Now that my team is actively investing in two markets, Tucson (for 10 years) and Kansas City (for 1 year), I have been surprised by the similarities in Kansas City that we saw 10 years ago when we started investing in Tucson. The underlying economic similarities and entry cost is what initially attracted us to KCMO, however after active involvement for the last 12 months we believe Kansas City has many of the same market signals that Tucson showed 10 years ago. For example, there is a substantial inventory of rundown/distressed properties, an appetite for growth by local leaders, the potential of rapid appreciation, strong rental demand and much more.
Kansas City has a lot of development that has started to bring growth to once undesirable neighborhoods. I wrote an article outlining the growth we have seen in Tucson (You can read that here: https://www.biggerpockets.com/forums/601/topics/555336-is-the-sleepy-old-pueblo-finally-waking-up?page=1#p3445167). Now I want to discuss the major projects that are going on in Kansas City. I'm going focus mainly on development that is happening on or near Troost Ave. If you are familiar with Kansas City, you know the history of this street, and how at one point it served as a dividing line between desirable and undesirable neighborhoods within the city. (If you aren’t a KC native and aren’t familiar with Troost Avenue, you can read about it here: http://kcur.org/post/how-troost-became-major-divide-kansas-city#stream/0)
The first major project that is having an impact on Kansas City is the expansion of the Streetcar System. Although it is still being voted on for approval, the preliminary polls suggest that the sales tax increase will pass, allowing the Streetcar to be expanded from Union Station to the University of Missouri Kansas City. The Streetcar system has contributed to the growth in downtown Kansas City, and the city government is hopeful the expansion can bring the same growth to other parts of the city (You can read more about the development here: https://www.kshb.com/news/local-news/kc-streetcar-expansion-explained). KC Streetcar Authority Executive Director Tom Gerend says, "If the vote is successful, that gives us a local revenue stream to really take the next step and to pursue federal funding. We then have to move to utility relocation, design, construction and testing and operation so it's still about a 5-year effort. We're looking at about 2023 before the project is completed.” Kansas City plans to request $100 million from the federal government in September. That money would be combined with an estimated $25 million a year generated from the TDD to cover the project. Early estimates for construction costs are from $250 to $275 million. Grand believes the return on investment for the existing streetcar route — around $2 billion so far — makes a case for the expansion. “With what we've seen downtown, we're optimistic we can extend the benefits through Midtown and down to the University of Missouri-Kansas City and really reconnect our city in a new and exciting way," he said.
The next project is the creation of “Scholar Row”. Historically, an apartment complex like this would not be built anywhere near Troost, but because of the expansion of the Streetcar, businesses have started to increase the devolvement of this area (http://www.kansascity.com/news/business/development/article142694969.html). “Troost Ave. in central Kansas City, an area known for its history of neglect, continued on a run of new investment when a $4 million apartment project won early approval at City Hall. UC-B Properties, a prolific real estate firm in Kansas City, proposed what it is calling ‘Scholar Row’ at 55th and Troost. The project is a 50-unit apartment project located on the west side of Troost Ave. between 55th and 56th streets. The City Plan Commission recommended approval of the project and moved it along for consideration by the Kansas City Council. If UC-B Properties gets a successful result before the city’s elected leadership, the firm expects to begin construction in July or August.”
Amazingly, “Scholar Row” is not the only apartment being built near Troost Ave. A development that started in the fall of 2017 is replacing a run-down and vacant block with 182 apartments, costing $24 million (https://cityscenekc.com/apartment-development-at-27th-and-troost-near-hospital-hill-receives-nod-for-tax-incentives). This Troost and Forest development is next to the Beacon Hill neighborhood and will target employees and students at the nearby Hospital Hill district of downtown. It’s being developed by Indianapolis-based Milhaus and locally-based UC-B Properties. “This is an exciting project, and we see the potential for pushing market-rate development east of Troost. It’s a risk for investors and lenders because there’s nothing else to compare it to.” Brad Vogelsmeier, Milhaus director of development, told the board of the Planned Industrial Expansion Authority. As a strategy to increase development, Kansas City has started an incentive program for building in this area by granting tax abetments. This particular building will have a unheard of 100% abetment for 10 years, and 50% abetment for the next 15.
