitely turned here in the Kansas City real estate investing market. Oh, don’t get me wrong. As I survey the country I know we are still a great, steady market to have some of your portfolio in. But the last 18 months (until about a month to two months ago) we were able to find 14% cash on cash returns on a regular basis on homes in neighborhoods where my grandmother would feel safe. (Not to @bawldguy)

Prices are up. Competition is definitely up. But, there are still houses to be had. It’s just that my usual forecast of 14% cash on cash has been downgraded to about 11%…maybe 12%. I challenge you to look at the strength of real estate as an investment vehicle and find better returns that that when you take in to account the 4 Benefits of Real Estate Investing.

Actual Cash on Cash Returns of a Kansas City Real Estate Investor

Here at Kansas City Real Estate Investing we get asked all the time, and rightfully so, for real life examples. Real numbers.

“What is my return going to be if I go with you?”

Well here are some actual cash on cash returns of an Kansas City real estate investor. Below is an email I sent to an income property investor who is actively in the Kansas City market buying, rehabbing and then renting property on a consistent basis. You’ll be able to figure out the average all in costs with a calculator and just a few minutes of your time.

Some background: This investor now holds 47 rental properties that we have had the pleasure to sell them, then manage the rehab and then manage the properties with suitable, qualified tenants. We ran these numbers for the houses that had closed before the end of October of 2011 and thus were inhabited by real life tenants by January 1.

Also, while these homes are not in Mission Hills style neighborhoods they are perfectly safe, have good school districts and now have lots of sweat-equity. I won’t let my clients buy – rehab – rent a house that I don’t want to manage. And if my grandma wouldn’t spend the night there* (God rest her soul) then we don’t buy it.

Enjoy…and hopefully you’ll pick a few nuggets out of the brief synopsis.

* Phrase stolen from BawldGuy.

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So to get to the bottom of the question as to how much these houses are/are not making what I did was go back to the homes that we purchased last summer/fall that we had time to get rehabbed and rented before Christmas. I took the close date and then gave about 60-75days (or so) for rehab and lease out and to basically let all the rehab expenses fall off and just get to the expenses you would have if you had bought turn key.

Attached is a .pdf of the raw data if you would like read. But here is a breakdown that may be helpful.

There are 15 properties in question. Of those, 4 turned out to have some post-inhabited major repairs…either things we should have done before occupancy or things we had no way of knowing. (See more details in the raw, scribbled data.) Also realize that on the raw sheets I put approx how many months the homes are being evaluated from. No insurance or taxes are included. But literally everything else is.

All 15 homes had an income of $109,083 with expenses at $40,887 which is 37.5% of income.

If we lose the 4 homes with the more major repairs (new ac, new plumbing, etc.) we had 11 homes with income of $82,321 and expenses of $23,947 which is, of course, 29.1% of income.

There are variables here that are hard to pinpoint. We cannot know EXACTLY what the numbers are until all rehab expenses are pared off and I cannot know that without a forensic examination of each and every property. So I tried to accomplish it by just taking the close date and adding a couple months as mentioned above.

So sometimes the lease out fees may not be totally included. But in most cases it’s close.

Adding in pro-rated insurance and taxes and I think we’re pretty close to (or possibly under) the 35% I like to shoot for…at least on the houses that didn’t have something major come up on. With those extra four houses included we’re probably more like around 40%-41% range.

I hope this helps. I’m happy it showed pretty much what I promised/expected. 🙂 But positive or negative I’d love to hear your thoughts.

If we want to take the scenario farther…and I do…let’s figure a pro-rated return of all 15 homes. I’d say the average is about 9 months.

109,083 – 40887 = 68,196 / 9 months =7,577/mo x 12 = 90,928

If you take the CAPEX Column R from our KC Portfolio Master then you’ll see your all in price for those homes is $648,747.

$90,928 / $648,747 = 14.0% cash on cash return

Not too shabby.

