Surprising Kansas City

It may not be a flashy city, but Kansas City is quietly and steadily growing its economy and population—and, consequently, its real estate values. Investors seeking cash flow …

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It may not be a flashy city, but Kansas City is quietly and steadily growing its economy and population—and, consequently, its real estate values. Investors seeking cash flow and long-term growth potential just might be pleasantly surprised by the opportunity in a metropolitan area known for its affordable quality of life.


Kansas City shares many of the traditional benefits of a Midwest economy, including stability and conservative growth without major dips or jumps. For a cash flow or long-term buy-and-hold investor, the Kansas City market provides plenty of opportunities.  


![filekey=|152| align=|right| caption=|Photo by Bill Cobb|]A steady, diverse economy


The Kansas City area, home to approximately two million people, is one of the fastest growing cities in the nation with one of the fastest growing job markets in the Midwest, according to the Kansas City Area Development Council (KCADC). Major employers include Sprint Nextel Corporation, Hallmark Cards, H&R Block, Cerner, General Motors and Ford.


The area has plenty of job openings, Chris Dowell, local realtor with the Dowell Taggart team, said. Although the city doesn’t have many Fortune 500 company headquarters, many smaller and medium sized companies are moving to the area because of the convenience of “being in the middle of everywhere” and the availability of affordable housing, he said.


As the major city nearest to the geographical center of the continent, Kansas City is a natural transportation hub. “Transportation is huge here, the trains and the trucking,” Chris Lengquist, a local investor and Keller Williams realtor, said.


“The economy doesn’t really depend on any one thing,” Sharon Sigman, a local realtor with Weichert Realtors, said. “If a company…moves someplace else, it’s really not going to ruin the economy.”


Affordability increases buyer pool


Residents of the Kansas City area benefit from an affordable cost of living relative to average salaries, according to the American Chamber of Commerce Researchers Association (ACCRA) Cost of Living Index. This makes Kansas City one of the most affordable large U.S. cities, according to the KCADC.


“We have a lot of disposable income here compared to other markets around the country as far as your tenants and your homeowners are concerned,” Lengquist said.


![filekey=|160| align=|center| caption=|Map courtesy of the Kansas City Area Development Council|]


Because the cost of living is relatively low, Kansas City has a large pool of prospective homebuyers. This is an advantage during a period when subprime lending looms as a dangerous problem for much of the nation.


Disposable income and affordable homes make it easier for first-time buyers to afford homes in Kansas City than in many other national markets. The first-time homebuyer market is “still real strong,” Dowell said, because “you can still get homes here in the $110,000 to $120,000 price range.”










































Kansas City’s Affordability


City


Ratio of MHV to MFI


Median Home Value


Median Family Income


Kansas City


2.4


$ 157,000


$ 65,400


Miami


6.7


$ 311,000


$ 46,350


Washngton, D.C.


5.0


$ 428,000


$ 86,200


Los Angeles


9.6


$ 525,000


$ 54,450


New York


7.9


$ 457,000


$ 57,650


San Francisco


9.4


$ 835,000


$ 88,450


*Source: CNN Money


“I’m very much into education and conferences, and I do a lot of national training…so I really get a good look at what’s going on around the country, and I’ll tell you, what really excites me about the Kansas City area is that it’s one of the few places left in the country where you can get a three bedroom, two bath, two car garage home for…$60,000 to $70,000,” Brad Korn, a local Keller Williams realtor, said.


One of Kansas City’s main advantages “is that it’s so much easier to get into investment property,” Michael Fry, a local property manager, said. “You’re really getting a great value.”


A conservative investor’s market


“The real estate market in Kansas City is pretty stable,” Ron Yarbrough, a certified mortgage planning specialist based in the Kansas City area, said.


Although Kansas City doesn’t experience the “big growth” that occurs on the coasts, “the big difference here is that we get steady growth, basically 5 percent year in, year out, hardly ever any dips. It’s just a nice safe place for long-term real estate investing,” Lengquist said.


Kansas City is really not a get-rich-quick market for real estate, Fry said. “The properties here are not overpriced, not so much affected by the housing market bubble, and therefore much safer and stable in the long run.”


Indeed, Fortune’s May 2006 issue dubbed Kansas City a “safe haven for real estate.”


“You can get a better rate of return here than you can in a lot of the other states,” Sigman said.


![filekey=|161| align=|right| caption=|Photo by Kevin Venator|]The area has “great cash flow opportunities” as well as “a very consistent 5 to 7 percent appreciation,” Dowell said. Most of his investors are focused on either cash flow or long-term buy-and-hold strategies.


Flipping is less successful and “not really our cup of tea here in the Midwest,” he said. “In the Midwest, if you look to buy a property and flip it, you’ve got to really do your research…because we don’t have the margins like they do when things are going right on the coasts.”


Although he doesn’t recommend flipping, Dowell said investors who want to flip should look for areas with less competition, such as Wyandotte County and areas north of the river.


Lengquist agreed that “there’s just not enough margin” in many properties for a buy-and-sell approach to be profitable. Investors interested in rehabbing will find the most success in neighborhoods just outside the downtown core, such as Waldo and Brookside, because “you’re just going to have a bigger pool of people who are looking to buy,” he said.


Conservative, realistic investors succeed in Kansas City, Dowell said. Those expecting dramatic short-term appreciation are looking in the wrong place. “A very conservative investor will do very well here. You don’t typically see the investors lose a lot of money here.”


The most successful investors in Kansas City combine a buy-and-hold approach with cash flow, Fry said. “Cash flow is air for investors, and without it you can’t stay in the game very long. But at the same time where you’re going to see much of your gains over time is through property appreciation.”


