BBQ Capital | Kansas City Real Estate Investing | Real estate investing and property management in Kansas City.

June 20, 2007 · 7:35 am

Kansas Gets Releford

This has nothing to do with real estate. But it’s just as important. Bill Self of the Kansas Jayhawks just secured his first big time recruit for the 2008-2009 season. We’re losing 5 seniors in 2008 as well as a couple (probably) players to the NBA. 2008-2009 will be young, young squad. But stocked with blue chippers? I hope so.

Congrats to Travis Releford and Bill Self. Keep the Kansas Basketball tradition alive!

Landlord Tales of Nighmare Tenants

This was found on MSN. I’m in a hurry and will read it later in it’s entirety. But the overview looked like something of interest for this real estate investing blog.

Why should you hire a property manager?

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June 15, 2007 · 7:40 am

Your First Investment Property

Yesterday evening Jeff Brown over at Bawldguy wrote a post titled Your First Real Estate Investment – Often The Most Critical. As always, it is an excellent resource for the real estate investor.

His title really got me to thinking. And while I agree completely with his post, especially since he mentioned Kansas City, the other side of his title should say something to the effect of how important that first property is that it doesn’t run you out of real estate investing.

I love working with all real estate investors. But there is a special satisfaction with working with “newbies.” They come all excited and are ready to purchase just about anything. An experienced investor I seldom have to say “WAIT!!!” to. But a newbie? I’m constantly talking them OUT of properties.

This may sound very self serving. But the whole experience reminds me of what gold-fever must have been like. At this time or your real estate investing career, having a professional’s opinion matters more than ever.

It doesn’t matter how much those rental homes will appreciate over the next 25 years using tax deferred exchanges if you buy an investment property that drains money from your grocery bill every month, has tenants that need evicting and other issues you never even considered. You’ll sell, take your losses and tell everyone how hard real estate investing really is.

When what you really needed was a proper education, a professional consultation, and a clear head. Take this advice, tag it on to Bawldguy’s post and get ready to go. We’ll see you at the top.

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Filed under Personal Real Estate Opinions, Real Estate Investing

June 15, 2007 · 7:02 am

News You Can Use

Midwest Airlines is being taken over by Air-Tran. As a Kansas Citian, this isn’t good news. Midwest has been a good civic partner for Kansas City. Air-Tran? Can you say Southwest Airlines without any of the status?

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The foreclosure market is at historic levels, on the high side. And look which states are causing the problem. We have quite a few here, but we are in much better shape in the Greater Kansas City area.

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Hey St. Louis, I thought your baseball team was supposed to be better than ours. Kind of reminds me of 1985. 🙂

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Congratulations to Jacque Vaughn of the San Antonio Spurs. Another Jayhawk gets a ring. I know Kansas has had Clyde Lovellette,Wilt Chamberlin, JoJo White, Darnell Valentine, Danny Manning, Paul Pierce, Kirk Hinrich and so many more. But Jacque Vaughn will always be my favorite point guard. A pure point guard and a perfect NBA backup. Plays 10-11 minutes a game without turnovers but with assists. What else could a coach ask for?

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Kansas City commercial real estate values inching upwards. Buyers from the east, of course.

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Newsflash. Slower sales mean higher commissions to your real estate agent. Why is this a surprise? When all you had to do to sell a home was put out a sign and wait 72 hours of course commission rates for real estate agents was going to drop. But now, when sales are slower and it takes a professional to get the word out about your home, of course commission rates are going to rise.

Why do people not think economic theory applies also to real estate? Same with the whole rising prices thing. Didn’t we see this story a few years ago with the stock market? Learn people. Learn.

Kansas City Events and Other Miscellaneous Thoughts

Kansas City’s Rhythm & Ribs is happening this weekend. If you like the Blues, Jazz and BBQ, you might want to think about visiting Kansas City’s historic 18th & Vine district. Pat Matheny, George Benson & Al Jarreau. Need I say more? See you there.

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My son went down this really cool luge ride yesterday in New Zealand. Check it out.

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I have a closing today. That’s always an exciting day for everyone. My investor gets a sharp new property that will help them have a retirement worth having. (Especially these. Brand new townhouses for $108,900 that rent for $925-$950/mo. Eat your heart out California.) The builder sells another property which frees up money to build more. A tenant will get a quality home. And I get paid for my efforts. Everybody wins.

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Just so you’ll keep up to date: It’s only 120 more days until Midnight Madness. What’s Midnight Madness? It’s when the NCAA allows college basketball teams to begin practicing. Ahh. Soon my beloved Jayhawks will be taking the floor again!