There is also commercial growth near Troost in the form of a mixed-use development project valued at $78 million. The development will bring 450 apartments and 28,000 square feet of retail space (https://cityscenekc.com/mac-properties-plans-78m-project-at-troost-and-armour-intersection/). This project has been explained as “a bold redevelopment plan that would transform the forlorn intersection of Armour and Troost into a small businesses vibrant hub with hundreds of new apartments.” The $78 million Armour Corners Project will feature five new buildings, holding 450 apartments and 28,000 square-feet of retail. The buildings are planned for the four corners of the intersection and a site at 520 E. Armour.
While it may be east of Troost, another exciting development that will cause rapid appreciation is the grand opening of a new grocery store. This 13-million-dollar store is close to a neighborhood my team has targeted and is actively investing. While it might not seem as big as the other projects mentioned above, this area is currently within a “starvation zone” because of the distance of the closest grocery store. The store will bring about 75 jobs and is the first grocery store to open in this area in nearly decade. (http://www.kctv5.com/story/38432857/sun-fresh-market-opens-as-oasis-in-east-kansas-city-food-desert).
There are several companies that already call Kansas City home, such as Hallmark, Cerner, Sprint, and XPO Logistics. The steady inflow of renters between the two universities and the medical school make Kansas City an ideal market for a buy and hold strategy. Historically, developments like those I outlined in this post have generated higher appreciation rates. That is why it is important to be able to identify neighborhoods where growth is expected. Having localized knowledge of the growth from on the ground partners allowed my team to become very comfortably invest in Kansas City.
As I said, this are only a few of the significant projects leading to the growth of Kansas City. If you know of any that I missed, or anything that you think will increase the property values, please post it in the comments. In the near future I will go into more detail about the KCMO economy, current market statistics and why I believe Kansas City real estate investment will produce alpha returns.
What's up BP? I want to share a story about how our team was able to secure 3 off market properties we are closing on today. The key to this deal is that we were able to identify the seller’s goals and build a relationship that made him feel heard and understood. As the old saying goes, we are in the relationship business not the real estate business. The relationship on this deal started with a cold call from our inside sales agent regarding a property we identified as run down. Our ISA is responsible for calling owners of properties that our bird dogs identify as distress (I go into a little more detail about are the off-market system in this post: https://www.biggerpockets.com/forums/311/topics/55...). We make a point, when cold calling, to find ways to provide value to homeowners and come from a place of contribution. It is important to remember that most owners of rundown and distressed properties have emotional ties to their homes. To do this successfully, you have to make sure you listen and understand the owner's key motivators. Our ISA identified the seller had interest in discussing selling his property (at this time we only knew of one) so the lead was transferred to our closing specialist. The closing specialist picked up right where the ISA left off and focused on building a relationship. After a few conversations, our closing agent was able to identify that the owner had two additional properties he needed to sell quickly. He explained he was no longer able to keep up with the maintenance of the properties and was thinking about listing all three properties for sale on the MLS. This "black swan" piece of information took five conversations before it was finally revealed to our team. We knew the owner was interested in selling, but until we identified the key motivators, we could not have a purposeful conversation about how we could help the seller solve his problems.
Because we came from a place of contribution and were concerned about the owner's needs, and not just our own, we were able to acquire three properties before they hit the MLS. That is why I preach to my team the importance of coming from the point of contribution and placing the client's needs first. Many times it is easy to lose sight of this very basic concept, and as a result, mean great real estate deals are lost. In a competitive market, building a relationship and hearing out the sellers needs is the difference between getting the deal and not.
About the Properties
Two of the three homes purchased will have minor repairs and updates before being listed for sale on the MLS. Based on area comps we anticipate a return of 8-10% after all closing costs and fees. The real value of this deal is in the third property. Unlike the first two which we will quickly touch-up and list for sale, the plan for the third is a substantial remodel. This home sits on an 8,925 SQFT and is currently a rundown 900 SqFt home. After the rebuild, the house will be over 2,500 SQFT and located in a neighborhood with $600,000+ homes.
The remodel will be extensive, taking this home that has been forgotten and essentially creating a new build. We have completed similar remodels like this before, creating a larger home from an original 2 bed one bath home (check out this remodel where we enclosed the carport to create a grand living room https://www.biggerpockets.com/forums/311/topics/55...).
FinancialsWe are purchasing this property for $185,000. We estimate that the remodel will be $230,000 because of the high-end finish, and the transformation from a 1,200 SQFT home into a 2500 SQFT home. Total investment is $415,000. The timeline for this project will be six to seven months. We expect the house to resale for $650,000+.
