There probably is no hotter market now than Kansas City. A large, prosperous, self-sufficient, and culturally-rich city, it is no wonder why it has seen a continuous rise in its employment, directly impacting the local real estate. In today’s Market Spotlight, Marco Santarelli takes us across the Kansas City market that he has been investing in since 2005. He talks with one of his property providers in the area to further discuss the market and the opportunities there. They tap into the combination of cash flow markets and appreciation markets found in the city, the rental demand and rent growth, as well as the desirability of its neighborhoods. Tune in further to this episode to discover why Kansas has long been the envy of many and more.
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Market Spotlight – Kansas City, MO
The Midwest is one of the most affordable places to live in the country, and Kansas City is right at the heart of this region. Kansas City is a large, prosperous, self-sufficient and culturally rich city located right along the Missouri River. It is the largest city in the state of Missouri, famous for its distinct barbecue cuisine and jazz heritage. It’s nicknamed the City of Fountains for obvious reasons. They have hundreds if not thousands of fountains throughout the city. Kansas City has seen a continuous rise in its employment over the last few years, a trend that directly impacts the local real estate market. The market is still in a wealth phase where the inflation-adjusted rate of appreciation is greater than zero.
In the past years, real estate has appreciated about 3.5%. The real estate market forecast is that home prices will continue to increase somewhere roughly by about 3.9% over the next several months according to the real estate data coming out from Zillow, as demand continues to exceed the supply. The Kansas City real estate market is hot. In many ways, it’s the envy of many people on both coasts. It is also one of the hottest real estate markets for affordable rental real estate investments. That is why we’ve been in this market for so long. We’ve been selling rental property in the Kansas City, Missouri metropolitan area since 2005. We have onboarded a new property provider, someone I’ve known for many years. They have great properties in good locations and with solid returns. I felt it was appropriate to revisit the Kansas City market and talk about the opportunities there.
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With me now is Nathan. He is one of our newest and exciting property providers in the Kansas City Metro area. We’re happy to have him on board. Nathan, welcome to the show.
Marco, thank you so much for having me.
It’s great to have you on. We’ve always loved Kansas City. I’ve been an investor there for a long time. I like to refer to some of the markets we’re in as perennial markets that we’ve been in for what seems like forever. I can tell you that we’ve been selling property in Kansas City since 2005. It is a favorite market. I know you like it too. Let’s talk about the market. What can you tell us about Kansas City? It’s very popular with investors. From a high level, why invest in Kansas City, Missouri?
We love Kansas City for several reasons. First, a lot of times investors think about cashflow markets versus appreciation markets. One of the things I like about it and a lot of investors like about it is that you get a balance of both. There’s both good and strong cashflow. There also has been appreciation. It’s nothing crazy. You don’t get that like East Coast, West Coast, but you get that steady a couple of percents a year appreciation. Over the last several years, there have also been population gains as well. It’s nothing crazy, no big booms, but also no big busts as well as looking at the valuation of the properties. Over time, we don’t have these big huge dips in value. You don’t have a big huge increase, but steady and stable. It’s been a good market for us.
That’s been my observation. It’s been what I refer to as a linear market. It’s been steady since 2005 up until about 2013. We started to see property values increase more so than prior years on average. I’ve enjoyed the last few years of appreciation, which is not out of the ballpark, but it’s been a little stronger than it normally has. You’re getting both of the cashflow and you’re getting the appreciation. We call that a hybrid market. For the most part, it’s still there. Don’t you think?
Yeah, I do.
Property values have been growing. What about rental demand and rent growth? That’s also an important consideration for investors.
Rental demand is still super strong. A lot of people, when they look at underwriting different markets, they want to understand the MSA, the number of people in the Metro. Kansas City is 2.2 million, 2.3 million. We’re a good size mid-level city from that perspective. The demand, we have a lot of different businesses and a lot of different sectors. Whether it’s H&R Block or you have the Sprint Campus here. You have Cerner and Farmers Insurance. There’s a bunch of large construction and lots of big hospitals. Kansas City Chiefs, you can’t forget our sports teams and the Royals not too long ago. All that to say there’s a great balance of that white-collar and blue-collar worker. There’s also a huge demand.