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Filed under Kansas City, Kansas City BBQ, Kansas City Sports

June 13, 2007 · 11:39 am

Conventional Loan v. Interest Only Loan For Your Income Property Investments

Today we are going to have a little fun with math. I used to hate math. But in my business now, math is my friend. So sit down. This post might be a long one.

As you know, I’m real big on knowing what the outcome of your 4 Benefits of real estate investing will be BEFORE you purchase an income property. And sometimes my clients like me to advise them on different financing options. So today we are going to compare conventional non-owner occupant financing with interest only non-owner occupant financing.

The first note to make here is that when you go with an interest only loan you immediately reduce your 2nd Benefit, Principal Reduction, to zero. So I’m not crazy about that. But is that a bad thing?

First we need some ground rules:

$175,000 duplex in play here
20% down payment ($35,000)
Financing based on $140,000
6.95% interest, amortized over thirty years
5% appreciation (on average)
Rents are $1,500/mo. (not escalating)
Expenses are $6,920/yr and include property management, taxes, insurance, a healthy reserve fund and 5% vacancy

Conventional Financing

With the conventional financing for our sample rental duplex the monthly debt service will be $926.73. Or $11,121 per year. Plugging in our numbers from above we know that our formula goes something like:

18,000 GRI
6,920 Expenses
11,080 NOI
11,121 Debt Service
( 41) yr Cash Flow Before Taxes.

So the property is paying for itself. And that’s great! California real estate investors would kill for these numbers. Same is true in Florida and Washington and New York.

At the end of the 6 year holding period we are looking at a investment property that is worth somewhere around $234,500. (Remember our 5% per year average appreciation.) So we should be thinking about an IRC 1031 exchange to re-maximize our leverage.

The Principal Reduction over these 6 years has been $10,317.

So when we measure only the first 2 Benefit we have a gain $10,071.

Interest Only Financing

With interest only financing for our sample duplex the monthly debt service will be $810.83/mo. Or $9,730/yr. Using the exact same formula from above (we’ll start from the NOI) will look something like this:

11,080 NOI
9,723 Debt Service
1,357 Cash Flow Before Taxes

So now this property is generating a fairly substantial monthly cash flow. At the end of the 6 year holding period the house will still be worth the same as our conventional financing house. Let us take the 6 years CFBT and we’ll show $8,142. We cannot add to that any principal reduction so the entire benefit from the first 2 Benefits only is $8,142.

So conventional financing wins, right? I don’t really know. Only you can make the decision of which is better for you. I can tell you this, however.

If you were to take those same monies that you put down for a 80% ltv on your interest only loan and bought two houses with 90% ltv on interest only loans I bet you would find a completely different story.

Now that you know how to do it. Why don’t you work out the numbers and let me know what you found.

Property Maintenance & Your Home’s Value

This post if for home owners and investment property owners alike. You need to be keenly aware of how your home is perceived by others when it is on the market. I’m going to give a couple of stories to illustrate my point.

The “Regular” Home Owner

I was out over the weekend looking at some single family homes for sale here in Olathe, Kansas. The first time home buyers I was working with ended up selecting a very nice home that had obviously been cared for over the years. Fresh paint, updated appliances and lighting fixtures were just a few of the items that had been improved over the years. The landscaping is well maintained and there was little if any wood rot on the exterior (a very common happening here in the heartland).

The funny thing is the other houses we saw weren’t horrible. They were clean and pretty well kept. But they were asking the same sales price as this home. And they didn’t have all the updates. They did have some wood rot. There just weren’t quite up to snuff.

The Investment Property Owner

Listen carefully Mr. Landlord. You are probably more likely to let your rental house go because “I’m not living in it.” Well, yes. But your tenants, real live human beings, are. And here is where you are supremely short-sighted. The more run down your property becomes the more expensive it will be to bring it up to “sales standard.”

Unless you just plan on discounting the house upon it’s sale. But I have met few (any?) real estate investors who will actually sell a long term rental home under market, even if that’s where it deserves to be sold.

I’m showing a duplex I have for sale right now and the seller requires me to be at all the showings. (He has had some bad real estate agent experiences before.) The comments from the buyers are consistently “this is one of the nicest properties we’ve seen.” Now they may or may not buy. But they recognize the value of the property because it has been kept clean, in good repair and up to date.

Both the “regular” house owner and the income property owner need to know that most buyers are looking for a “turn-key” home to either live in or invest in. So for your own benefit spend a little money each year doing necessary repairs and having the house inspected

for termites. Get the wood rot fixed as you recognize it rather than putting it off year after year.

Every once in a while change out a light fixture or two. Paint a room. Change the kitchen cabinet pulls to reflect today’s tastes. These sound like little things. But consciously or unconsciously, buyers recognize the care.

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