BBQ Capital | Kansas City Real Estate Investing

I love the mathematics of real estate. Numbers never lie. Or do they?

Here are some intangibles that you will want to look for when dealing with investment properties;

Does the house have a big back yard? Is it fenced? Is it too big? Where is the elementary school? What school district? Does that school offer any special services that you need to be aware of? Are there any major draws that a prospective tenant might want to be close to like a place of worship, or a shopping mall or a business center? Is the house loaded with low maintenance items like brick or a steel roof?

There are, of course, many more items to think about and weigh. But I just wanted to make the point that there are more than just numbers to deal with when dealing with real estate!

This is where the rubber meets the road.

My first question is personal property or investment property?

Personal Property – My advice here is work with an experienced REALTOR with a proven track record. Why? Because there is a little bit of art mixed with science here. It is extremely rare that a particular property will exactly match a neighboring property. And even if it did the negotiation skills of the Buyer and/or Seller would probably be different. Having said that, personal properties are mostly priced using a comparison model. It is helpful to know how your house compares to the other houses in your neighborhood. More bedrooms? Less baths? Are the mechanicals new or 15 years old? All of these are factors. So is the season of the year and motivation to sell.

Sit down with your real estate agent and go over the numbers for the last 12 months. Look for trends and be honest when comparing your home to your neighbors. Look at the home from a Buyer’s eye. (You may be very proud of the new roof and furnace. And the Buyer does notice that. But the Buyer also expected the house to have a dry inside and heat in the winter.)

Investment Property – I’ve said it before and continue to stand on my soap box. When buying income property the price should be based on the cash flow that property will produce. What should that be? I cannot answer that. It depends on your goals. If you are an investor looking for a 15% cash on cash return you will have an entirely different approach to the value as an investor looking for any home that will have an 8% cap rate.

Before you go out and look at properties I would advise you sitting down with an informed real estate agent and determine what your goals are for your money before you invest in rental properties. Yes, you have to take comparisons into account. But don’t base your bid on those alone.

Let’ s do some simple math.

$100,000 of stocks appreciating at 6% will yield you $106,000 at the end of the year. Of course you have to have $100,000 invested to accomplish this. (Yes, I know you can get fancy, but that is the basics.)

$100,000 invested in real estate can give you $500,000 worth of real estate holdings. How? 20% down on 5 homes with a market value of $100,000 each equals $100,000 invested with a worth of $500,000. If each home appreciates 5% your $100,000 investment yields you $25,000 worth of appreciation.

Or how about you find properties that will cash flow with only 10% down. Now at 10% down on $100,000 properties each appreciating at 5% you have 10 properties for a total of $50,000 appreciation in one year! Are you getting the message?

Yes. The gains are tied up in the house and you would have to liquidate the holdings to have access to it. Or would you? You could refinance. Or sell a share of the house.

And, we haven’t even spoken of the other 3 benefits of owning investment real estate. What are they?

1. Cash flow before taxes.
2. Loan paydown by somebody else.
3. Depreciation.

Where do you want to invest for your retirement?