Coming from a place of contribution and creating relationships is very important and can be the difference between your offer being accepted or missing out on a home run deal. Even though this home was off-market, the owner had received two other offers. By coming from a place of contribution we were able to identify that he needed to sell not only this property but two others. By being able to identify that issue and solve the owner’s problem we were able to close on this deal.
Hopefully, you found this post valuable. Would love to hear from you on how you have created value and helped owners accomplish their goals to land great real estate deals.
Have a wonderful day!
@Derek Crawford, you are absolutely correct. For individuals that live in high priced markets an alternative is to invest in other markets and use the cash-flow and income to cover living expenses. The bigger pockets "Long‑Distance Real Estate Investing: How to Buy, Rehab, and Manage Out‑..."by David Greene has great info. David is a friend of mine and lives in the Bay Area. He began investing in strong cash-flowing markets and breaks down exactly how to do it.
Thanks for commenting man!
@Account Closed, appreciate the comment. In my opinion the opportunity is in the transitioning areas of Tucson in the Sfh and small multi-family space. We are see steady rental increase in both the Sfh and small multi space.
Our group is also becoming active in the larger commercial space. We closed on a 137 space parking lot in downtown and are looking at acquiring other buildings in that area.
There are areas of Tucson where I feel are overpriced but all in all there is ample opportunity.
Would love to connect. Feel free to shoot me a dm.
@Bill F. Thank you my man!
I agree on your statement regarding inflation, however if you are using leverage as outlined then the appreciation is on leveraged funds and should ultimately increase your overall net worth by the 4% as outlined. On the invested capital (down payment) I would agree and could get very complex. My goal was to keep this article very general and easy to follow for the novice investor.
If I am missing something on the appreciation/inflation calculation when considering leverage I welcome the constructive feedback.
Look forward to your thoughts!
@Jay Hinrichs Thank you very much!
@Brian Mitchell, would love to connect. I will send you a DM right now!
@Brett Chien, send me your email address and I will send you high res.
Can also download here: https://apexaz.com/buildwealth/buildwealthpacket/
The average homeowner has a net worth that is 44 times higher than someone who rents. Would it be life changing if five years from now you had built a portfolio of 3 investment properties? Have you thought about how this would affect your net worth? What about the freedom that financial security would provide? In this post, I am going to discuss a detailed strategy on how to bring this to fruition, and the effects it will have on your net worth. We are going to set a few assumptions for ease of numbers.
The assumptions are:
1. You have $5,000 saved
2. Each year you save $10,000 outside of Real estate
3. The purchase price is $150,000 for each property
4. FHA loan used for the first property (3.5% to 5% down)
5. Additional properties are purchased at 20% percent down
Year oneAs stated above this home is purchased with an FHA loan at with 5% down ($7,500) and the principle of the loan for $142,500. I want to make it clear, that this is not your dream home. This home is to start the flywheel of financial freedom and allow you to live rent-free. You are going to have to suffer a little at the beginning of this journey. How can I live rent free? The most common way is buying a multi-unit, (duplex, triplex, quadplex) live in one unit and have your mortgage paid by the other tenant(s). This is commonly referred to as "house hacking". If you live in a market that does not have reasonably priced multi-unit properties available, another option is to purchase a larger single-family home (3+ bedrooms). You can live in one of the bedrooms and rent the other to cover the mortgage. "I don't want to live with roommates" which is understandable, but as I said before, you may have to suffer a little bit on this path to building wealth. At 18 years old I purchased an SFH in Tucson, AZ. I lived in an RV in the backyard with my three brothers as we worked on preparing the home for the school year. I rented rooms to two 30-year-old career women, which made for a less than ideal living situation for an 18-year-old freshman in college. Although less than perfect, this living situation allowed me to live rent-free. The mortgage payment breaks down for this home is as follows: (The numbers may change due to interest rates and other factors)
Taxes, as shown above, are property taxes; the bank wraps this into the mortgage to protect their interest. The insurance is for your asset and liability protection. PMI stands for Principal Mortgage Insurance. Because the Federal Government ensures the FHA loan, you must pay a monthly fee. That is the price for the ability to purchase a home for 5% down. In the first year you will pay $2,332 to the principal pay down, and $6,032 in interest. The good news is, if you have people renting rooms in your home or other units, you are not paying anything, they are. That means the 4% appreciation (4% is the average appreciation and can change throughout different markets) is on the purchase price, not your down payment. Which means you are receiving 4% return on the $150,000 purchase price. At the end of the first year, the home price would appreciate to $156,000. You will have $15,832 of equity built up (down payment + principle paydown+ appreciation). Living rent free will allow you to save $500 a month ($6,000 a year). Additionally, in this first year, you will need to save $10,000 outside of real estate, you need to continue to grind and hustle. Your end of year bank account balance is $13,500.
