By Joe Cooke
Although it takes some specialized knowledge to work with clients who are investing in real estate, adding a few repeat buyers to your client base can increase and stabilize your income, especially during times of low interest rates and depressed property values.
Although most agents tend to shy away from investment professionals, there are several good reasons to add at least a few investors to your database. Investors tend to be repeat buyers and sellers, and as they progress in expertise and experience, they tend to buy bigger and bigger properties. With proper care, investors can be loyal customers (especially if they are not local.)
Investors come in two basic categories; green and seasoned. If you are just starting out with investors, find the green investors and develop along with them. You can build your expertise and, over time, some of your green investors will ripen into seasoned investors as you ripen into a seasoned investor’s agent.
Here are the fundamentals of working with investors: first, you have to educate yourself in the basics of investment real estate-know the terminology and techniques of investing; also, start with someone friendly and who is at about the same level of knowledge as you-a successful new investor will grow along with you; know your market, know what the best investments are-perhaps four-plexes are hot right now in your town, or commercial property; finally, develop working relationships with loan officers and financial planners who are also knowledgeable in the field of real estate investing.
Assess Your Investor’s Knowledge
In order to assess your prospect’s level of expertise, ask a few qualifying questions. Ask about their current portfolio; find out how many investment properties they own, how long they have owned them, what kind of properties they are and where they are located. Ask them about their long-term goals and find out if they are following an investment plan. If they are not, you might offer to help them develop one or refer them to a qualified financial planner.
Give Something of Value
Providing free information on how to build a real estate investment plan can be an effective value-added service, and the tangible gift will show your professionalism and expertise far better than words.
The basic real estate investing plan includes:
(a) an executive summary with goals, objectives and resources
(b) a brief description of the market niche (i.e. 3 bedroom 2 bath homes or multi-family units) and acquisition strategies (i.e. creative financing, bank financing, foreclosures)
(c) an implementation plan
(d) a sales strategy (even if it is a simple as buy-and-hold)
(e) a financial plan with cash flows and purchases and sales projections
(f) a summary of the major investment assumptions, such as a declining market, or a forecasted market recovery.
Visit www.joecooke.com for a free Business Plan Template that you can download and then give away to clients and prospects.
In order to build a list of green investors, some agents hold classes on real estate investment fundamentals, drawing in new clients by showing and sharing knowledge, experience and expertise. This is a great way to get started, since these novice investors will see you as a resource and will grow along with you.
Your class could be an evening or lunch-hour presentation, and could focus on a specific topic, such as “How to Create an Investment Plan.” Some agents invite other professionals to do the actual presentation, such as a financial planner with expertise in real estate investment. Classes could also focus on topics such as, how to get started the right way, how to analyze a real estate investment, how to structure an offer, financing options, how to find properties in any market or how to effectively evaluate risk.
Develop a Working Vocabulary
At the very least, you should have a working knowledge of common investor lingo, such as Gross Rent Multiplier, Cash-on-Cash Return, Cap Rate and Return on Investment. Here is a quick primer:
Gross Rent Multiplier
Let’s say you find a 3 bedroom, 2 bath property near Whitman College for $185,000. Assume the going rate for college tenants is $350 for each bedroom. In a perfect world, your annual gross rents would be $12,600.
Based on this information, your Gross Rent Multiplier (GRM) would be very close to 15, derived by dividing the purchase price by the annual gross rents. If you are looking at several properties, the one with the lowest GRM would be the most appealing at first glance. But, you have to dig deeper before you make a final decision.
Cash-on-Cash return, like the GRM, is an acid-test – useful for a quick, high level analysis. Let’s say you plan to invest $21,000 of your own cash into that $185,000 property, and that you expect to get $2,100 per year in cash flow. Your cash-on-cash return will be 10%.
Let’s say that the property taxes, insurance, mortgage payment and other miscellaneous costs on your property come to $10,000 per year against your $12,600 in rents. That means that your maximum cash flow will be $2,600, for a Cap Rate of about 1/10th of 1%. That may not seem like much, but remember that in this example most of your capital is borrowed. For this particular property, cash-on-cash return and ROI are probably better measures.
Return on Investment
Calculate return on investment (ROI) by including appreciation in the basic cap rate formula. If you add $11,100 per year to your projected cash flow to account for an average annual lifetime appreciation of 6%, your rate of return jumps up to almost 7.5%.
You should also be familiar with the current 1031 Tax Deferred exchange rules.
Widen Your Sphere
In addition to local investors with whom you can regularly meet and show properties, you may attract investors from remote locations. Working with non-local investors may seem intimidating at first, but if you do a good job with these clients they can turn out to be the most loyal.
Working with investors is not for everyone, and you may not want to base your entire income stream on investment clientele.
California-based investor and loan officer Todd Newington points out a few of the negatives of working with investors. According to Newington, “The problem with investors is there is no emotional attachment to the properties they evaluate.”
In addition to the fact that investors are not emotionally attached to the property and may be more likely to back out of a transaction, they often may not feel any loyalty toward a particular real estate agent.
They also expect a higher level of specialized knowledge, expertise and experience from their agent and sophisticated investors may want to avoid using a real estate agent in some transactions.
Newington adds, “I find often times they will do a lot of the leg work on their own like driving by properties and determining the neighborhoods they want to invest in.”
Despite the drawbacks, if you are struggling right now with a lot of listings and a few buyers who are running you ragged looking at 30 homes or more, try spending a bit of time each day educating yourself on investing and nurturing some investment clients. If you find that you fit in this niche market, you’ll find excellent returns on the time you invested.
Newington advises, “I think if you are new to the investor community now is a good time to position yourself.”
Joe Cooke is a profession freelance writer and speaker with over 25 years of experience in real estate, business and marketing.
Visit www.joecooke.com for more information and to obtain a free Real Estate Investment Business Plan template.