We are continuing to see properties as long as they’re priced right if they’re total rehab or pricing them correct for their situation, there’s still high demand and low vacancy. It’s been very good to be in this market. One of the things we were thinking of when we put properties out is to make sure, do they present themselves well and pictures were taken well? We make sure that we’re informing that tenant as well and make sure that they can see, “Is this a place I would want to live?” We do a good job marketing and explaining it. In that way, we can help find the right people that want to call that place home.
Nathan, a few months ago, we saw a situation where there was high demand. There was also low inventory at the same time and that was driving up home values. The speed of sales was compressed. I don’t know if that’s changed now. What do you see in the market?
Interestingly, you mentioned that. By way of having the things going on in the world, it has put some strain on people being able to move about easily. With that said, we’re talking with property management or talking with people who are buying. What’s been wonderful is we might have fewer tours on the leasing side, but we’ve had more serious people. You might have fewer tours, but you still have a demand for people to have a nice place to live. If you go out and you’re walking that property, then you’re serious. We’ve still seen a high demand for those rentals. We’ve still seen a lot of activity with our buyers as well.
When you look at the value proposition, this is what I tell my clients all the time, “If you were an investor 2, 3 or 6 months ago and your goal was to buy 2, 3 or 4 properties whatever it was in 2020, that should still be your goal. Let’s look at it and assess it deal by deal and opportunity by opportunity. Let’s make sure that we help you make a great decision.” I was talking to one of my acquisitions guys and they’re still getting multiple offers on rehab houses. It’s very much stable. There’s still very much a high demand for both the rental side and the investment property side.
We’re still very bullish on the market. There’s no reason not to be investing in the Kansas City Metro area. There’s pretty much every reason to be investing in that market. The inventory is there. You’ve got a good team to work with. The cashflow numbers work. Therefore, your cash-on-cash numbers work. There’s still an expected price appreciation, although more modestly, our research is showing about 3.9% over the next several months, which is still healthy. Anything in the 3% to 5% range is considered very healthy. There are many reasons to be investing. I am in an escrow on a property that I’m finishing up on and refinancing. I’m still investing in the city.
Moving on, let’s talk about the opportunities there. Before we talk about the property specifically, what they look like, the price ranges and all that stuff, let’s talk about neighborhoods. To me, neighborhood quality is critically important. You can look at a market and say, “Kansas City is a good market to invest in,” but that’s a high-level decision. It’s very macroeconomic. When you get down to neighborhoods, you start talking about things like the demographics, the schools, the crime, and all that stuff. Let’s begin with neighborhoods. What types of neighborhoods do you suggest? What types of neighborhoods are you focused on in terms of turning inventory over?
We focus on your basic solid safe neighborhoods. Kansas City is laid out in a way that there are a lot of different neighborhoods, a lot of different city names. I take the approach of if I can’t send my wife there or our staff wouldn’t be safe there, we don’t invest there. From the perspective of people who we’ve worked within the past, we have your basic house, whether it’s three-bedroom, four-bedroom cute neighborhoods. Most of them are older neighborhoods. Homes are built from the ‘40s, typically to the ‘60s. They are places that have a normal neighborhood with the school. People are easily able to get in and out.
Kansas City is not a lot of internal transport. Most of the time people drive from wherever they’re going to wherever they work. That also has been something that came up a lot. It’s not a big deal to drive twenty minutes. People live in neighborhoods that they’re used to. We find a lot of times if you grew up in a certain city, you’re going to live in that city. Your kids are going to go to school in that city. You take a new job. You move to KC. You want to be closer to work. You’ll live in this little pocket because you like the arts and whatever’s happening rather than it being super close to work or whatever. There are a lot of different types of neighborhoods. Some are closer to arts and entertainment. Some are closer to the highway access. We looked for a solid neighborhood, a nice area, a house that both the tenant would like to move into and that we can rehab it well. It’s a safe area. We have a good size buy box from the areas that we work in.
An important factor is the desirability of a neighborhood. What is the rental demand going to be like now and in the future? You want your property leased and leased all the time or as often as it can be leased. Occupancy is probably going to be 90% to 95% on average throughout a property’s life. The desirability is an important factor. If you are picking properties in neighborhoods that have that desirability, your property manager is always going to have a pool of tenants to draw from because they’re going to want to live in that area.
