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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].
Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 12 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, near a national and the Pacific Ocean.
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