But again, this just can’t be exact with some of the educated guess work I’ve had to do. So plus or minus 1% is probably safe to say.

And we haven’t even talked about the hidden equity in all of these homes now….

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Find out more about Kansas City real estate investing by following me
@KCInvestments

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Filed under 4 Benefits of Real Estate Investing, Investment Property, Kansas City, Real Estate Investing, Real Estate Investor Interview

April 10, 2012 · 5:20 pm

Always Read the Addenda

Buying REO property from banks and Fannie and HUD is much different than buying homes from Joe & Sally Homeowner. First, the condition is usually much less. Second, you’ll be amazed at the extra paperwork! Usually 20-40 pages of additional addenda that have to be culled over. Some of the items you will find in there that will affect you;

The over-priced re-key charge for crappy locks that you will throw away as soon as the rehab is done.
The provision that says you cannot resell for 60 or 90 days.
The per diem fee if you don’t close on time.

And of course pay attention to your sales price, earnest money and closing dates. Sometimes they change them in that tiny type and if you are not paying attention, well….

The Change-Over

Whenever you buy a tenant occupied rental property there are challenges to be had. Most tenants, and I do mean at least 90%, are good and honest and ethical. They don’t lie about to whom the appliances belong and they don’t make up stories about how rent is paid in the past.

But…

There are those tenants that just can’t seem to to wrap their head around “the right thing to do”. They will tell you the refrigerator belongs to them and that they paid the “other owner” rent already and that they had a larger deposit than they actually did. So it’s very important to you, the investment property buyer, to get all of these issued clarified during the escrow period if at all possible.

Here are some items I would include in my contract;

Rent roll.
Delinquency roll.
List of Security Deposits.
Personal Property inventory.
Estoppel Certificate.

Make sure your would-be tenants don’t think they have one lease when you think the lease terms are different. A common problem during any investment property turnover.

Rental Property…

Owning rental property is challenging and rewarding. But it’s also not for the feint of heart. 🙂 On the one hand you can get better returns in real estate than you can with many other investment vehicles. On the other hand, just like any investment, there can be great lows to go along with the great highs. How can you avoid the lows?

First, know what you are getting in to. Each rental income range has it’s pluses and minuses. Vacancies can be longer on the higher end but payment, most times, more stable. When empty that’s a harder hit to your wallet. Newer properties require less upkeep/maintenance than older properties but that in turn cuts in to your bottom line on a monthly basis. So many things to think about and trade-off for.

Second, avoid functional obsolescence by keeping your property up to date as the months and years roll by. Little hits here and there keep the property looking better and the tenants happier. Happy tenants don’t leave and probably take care of the investment house better. And in the long run, trust me on this, it’s less expensive.

Lastly, SAVE! Keep a couple thousand in your reserves. Maybe that’s overstating it if you own the rental property free and clear. But if you have a mortgage I would recommend always having access to about $1,500 for any emergency repair (very, very, very seldom will you need that much) and at least 90 days worth of mortgage payments. That should ride out 99% of the storms out there. Don’t have quite that much but itching to pull the trigger? Delay. My best advice to you.

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Filed under Real Estate Investing

October 27, 2011 · 9:39 am

What are YOU looking for in an investment property?

Investment property goals can vary from person to person and situation to situation. And they should. Just the other evening I sat down with a couple who both work and I can guess they both make very good incomes. Kids are out of college. They are within 20 years of social security checks and enjoying the rest of their lives.

I’m a bit younger, a professional real estate agent and am still raising 3 of our 4 kids…the other off to college.

And a younger, favorite investor of mine is just barely 30, no kids, great job income and has a goal of replacing his job income with real estate.

That’s three very different situations and there is no one real estate investing formula that would cover all three.

What are YOU looking for in an investment property?
That’s the $10 question.

Cash flow?
Equity growth?
Delayed financial security?

So many more questions can be asked here. You probably need to talk to a professional who knows what questions to ask.

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