Year two
After the first year, the flywheel of financial freedom has started to spin easier. In year two you begin preparing for your second purchase. Another year of living rent-free brings your total saving from not paying rent to $12,000. Year two property value with appreciation of 4% is $162,240. (Again, I want to point out that the home is rented, and you are gaining this appreciation on the Purchase price. Appreciation is often forgotten about but can have a considerable effect on your net worth) Principal pay-down of $2,436, At the end of year two, you will have total equity of $22,072. (Again this is down payment + principle pay-down+ appreciation) In this year, you are saving an additional $10,000, which will give you the ability to purchase your second home in year 3. I want to make it clear that this $10,000 is saved outside of real estate. You are still hustling, finding ways to make additional income. (I worked as a parking lot attendant, to help increase my income while I was going to school at the University of Arizona. Today, my company is facilitating a deal to purchase that same parking lot, but that’s a story for a different day). At the end of the second year your bank account is $29,500, and ready to purchase your second investment property.
Year three
Congratulations, you are about to purchase your second investment property. Acquiring the investment with a traditional 20% down payment. Again, we are assuming the purchase of $150,000, down payment of $30,000. The principal loan amount is $120,000. We assume that you will net 500 per month after all expenses on this property. As a result you are now earning rental income of $4,800 a year. You are also saving $6,000 per year by not paying rent. Principle pay down for both homes in year three will be $4,669, your total equity will be $69,490. Both homes are appreciating at 4% each year, bringing the home value of the two properties to $168,730, and $156,000 at the end of this year (At this point you are now receiving appreciation of 4% on $300,000 each year). The break down for the mortgage payment for this second home is:
(Key point to note is that this mortgage payment is $273 less than the first home. The property was purchased as an investment property with 20% down payment, and you no longer have the PMI. The ability to buy your first property with 5% is critical to getting started without a significant amount of capital. As you can see purchasing your first property the traditional way can significantly decrease your mortgage payment. Factor this in when you start to decide to invest in real estate.)
Saving another $10,000, outside of real estate, for a year-end bank account of $20,300. At this point you are now in the driver’s seat, you have saved $30,000 in the last three years outside of real estate. You have a two home real estate portfolio, have $69,490 of equity, and $4,800 of passive income. You have also saved $18,000 from not paying rent. Real estate is one of the only investments where you can gain a return on someone else’s money. A critical fact that can be overlooked is that the equity you're building is a piggy bank that will return to you when you sell the homes or refinance in the future.
Year four
Year four is another year of saving. You are still receiving $4,800 of rental income per year. Saving $6,000 from not paying rent, and have principle pay down in year four is $4,897, and your homes have appreciated to $ 175,479 and $162,240, bringing your total equity to $74,387. You will need to save another $10,000 to be in the right financial position to purchase your 3rd home in year 5. Your year-end bank account is $41,100. In year four you have saved $40,000 outside of RE, you have saved $24,000 from not paying rent. The flywheel of financial freedom is starting to turn now, and you are in the position to purchase your third property.
Year Five
You are now in position to purchase your third investment property. Again, you will pay the $30,000 down payment and take a loan of $120,000. Again you are purchasing a property that should generate a return of $400 per month after all expenses. This year’s principle pay down is $7,501, your properties have appreciated to $182,489, $168730 and $156,000. At this point you have equity of $155,607. Yearly rental income of $9,600. You continue to save $6,000 a year from not paying rent for a total saving of $36,000. You have saved 60,000 dollars outside of real estate. $21,579 of principal pay down, that your tenants have paid. Your net worth is increasing $42,845 per year, and you have created the economic habits to repeat this process as many times as you want.
My hope with this post is to show you that although “Financial Freedom” appears to be a distant fantasy, the reality is that through purposeful action you can be well on your way within 5 years. It is not easy and there will undoubtedly be setbacks. That being said, in my opinion, the biggest mistake you can make is failing to take action and begin the process of building wealth immediately.
Now, go take purposely action to create a life of financial freedom
@Dave Rav We are not currently using private lenders. In my experience the interest rates for PL vary, I have seen between 12-14% and as low as 8% for experienced investors.