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

October 26, 2007 · 8:40 am

Proceed With Caution On Your Real Estate Investments

The basics of real estate investing have never been more important than they are right now. I read a headline on Yahoo! that Countrywide Home Loans has announced a loss last quarter of $1.2 Billion. I read in the Kansas City Star that some analyst are expecting this real estate correction to last into 2009.

And while I cannot tell the future any better than you I can tell you that perception can become reality. For that reason alone I urge you to make sure that when you are purchasing your next income property that it makes sense financially to do so.

Listen, markets go up (we like that) and they go down (we like not so much). During a Seller’s market it might be tempting to purchase income property on more of a “speculative” basis. A little negative cash flow may be acceptable so long as there is a belief that you will make money on the appreciation on the back side. I’m not advocating this! Just merely pointing out behavior.

But the real estate market here in Kansas City has come to a standstill, overall. Yes, there are definitely some areas of town where appreciation is still happening. Population growth and housing demand don’t stop just because the credit crunch hits. But there are also many parts of town where days on market is soaring and prices are softening.

As I have always advocated and now yell from the mountain top, do not purchase income property you cannot afford to keep. Make sure that you are honest with yourself on the expense expectations including capital improvements and vacancy. Make sure rents will cover your PITI PLUS the improvements and vacancies mentioned.

Don’t gamble with your retirement worth having. There is too much at stake. Now, if you are in a position to buy and buy right now, you should be smiling. But if you are in need of selling because you got caught speculating, you are probably nervous. You should be.

Just look at the slippery road caution sign. It doesn’t say stop. But it does say proceed with caution and be aware of the pitfalls. The same is true with your real estate investing.

Changing Relationships

I love it when I see real growth out of my clients. I had about a twenty minute conversation this evening with a gentleman I helped to buy his very first home three years ago. I said his first home. Not his first real estate investment property.

Today, he owns more property than I do. Seven to be exact. He had called for some advice regarding a particular concern he had. Hopefully I got him the answer he needed. But as we talked I asked him questions and gained insight to some things he was doing.

It seems I’m still his mentor in many ways. I’m about 16 years older. I’ve been working with real estate longer. And the advice of mine that he has followed has really provided him with some sweet, sweet equity positions. But I feel the relationship changing. Changing for the better.

It’s a lot like when I talk with my fifteen year old, now. There was a time when I told him

everything he needed to know. I helped him get dressed. I helped him fight his fights. Now I sit back amazed at the path he is taking. The answers he comes up with himself. Amazed at the man he is becoming.

Sure, I’m still there to say “what about this” now and again. But my role isn’t so much to dictate as it is to advise. My boys, both literally and figuratively, are growing up.

Calculating Returns on Real Estate Investment Property

When I calculate returns for my real estate investment property here in Kansas City I am usually worried more about what my equity return is than any other issue concerning returns.

What do I mean by Equity Return?

Quite simply, the money that you have tied up in the real estate investment. For instance, in your first year your equity will be:

Your down payment.
Any difference between what it’s worth and what you paid for it.

A couple of years later (say the 5-8 year window I talk about for trading in/up your real estate investments here in Kansas City) you equity will be:

The difference between what you sell it for minus what you owe (including your down payment).

So keep in mind you’ve had principal reduction going on (unless you went with an interest only loan, which could have been a good strategy depending on your situation) in conjunction with appreciation to raise that equity.

Here in Kansas City when you first purchase an investment property I would encourage you to make sure you are getting at least an 18%-22% return on your equity investment. But as you can probably figure out 6 years later that equity investment return will probably have been reduced by as much as 7%-10%.

Why? Because your accelerated depreciation has been exhausted on most facets of the personal property in the rental property and the percentage of net equity to value has steadily dropped, therefore lowering your leverage.

Knowing how you measure what a successful real estate investment property is provides you with the fist step in knowing whether or not that particular house is the right house for you and your investment property portfolio.

As California Burns…

Remember the people in southern California today in your prayers. I can imagine replacing my house. But replacing the memories, the photos, the keepsakes…those things you can’t replace.