It’s like when you think about the exterior of the house, is it a place that there’s a cute from the curb? Can you envision cooking in the kitchen? Is it a nice space to be in? In the backyard or whatever, can you picture hosting your kid’s birthday party or the barbecue with the neighbor or whatever? We try to think through the two different lenses because there’s the investor lens, which is you want to understand and underwrite it from the financial perspective as well as like, “Marco, you and I are having a beer together and it’s exciting to go talk.” Would I be excited about sharing this property? From the perspective of the tenant who calls it home and they live in that home. We want to make sure that we’re not putting lipstick on a pig. We get a good house that we can do a great renovation on, it’s laid out, that makes sense for that person to want to live there and stay there for a long time.
Not to put words in your mouth, but if we were to put this on a spectrum, what would you grade these neighborhoods in terms of A-plus down to a C-minus?
This is one of the things that I don’t love the A B, C, D neighborhood thing. Some people call it an A-house that I’d call it a B-house. Some people call it B-house that I’d call it A-house. I’ll put it in this perspective. I believe that there are a couple of different things that we should think about if we’re calling them letters. Number one is the quality of the rehab. Number two is the safety in the area. Number three is the price point. I’d call ours like the C-plus to B-minus or solid B. We have good neighborhoods. Sometimes the school ratings aren’t that great, but it keeps no difference in getting somebody to rent there.
Price point-wise, let’s say it’s $110,000 to $150,000, which is that right sweet spot in the marketplace for the types of houses. From our rehab, I went there A-plus. We do a knock out beautiful renovation job. A lot of times I have seen people who market homes that are in not good areas. They call them a B or an A because they have a nice rehab or at least presumably have one. All that to say, we focus on a safe area, easy to rent, a good and detailed job in the construction. Handing it off to rock-solid property management and that makes all the difference.
I have two points here. One of these days, I’m going to do an episode on grading properties, grading neighborhoods and separating the idea of those things. A lot of people talk about an A or B property. They’re referring to the quality of the renovation work in the property itself. They’re not referring to the neighborhood or the street that it’s on. You can talk about both and you probably should talk about both. The reason we probably don’t talk about the grade of the property itself is that we only focus on turnkey rentals. For the most part, they’re going to be called A’s anyway. We’re not going to call the property a B or C-class property because that wouldn’t be a turnkey rental in our opinion. We’re going to refer to the neighborhood.
I love what you said and that would be a great episode. When you think about an A-class property, in Kansas City it would be $250,000 to $350,000 house and top schools of the area. You don’t typically have that. It doesn’t typically make financial sense to be buying that house as an investment. That’s why people from the East Coast, West Coast want to invest in a city like Kansas City because you get a great house in a great neighborhood for much less than that. It’s understanding what the neighborhood is, what is the rehab and what is the end product that you’re getting.
At a high level, I like to look at neighborhoods that have an owner-occupied rate of over 50%, meaning that more than 50% of the properties in that neighborhood are owner-occupied, not rentals. I also like to see that the median income in that area is exactly that, the median income for the market, not a low-income area. I would put C-class neighborhoods in the low-income category, the median income, your middle market, your middle-class is your B-class neighborhoods. Anything above that would be your A-class neighborhood. You’re always going to have a little bit of crime in your B-class neighborhoods. The schools aren’t going to be the greatest, but they’re going to be good.
That to me is the sweet spot, that B, B-plus area. That’s where you’re going to get the biggest bang for the buck, in my opinion. You certainly will have the right cashflow and rates of return, but you still have the upside of what the market is doing in terms of potential future appreciation. Let’s talk about the properties. Properties vary from market to market and neighborhood to neighborhood. Depending on who you’re working with, the quality of that property may differ in terms of renovation work. Describe a typical property in the neighborhoods that you operate in.
We do have some two-bedrooms, but the vast majority are three-bedroom. We get some four-bedroom as well. In Kansas City, it’s normal to have one bathroom. We do have some that are 1.5 and 2 bathrooms as well, but we’ll call it 1,000 square feet, 1,200 square feet. Some of them are ranches, some of them are a story and a half. Most typically it’s that either front to back split or ranch. It’s either on a basement crawl space or a slab. All three of those are normal here in the market. We do a serious level of rehab. Over the years, we have gone through, reviewed our process and updated it numerous times. At this point, we go through. We have a high-detailed down to every ceiling fan and the number of tiles.
