August 15, 2007 · 8:59 pm

McMansions A Lasting Legacy Of The Housing Boom – Gee, Thanks

I’ve often had people raise their eyebrows when they see where I live. A very modest 4 bedroom home in the heart of older Olathe. Problem is, I can’t stand a lot of the newer construction and it’s uniformity. The lack of trees.

Heck, just look down the street in a neighborhood built here in the last 10 years and you will see EVERY driveway has a dark colored SUV and the front yard has an 8′ tall oak tree planted dead center. (Where it will eventually block the view of the house for decades to come.)

No, if I’m going to live in the suburbs I’m at least going to live in an older neighborhood. Cheaper, too.

Here’s an aside: One of my favorite stories as a REALTOR are the people who want me to discount my fees because they don’t have enough equity. How could that be? They keep telling me about their trips to warm places in the winter and that SUV outside is less than a year old. (Home equity loans. That’s how. Now I’m supposed to subsidize that?)

Anyway, here is a great read over at Inman about the lasting legacy of the housing boom we experienced.

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August 15, 2007 · 8:10 am

Principal Reduction: #2 Benefit When Investing In Kansas City Real Estate

This week I have been reviewing the 4 Benefits of real estate investing. And today I want to re-tackle the #2 benefit of principal reduction. Actually, I’ve done this before and I’m not really sure that I could do any better. So click the “before” link and read. Also be sure to read the comments because a great alternative is discussed.

Personally, I love the fact that each month I collect rent a portion of that rent is going towards the reduction of my loan balance. I love that my tenants are buying me a house! But Jeff Brown makes a great argument about using interest only or negative am loans to accomplish even greater growth.

Jeff has been doing what I do for about 30 years longer than me. So do you think I’m going to say he’s silly? That’s 30 years of real world experience. I listen when he talks. But on this subject, I still take it case by case.

In a faster growing market I think the advice to go interest only makes sense all the time. Here in Kansas City when investing in real estate I want to weigh the options of what the rent will bring, down payment involved and how high I expect the growth to be over the next 5 years. (A forecast, at best.)

Kansas City real estate is currently still on an upswing, growth wise. Though much slower than several years ago. Heavy inventories and rising foreclosures have dampened our normal 5%-7% growth to around 1%-3% in a lot of areas. Still not bad when considering the coasts.

So be sure to look at alternative mortgages when buying your next Kansas City real estate investment property. But get some advice and do some calculations before deciding to go with either. Sharpen some pencils and go to work. Make an educated decision.

Your thoughts, Jeff?

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August 14, 2007 · 9:30 am

Cash Flow Before Taxes: #1 Benefit When Investing In Kansas City Real Estate

I have spoken before about the 4 Benefits of real estate investing. And in many parts of the country the first benefit, Cash Flow Before Taxes, is very hard to obtain. But here in the Greater Kansas City area it’s pretty tough not to do…at least if you come in with some capital.

I’ve posted the formula for determining cash flow before taxes before here. If the term in new to you I would really encourage you to go back and study it.

The key to remember is that just because your rent will cover your PITI (Principal, Interest, Taxes and Insurance) that doesn’t mean your new rental property is cash flowing. Heck no. What about property management expenses, if any? How about utility costs when there is a vacancy? (Are you gonna let those water pipes freeze in January when the house is empty?)

Other costs to consider;
  • Vacancy rates.
  • Maintenance fund for general repairs.
  • Lawn care fund even if tenant is mowing.
  • Sinking fund for that roof that looks like it’s almost done, or the furnace, or the water heater, or the foundation, etc.
  • Administrative costs like LLC expenses, travel and tax preparation.

That’s not an all encompassing list. But unless you want your personal account to continue to kick in for your rental property until you sell it 5-7 years from now you will probably want your rental property to pay for itself, right?

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August 13, 2007 · 9:41 pm

The Four Benefits Of Real Estate Investing…Again

I was talking today with someone who had found me on “the web.” As I spoke to him about the four benefits of real estate investing I realized that it had been a while since I had done a post about them.

Now, if you already know them, feel free to skip this post. Or take a refresher. Since about 60% of my visitors each day are first time visitors I’m going to assume many of you have not stopped by before.

Here are the 4 Benefits of Real Estate Investing…as I see them. (Quick, if you’ve been here before see if you can name them before moving on!)

  1. Cash Flow Before Taxes
  2. Principal Reduction
  3. Depreciation
  4. Appreciation

(How many did you get? If you got all four, congratulations! I’ll give you a gold star if you’ll send me a self addressed stamped envelop.)

Yes, there are other peripheral benefits. Leverage. Everyone knows about housing. Easy loan qualification. But the financial benefits can be boiled down to these four.

Do you know how to calculate them? Better learn. What is appreciation in your area? Historically? How will you be utilizing depreciation?

All those are good questions to help you successfully calculate the returns each and every rental property is bringing home for you.

Here’s a tip for you seasoned investors. If the last time you calculated the four benefits was when you were considering purchase, perhaps you need to do it on a yearly basis. Remember, as time goes by depreciation schedules begin to take a dive. Could that equity in the one property be better served in two? Just a question. The numbers will probably give you the answer.

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August 13, 2007 · 11:10 am

The Danger In Reading About Real Estate Investing

There is a real danger when you only “read about” real estate investing and then try to apply that. And I don’t care if you are talking about Loral Langemeier’s Guide to Wealth Cycle Investing or you are reading my blog.

But today, I’m going to talk a little about Loral’s book. I picked it up because everyone I run into says they’ve read it and it’s great. Unfortunately, I didn’t preview before buying. Where can I go to get my $24.95 back?