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If you have your money in 401Ks and IRAs you are going to want to read this from last week. It’s worth your time. Sound financial planning takes more than one vehicle. So go read Jeff Brown’s Trojan Horse.

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As I understand it the workshop I’m doing at UMKC regarding real estate investing already has more students registered than I usually speak with at one time. I’ve liked the smaller groups in the past because of the active participation. It will be interesting to see how this goes. You can register for this class by calling 816. 235.1448.

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I was speaking to a would be real estate investor on the phone today and she said she went to a 3 hour course on REI and the only answers she got was to buy the books and tapes they had to sell. Gee, that sounds familiar.

You DO NOT have to spend thousands on books and tapes to be a good real estate investor. Work with someone that has a vested interest in your success. You could be reading one, right now.

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October 22, 2007 · 11:59 am

A Real Estate Joke: Rated PG-13

A businessman met a beautiful girl and agreed to spend the night with her for $500. They did their thing, and, before he left, told her that he did not have any cash with him, but he would have his secretary write a cheque and mail it to her, calling the payment “RENT FOR APARTMENT.”

On the way to the office, he regretted what he had done, realizing that the whole event had not been worth the price. So he had his secretary send a cheque for $250 and enclose the following typed note:

Dear Madam,

Enclosed find a cheque for $250 for rent of your apartment. I am not sending the amount agreed upon, because when I rented the place, I was under the impression that:

#1 – It had never been occupied;
#2 – There was plenty of heat; and
#3 – It was small enough to make me feel cosy and at home.

However, I found out that:

#1 – It had been previously occupied,
#2 – There wasn’t any heat, and
#3 – It was entirely too large.

Upon receipt of the note, the girl immediately returned the cheque for $250 with the following note:

Dear Sir,

#1 – I cannot understand how you could expect a beautiful apartment to remain unoccupied indefinitely.
#2 – As for the heat, there is plenty of it, if you know how to turn it on.
#3 – Regarding the space, the apartment is indeed of regular size, but if you don’t have enough furniture to fill it, please do not blame the management.

Please send the rent in full or we will be forced to contact your present landlady.

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Thanks you to Al S. for sending this way.

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October 20, 2007 · 7:59 am

Kansas City Royals Have New Manager

The Kansas City Royals have hired a new manager by the name of Trey Hillman. He’s the guy pictured below celebrating a Japan Series win with the Hokkaido Nippon Ham Fighters. (Try saying that three times quickly with a straight face.)

As stated here before my first choice would have been for Frank White. Having said that, I don’t think you want me running a baseball team with my vast knowledge of college basketball.

To date most of Dayton Moore’s decisions have been spot on as to changing the talent make-up and losing culture of the Royals. We had very modest improvement this year with a manager that came in with a lousy record. So in walks this guy who knows how to win. He knows how to adapt. He wasn’t a golden boy. He was the kid you wanted to cut but couldn’t. At least that’s what I get when I read between the lines. See Joe Posnanski’s article in today’s Kansas City Star.

Also, doesn’t this all make you wonder about Buddy Bell’s “retirement?” He retired to spend more time with family and work in the Royals’ front office. Then, an hour and a half later, he takes a scouting job with the Chicago White Sox. Does that sound like he retired? Sounds like Dayton Moore allowed him to leave with dignity so that he could make a hire of a younger manager more in tune with all the young talent the Royals have both here in Kansas City and Wichita.

In a closing thought this can only help real estate investing, right? As the Royals begin a ten year tear winning 3 World Series titles the value of the team and the city will rise exponentially. It’s perfect! 🙂

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October 19, 2007 · 8:48 am

UMKC Communiversity Class On Real Estate Investing

On November 10th, 2007 I have been asked to teach a class on practical real estate investing here at the University of Missouri-Kansas City’s Communiversity. Communiversity is an adult outreach service of UMKC.

Of course I have agreed to do so because it is in everyone’s best interest that as many people know about and understand real estate investing as possible. I didn’t say everyone needed to be a real estate investor, though that wouldn’t be a bad idea. But if people understand the basic dynamics of income property and real estate investing then maybe they won’t fall victim to the get-rich-quick gurus out there.

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