Everything is high detail. We go through and make sure from the frontend that we know exactly what the full scope of the work is. We do an extensive renovation typically. Some don’t need as much, but we spent on average well over $30,000 for rehab. We’re serious about making sure that we can do everything we can to find anything that was not in good condition like HVAC, windows, roof, anything in the kitchen, appliances and so forth. We go through and want to have it set, not only to look nice but to have as much longevity and be tenant proof as possible.
That’s a good number for a scope of work. A light renovation would be $10,000 to $12,000, $30,000 is good. I find that the curb appeal is critically important. Those finishing touches that you put in the property also draw tenants in. It not only leases up quicker but sometimes you can get an extra $50, $75, $100 a month just having nice finishes. I’ll give you an example. I have some property in Florida that I’m putting granite countertops in the kitchen and bath as I’m replacing appliances. I’ve come to find out through some market research that I can bump the rents up to $100 a month because of the granite. It’s worth the expense of having that granite in there.
Whether looking at the property, looking at the area and understanding what it is. We’ve played with that back and forth. We are very much focused looking at the colors, looking at the style, looking at the way it’s finished. It makes a huge difference. I agree and I think it’s worth looking at that. That’s also why our budgets have gone up over the last several months on construction and well into the $30,000. We wanted to make sure that from the beginning that we got both right. We got the rehab side right. We also got the pretty looks nice and pictures and has a nice finish.
That’s all-important stuff. Nathan, some investors are numbers based and they’ll look at price versus rent. They’re looking at the ratio of those things. When you look at the types of properties that you are turning over, what are the price ranges? What are the related monthly rents to those properties? It’s so we have a perspective on that rent-to-price ratio.
It’s critically important to also think about the tax rate and also the insurance costs here. I think about all of those things. Typically, the lowest end prices that we have been in that $100,000 to $110,000 range. They’re typically very close to 1%, if not a little bit under. If it’s $105,000 house and it’s $950 to $1,000 rent per month. We have like the $115,000 to say $130,000 range. Let’s say it’s $120,000 house and roughly $1,095 or so rent. A little bit nicer and a little bit bigger home, let’s say $135,000 to $150,000. It’s $1,250 to $1,350 rent, give or take in the range of the price point and the size of the house. We also have relatively low taxes in Kansas City. On those $100,000, $120,000, they call it 1% to a little over 1%, so $1,000 to $1,500 a year. It’s relatively low and also insurance is $40, $50, $45 per $100,000 or so. It’s on the lower side of costs there too.
It should also be mentioned that typically tenants are paying their utilities there. In terms of inventory, are you finding enough inventory in the market? I know that there was a time when it was pretty tight. It was hard to find inventory. Inventory as in your types of inventory you’re picking up in a distressing condition that you’re fixing up.
We are. It’s a give and takes, but we have a lot of great relationships with a lot of people that we get to work with. We operate at scale, which is nice. We have built those relationships over time. All that to say, on a given week, we might not buy a certain number of houses, but for the last 3, 6, 12 months, we’ve still been able to buy at scale and be able to bring in enough inventory to make sense for us. We have gotten much better both of the time to get to a property to underwrite it as well as the systems and process to underwrite those houses. That has helped us be able to buy enough houses as well.
You mentioned this at one time in the past, but warranty work. If one of our clients are investing in some of your properties and something happens in the first 2, 4 weeks after they’ve acquired the property and it was related to something in the scope of work or the workmanship. Is there any warranty on that renovation?
We’ve been working on this for a while. One of the things we changed up instead of trying to have a warranty on the backend of that, specifically, what we’ve gone through is we take the third-party inspection and we go through. Instead of trying to say like, “We’re going to do this. We’re not going to do this.” First of all, we provide the whole scope of work so you know what we did. Number two, we go through and take every item in the inspection report and put it into an Excel spreadsheet. We go through and identify every item that we did to fix it and a picture of that issue. If there’s something that comes up that we missed, we will come and look at it.
We try to make it simpler and simpler. In that way, it was clear what we did and what the investor is getting. The other thing we do too is if the investor is buying it at the moment that it is not tenanted yet. We also have a rent guarantee too. For some reason it took an additional couple of weeks, we cover the amount at the point that you’d have a mortgage payment, we will cover the full amount of rent. After 30 days, we will cover that until the tenant is place.
