Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].
Question. Sheila and Craig from PA write: Hi Brian, my husband and I are both relatively successful real estate agents. For 12 years we’ve been working as a team. The team approach has worked well because we divide the responsibilities and when we occasionally have more than one urgent deal working, one of us focuses full time on each transaction. Lately, we’ve been thinking about expanding our coverage with me working with investors while Craig holds down the retail side of the business. While we are investors ourselves, we’ve never worked as agents for other investors. What do you suggest as first a first step?
Answer. Hello Shelia and Carl. That sounds like a good team strategy by opening your business to another segment of the market. With that said, working with investors is another game if you’ve always worked the retail side. On the retail side, you’re selling the dream of home-sweet-home. White picket fences and the smell of fresh bread in the kitchen. On the other hand, investors have ice water running through their veins. For the right discount, they’d rather smell rotting garbage rather than fresh bread. Get the picture? Investors are a completely different.
With few exceptions, the only thing investors care about is the ROI or sometimes called the hurdle rate. You can recommend 100 white picket fence houses without an investor wanting to spend time looking at even a single one. The first thing you need to do is understand what an investor is looking for. Most of the questions you ask investors will be very different from what you ask the mom and dad with one kid and another on the way.
Before you even start asking questions, you need to be able to talk the language of “hurdle rate,” “cap rate,” “internal rate of return” and “income vs. capital gains,” and have a solid understanding of how 1031 exchanges work. A simple mortgage calculator won’t do the job. You’ll need to present the right properties in a spreadsheet with the calculations an investor wants to see. Once you have a good grasp on those numbers, you can start asking individual investors what is most important to him or her.
Of course it goes deeper. Investors tend to specialize. Some invest in small apartment buildings, some in condos, others prefer duplexes, but many are looking for profitable single family homes. Generally, it’s wise to aim for the middle of the single family market or slightly below. Investors know properties above this level are expensive to repair and maintain.
That assumes the investor is a landlord. Sheila, you probably want to decide if you will specialize in the landlord or fix and flip market. I’ll leave the fix and flip for another article but that tends to be a higher end market where you are dealing with granite countertops, stainless steel appliances, and master suites with bathrooms as big as a child’s bedroom.
Back to the landlord scenario. Once you have a discounted house you think is worth investing in, you need to be able to discuss repair costs. Of course, all of this is going into that multi calculation spreadsheet you’ll prepare. Part of this calculation is the “after repair value.” This is where your white picket fence experience helps. Obviously, the repaired value is based on what similar houses have sold for recently (comps). It’s also a good idea to know what similar houses are renting for in the neighborhood.
You want to learn what role the investor expects you to play in deals. It’s probably not the same as with mom and pop buyers. Does the investor want you to screen for only the best deals or to send him all possibilities? Are you going to be showing everything or will he do a drive by before wanting to look inside? Will the investor negotiate most of the deal and only need you strictly handling paperwork? It may be something different altogether.
Sheila, this might seem more complicated than it is but you are embarking on a market segment that you haven’t work in before. Beyond being able to talk the language, you need to prequalify the investor. Where is his or her money coming from? Do they have their own money? Are they preapproved? It’s best to have a business meeting up front. You don’t need answers to every detail but you don’t want to leave the meeting to do a bunch of legwork based on assumptions. At a minimum, you need to know what the investor is really looking for and if he or she has the financing to close the deal when you bring them the right property. And one las thing, don’t ignore flippers the way I did in this article. Flippers can provide a steady stream of deals.
I’m sure other readers want to hear your ideas for working with investors. Please leave your comments. Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].