I didn’t find anything too Earth shattering under the cover. Sure it was an okay read and it skimmed over many different options. But that’s the point, isn’t it? It’s just skimming.

I am in real fear of someone reading her chapter on Real Estate and then deciding to become a real estate investor. But not quite in as much fear as if they’ve watched some show on A&E.

What she does, she does well. She covers the basics and moves quickly from topic to topic. She gives just enough information that I question whether she knows the details or holds those back until you pay for her coaching. If you are not knowledgeable enough to discern the difference, you could get yourself in serious trouble.

Her whole philosophy on buying $45,000 rental houses is flawed. (Where are those located and in what condition? Do you have any idea the headaches $45,000 houses can become?) She is also happy about the fact, or at least not worried, that these homes won’t have any appreciation. Excuse me? Isn’t that one of the reasons to own real estate investment property? She advocated NOT buying in high growth, high appreciation areas…at least to start. And her explanation of depreciation is incomplete at best, incompetent at worst. There is so much more to know on that topic alone.

Listen, I don’t know Ms. Langemeier and she is probably ten times more wealthy than I am. And obviously much more knowledgeable on a whole host of issues. I’ll grant you that. But on THIS SUBJECT I want to be clear…don’t invest in real estate just from what you read.

I recommend two books on this blog and you can find them in the right hand column. But you can’t rely on them 100% either. For instance Gary Keller’s pie-in-the-sky examples are comical. I like the worksheets he uses. But the examples are not available in most markets. (Any market?) And John Schaub’s refusal to buy anything but single family homes is not a tenet that I hold dear.

If you want one more example just take a second and think about the Bible. Here God gave us an actual manual to use to live our lives in peaceful coexistence with one another while serving His needs and His kingdom. And yet, how have we screwed it up? We have 3,000 denominations (or more?) because no one can agree on exactly how every verse should be interpreted.

So it’s no wonder real estate investment pundits cannot do any better.

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Filed under Personal Real Estate Opinions, Real Estate Investing, Worth Reading

August 12, 2007 · 9:02 am

Rental Housing Registration In Kansas City

The Kansas City Star ran an article in the Local section of the paper today titled More cities keep eye on landlords. I found that the article clearly presented the issue revolving around rental property licensing that is being proposed in several areas around the Kansas City metropolitan area.

(Although I still find it annoying that every weekend the KC Star insists on running some horrible foreclosure related photo from the west coast in the business section. Note to KC Star, if you cannot find the problem here then don’t take the photo. You keep insinuating the real estate meltdown is here, as well. And you know it.)

Let BBQCapital be very clear where we stand on the issue or rental housing registration and/or licensing;

  • Rental licensing is not acceptable. It is simply a tax and an additional burden to the investment property owner.
  • Registering rental properties and having an individual with sole responsibility is okay here. (No hiding behind a LLC to shirk your responsibilities.)
  • Administrative warrants (used by the City of Lawrence) to inspect rental property without the permission of either tenants or landlord is blatantly absurd…regardless of what the federal court of appeals says.
  • The City of Mission ordinance that allows the city to conduct an inspection of the property when requested by the tenant is a solid compromise.
  • Tenants should treat their rental homes with respect and care.
  • Landlords should treat their tenants with respect and care and maintain their Kansas City area investment property to a clean and safe standard.

Agreeing with Dan Kelly of Landlords, Inc. in Kansas City a city should spend more time worrying about code enforcement. If a rental house is becoming a blight on the neighborhood then code enforcement should act. Having registered owners, actual individuals, will allow the city to go after the owner and not have the owner “hiding” from the violations because the city doesn’t know whom he or she is.

And our last point here will be this: Landlords, it is to your benefit to maintain your properties! You will attract better tenants, collect higher rents and sell for more money. Why is this so hard to get across? If you don’t, if there is mold in the basement or a roof leaking then a tenant should have the right to have the city come in and work on their behalf. It wouldn’t have happened if you had maintained the house, right?

Here in Kansas City landlords can evict a tenant for non-performance (no rent payments or tearing up the house) a lot easier than in other parts of the country. Believe me. The flip side is they should have rights too when the landlord is guilty of non-performance.

In the words of Stuart Smith of Mission (as quoted in the Kansas City Star) “If you can’t afford to keep the property up, you shouldn’t have bought it in the first place.”

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Filed under Investment Property, Property Management

August 11, 2007 · 10:57 am

Don’t Worry, Be Happy

One of my real estate investor clients and I were on the phone this morning and she expressed to me concern with all the mortgage woes going on. We are passively looking for another property for her and she was worried about her ability to secure a mortgage on another property.

Although I didn’t outright say “Don’t worry, be happy” it was the theme of my response.
I took the necessary time to explain what I believe got us into this mess and that I believed it would probably go on a while longer. But that, in her case and in the case of many/most of my clients, it would have no bearing.
Why? Because most of my clients only own 2-4 rental properties. Most of my clients have household incomes well into the six figures. Most of my clients have credit scores that will make your nose bleed. And most of my clients have healthy and available liquid assets.
Not to say I don’t work with anyone. But I have to work with those that can qualify to own investment property, right?
No matter how tight credit gets, in my opinion, if you are able to put down 10% and stay under the “10” limit and find a property that works under your criteria then you will be able to acquire that property. At least the clients that I am speaking of.
Now, if you have four loans out and they are all 95% LTV or more, then you are probably going to have problems. You need to spend the next year or two getting those ratios more in line. Otherwise, don’t worry, be happy.

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