I forgot about that. That’s a good point to emphasize is that the rent guarantee that you’re talking about is not covering just the mortgage itself, but it’s for the full amount of anticipated market rent. If it’s a $1,000 a month lease, it’s $1,000 a month that you’re essentially covering. Do you prorate that daily or something?
Yeah, and we’ll typically cut that as one check at the point that it’s leased the tenant’s placed, and then that way one check, one time. We’re not trying to track down exactly this month or this month. They can have one check. You know how much it was and prorate it based on the days and such.
Let’s wrap up with property management since we’re talking about leasing the property. I know it’s a third party and someone or a company that you work closely with and have worked with for quite a while. Briefly describe the property management services, which I assume are full service and what the terms are under that management.
We did have property management at one point. We found that we were much better served and our clients were much better served with third-party property management. These guys have been in business for a long time and do a wonderful job. We’ve built an awesome relationship and partnership with them as well. Our staffs meet together regularly and work together regularly with feedback back and forth. It’s been a real blessing. They charge 8% monthly for the management. They do 50% for the placement of the tenant. It’s very reasonably priced. They do have a high level of skill and ability. Their staff does a great job.
Lastly, let’s talk about some stats. Do you have any stats on occupancy rates or turnover times right now in the market?
There’s still a low level of vacancy. I’ve spoken to 4 or 5 property managers over the last few weeks. They cover maybe 5,000-plus doors between them here in Kansas City. Everyone is still getting a high level of applications. There was a one-week glow. All of a sudden, a high level of applications, single-digit, a low vacancy. The company we work with has 76%, 77% of their people renew and they put a serious focus on that. I was talking with one of the property management friends of ours. She was mentioning even how they were getting multiple people trying to bring their deposit money to lock up properties. It’s extraordinary when you think about there’s a little crazy in the world, no doubt. When you think about what the necessities are, real estate and a place to live are being one of them. If you have the right property in a good area and priced appropriately, there’s a lot of movement happening. There are low vacancy and still incredibly high demand.
Housing is a basic need. People need a place to live in. It’s a good feeling when you have tenants fighting over your rental property and they’re clamoring to take possession of it. It’s a good feeling.
That’s part of the other thing too is when you are in the turnkey space, that’s one of the incredible jobs as an investor too. You’re getting a property that’s well renovated. If you have something that might be a little bit more money, but it’s much nicer than the house down the street for $50 or $100 less. It’s easy to rent them because they look great. People want to live there and they want that HGTV experience. They get to have that because you provide a high-quality product.
All else being equal. If it’s the same size, the same floor plan, the same rent, but yours is newly renovated. It will be the first one to lease-up. It’ll lease before the one down the street, which is a competitive advantage being a property owner. Nathan, anything else about the market or the investment opportunities you’d like to share before we wrap it up?
We’ve done a good job. I appreciate you, Marco, to have the conversation and chat about it. We approach our business every single day to learn and approach with integrity and leadership. We have an incredible team and not just focus on one individual but the collective. We’re bringing in the right people and working with amazing clients and being able to help people achieve what they’re looking to achieve. It’s a blessing to get do what we do and to get to work with awesome people like you.
Thank you. I feel the same way. We’re excited to work with you because we do need more inventory. I know from people in the industry that you put out incredible work. I know our clients are going to be happy with the product that you put out. Nathan, I appreciate you taking the time.
Marco, thanks for the opportunity.
Thank you.
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Be sure to contact one of our investment counselors for a free strategy session. If you’re interested in the Kansas City Metro market as an investment opportunity and find out what inventory we have coming down the pipe as well as what we have available. If you don’t have an investment counselor, not a problem, fill out the form on our website. We will connect you within 24 hours and you will be in touch with 1 of our 6 great team members here. If you have a question about real estate investing, then please click the Ask Marco button on the top of the website at PassiveRealEstateInvesting.com. I would be happy to answer your question either on the blog, in an email or on the show. Help us spread the word, leave us a rating and review on iTunes, help share this show with other great like-minded people like you. Once again, thanks for tuning in. We will see you in our next episode.
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