Korn sees the flat market as an opportunity for investors. “You can buy houses at a little better price now” and rent them out without much difficulty. “The whole Kansas City area has got a good rental market.”


Single and multi-family strategies


Single family properties hold the most potential for long-term appreciation, Lengquist said. Another advantage is “a real large pool of potential buyers” when it comes time to sell, he said.


Many out-of-state investors are interested in duplexes and fourplexes, Korn said, but he personally leans toward the three bedroom, two bath, two car garage, fenced yard home “because I know that that is going to be in high demand no matter what.”


The easiest properties to rent are three bedroom duplexes and single family houses with garages, dishwashers, washer/dryers and refrigerators in stable, family-friendly suburban neighborhoods, Fry, who specializes in the southern Kansas City suburban area, said.


One bedroom apartments and condos are also “pretty quick to rent,” but two and four bedroom properties are more difficult, Fry said.


Many investors like multi-family properties because they offer a more steady income; if one unit is vacant, the investor still receives income from the other units. “It provides them with a little bit of a margin for error,” Lengquist said.


![filekey=|163| align=|left| caption=|Photo by Kevin Venator|]Lengquist said the downside to multi-family properties is that they tend to appreciate along with rental rates rather than neighborhood values. “So there are positives and negatives in both,” he said. “It comes down to the criteria of the particular investor.”


Regardless of the specific strategy, the main pitfall lies in getting “sticker excited,” said Korn, who has seen many investors pay too much for properties. “You definitely need somebody who really knows the area, that can look at what the neighborhood’s been selling for.” Long-distance investors need to find local comparables and avoid comparing prices to their local markets.


Downtown revitalization


During the 1990s, Kansas City’s downtown core “hollowed out,” with population loss at the core and growth around the periphery, according to an October 2002 report by the Brookings Institution Center on Urban and Metropolitan Policy.


The downtown core is showing strong signs of growth and revitalization. Approximately $4.5 billion is being invested in the downtown core, including the Power and Light District, Sprint Center, H&R Block World Headquarters and renovation of the Kansas City Convention Center, according to the KCADC.


“There’s a lot of growth downtown,” Sigman said. The downtown area is being cleaned up and is becoming nicer and safer, she said.


“I think that a lot of the younger people are moving back into the city,” Lengquist said. “People are excited about the city again.”


The downtown area is experiencing a condo boom in its urban core, Lengquist said, but he is “not sold on their returns as far as investments go.”


Kansas City’s condo market “is very strong,” Korn said. “You will hear controversy when you talk to people whether or not it’s tapped out or whether it’s just beginning. I think it’s somewhere in the middle there.”


While young professionals “like access to the nightlife obviously and to the downtown areas where they’re most likely going to be working,” Lengquist said he sees more opportunity in areas slightly outside the urban core.


“I think that there are much better places to put your money than the condos downtown,” Lengquist said. He said returns will be better in “the Waldos and Brooksides and Overland Parks and Olathes.”



































Comparable Investments


City


Price


Cap rate


Kansas City


$ 325,000


9.31 %


Miami


$ 950,000


7.05 %


Washngton, D.C.


$ 960,000


6.32 %


Los Angeles


$ 1,580,000


4.52 %


New York


$ 2,200,000


5.00 %


San Francisco


$ 2,625,000


3.74 %


*Numbers from recent listings of 12-unit buildings of comparable age, size and type


Suburban strength


The suburbs in the seven counties surrounding Kansas City hold two-thirds of the area’s population, according to a November 2005 article in the Kansas City Star.


The Kansas City area straddles the Kansas and Missouri border, with growth currently expanding outward in all directions, Korn said.


In the past, the nicer northern suburbs were isolated little islands, but “now everything’s starting to grow together” as Kansas City proper expands, Korn said.


“Younger families are really attracted to luxury apartments or the loft areas, and there’s just been an explosion and growth of the luxury apartments, especially in Johnson County, Kansas, in the last couple of years. The building of luxury apartments have slowed but they still continue to be rented at a very high rate,” Fry said.


On the Missouri side, the Raymore and Belton areas are experiencing notable growth as well, Fry said.


“The new construction and the subdivision building…has slowed down. You’ve really seen a lot of builders kind of pull back a little bit just with the market flattening out and the amount of inventory coming on the market…the existing homes right now are just a really, really good value,” Korn said.


The northern and southwestern suburbs have higher prices than the eastern side of the city, Korn said. He said the best values and opportunities for cash flow are found in the east.


Cash flow is a little more difficult to achieve in the north, and it is significantly tougher on the Kansas side because property values are higher, Korn said.


Future outlook


In the future, most local experts expect to see moderate, consistent growth in property values. “I think…we’re going to continue to average about 7 percent over a 10-year period of time, but that could be 3 percent this year and 12 [percent] next, but I think we’re going to continue with our average that we’ve had over the last 30 years,” Yarbrough said.


![filekey=|219| align=|left| caption=||]The low prices Kansas City is experiencing mean that “it’s the best time for a buyer to take advantage of that market,” Korn said. He expects appreciation to “kick back up again this year” and reach around 2 to 3 percent.


Although he has not yet seen many lease options, Dowell expects them to grow in popularity as some buyers find it more difficult to get financing because of stricter lending standards.


The subprime market problems may also lead to an increase in foreclosures, Fry said. Investors should prepare for opportunities in buying out property owners and saving them from bankruptcy, as well as traditional foreclosure purchases and rehabs, he said.


Although a spike in foreclosures could have a temporary negative effect on property values, “that might be a great time for an investor to get in, purchase some properties at great prices and then see the values go up over time,” Fry said.


The future outlook for Kansas City is one of stability and predictability, Korn said. “I don’t see any little secret things coming out, or some new big wave hitting…what you see is just going to consistently grow for a little while, and it’s just a very consistent market.”

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