We taped this episode of The Real Estate Guys™ show at the Single Family Rental Investment Forum in Scottsdale, Arizona.
This is our second year at the event, and while it features many big institutional investors, we’ve also spoken to a number of mom-and-pop investors who are looking at the big picture for single-family investing.
That’s a great thing to do…it means you get a look at what your competition’s doing so you can jump into market niches before they do.
In this show, we talk to a guest who has found a market niche and perfected the process for investing in single-family homes there.
Learn all about this hot market … and get an update on the state of single-family rentals. You’ll hear from:
- Your singular host, Robert Helms
- His singled-out co-host, Russell Gray
- Single-family expert Patrick Grace
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Kansas City, Missouri, market drivers
We always say live where you want, but invest where the numbers make sense.
Well, our guest today happens to live and work in the same market. He has spent so much time with his boots on the ground … 20 years! … that he has his market down cold.
Our guest is syndicator and investor Patrick Grace, and his market is Kansas City, Missouri.
Pat works exclusively on the Missouri side … but there is a Kansas City, Kansas, right across the river, in case you were curious.
We asked Pat to give us a market spotlight, so let’s start with the basics. Why does Kansas City make sense?
- The cost of living is low. Housing, groceries, and basic necessities are affordable for residents.
- It’s a low-risk market. KC doesn’t go through big ups and downs.
- It’s a booming metro area. KC is centrally located in the U.S., making it a transportation hub for trucks, trains, and boats. Both the Missouri River and the nation’s second-largest railroad pass through KC.
- It’s packed with thriving educational institutions. Pat says there are almost 47 four-year colleges within 30 to 40 miles of the KC metro area. Many college grads come to the area for school, then stay to work and live.
- It’s business-friendly. Not only because of its great location and low cost of living, but also because of labor availability.
Are there any weaknesses to KC? Pat says most jobs are fairly low-wage, which makes sense, based on the city’s cost of living and economic base. That’s actually a good thing for single-family rental investors … it means people stay renters.
Kansas City single-family rental profile
Pat is a syndicator in Kansas City. He currently owns and/or manages over 700 single-family homes in the market.
His focus … his niche … is finding distressed properties or properties on auction and bringing them back to life.
His business is a vertically integrated, one-stop-shop for investors. He has an in-house real estate company for finding homes along with construction and property management businesses.
Investors can invest in anywhere from 1 to 100 homes, and Pat’s team handles the entire process … from finding the property, to fixing and renting it.
Properties in Pat’s portfolio usually fit a standard profile … 2-bedroom, 2-bath homes with 3-car garages, sold for $130-150 thousand.
Investors usually put down 20 to 25 percent of the sale price, for which they have a variety of loan options, including Fanny Mae, IRA funds, 1031 exchanges, and private loans.
“Renters are plentiful,” Pat says. And rents are reasonable for both renters and investors seeking cashflow. The sweet spot, Pat says, is between $800 and $1,500 per month.
What about the tenant-landlord law? “Missouri is favorable to landlords,” he says.
Landlords can get in front of a judge within a month and get non-paying tenants out within 30 days of the court date, typically … although usually, it doesn’t come to that.
And occupancy is high. “Our portfolio is 97 percent occupied,” Pat notes. He says he gets a pile of rental applications every day, which means he can be selective about screening and vetting tenants.
The turnkey rental model
Pat’s business functions on a turnkey rental model. In fact, he says, 90 percent of his investors live outside of Kansas City, simply because Pat and his team are so good at handling every component of the buy-rehab-rent-manage process.
Investors don’t have to use all of Pat’s services, but most choose to once they buy one (or more) of the properties within his portfolio.
Most investors come in after Pat has found, rehabbed, and rented the property, but some like to get involved earlier. That’s the “skinny cow” rental model.
In those cases, investors are involved from the beginning. They know exactly how much the property costs and have a say in rehab and construction. They still work with Pat’s vetted crews and companies, but they get to see the process from beginning to end and have a say in tenant placement.
This allows investors to get some education on the process.
Pat’s business model works well because he’s exploiting a niche. He says most hedge funds and bigger investment companies go after more expensive homeowner-sold, ready-to-rent properties instead of choosing the more intensive value-add option.
By working with distressed properties, Pat can force equity. And he’s learned that by choosing premium-grade materials during rehab, he can also charge premium rents to tenants. That means spending maybe $1,000 more than he could to put in quality tiling, fixtures, and appliances that draw more, and better, tenants.
And because Pat owns his own rehab and construction companies, he can use the same materials in bulk and renovate quickly and efficiently.
Tenants usually sign one- to two-year leases. Pat says his contracts have automatic lease renewal clauses along with 3 to 5 percent yearly lease escalators.
Low-entry, high-cashflow investing
What does Pat wish people knew about Kansas City?
“Kansas City is low-entry and high-cashflow, but we also have a duel-exit strategy,” Pat says. Owners can rent for cashflow or sell rehabbed properties for equity.
Pat also says he wished people knew how metropolitan KC is. It’s a big metro area with a revitalized airport, great infrastructure and transportation, including over 1,000 miles of bike lanes, and a growing number of commercial and retail facilities.
Yet despite its growth, KC remains affordable to the tenants that are Pat’s bread and butter. He says he primarily serves service workers, medical professionals, mechanics and truck drivers, warehouse and distribution center workers, and tech professionals. Most tenants work blue-collar jobs, making them reliable long-term renters.
And the growth shows no signs of stopping … millennials and college grads are flocking to KC and settling down there. KC is the perfect combination of affordability and lifestyle.
Kansas City sounds pretty great to us, but if you want even more information, check out Pat Grace’s exclusive video presentation, which you can access by listening in to the podcast. He also created a market report just for our readers. Check it out here!
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