Why Realtors Should Consider Selling Rental Income Property
Having listed and sold rental income property almost exclusively as a realtor for thirty years, I would like to pass along some things I learned about real estate investment property that could be helpful to those of you thinking about making the transition from residential property (i.e., houses) to rental income (income-producing) property.
Okay. But let's be sure we're on the same page. By investment property we're generally referring to any type of residential or commercial real estate other than a single family residence (e.g., land, apartments, office, industrial building, etc.).
Fair enough. But let's narrow it down. In this article, since my experience dealt mostly with residential properties purchased for the sake of renting (i.e., single-family, duplex, triplex, apartment complex), I will refer to those types of property rather than commercial property.
I have organized this article in the following manner:
- The incentive - a couple of proven reasons why real estate agents should consider selling rental income property.
- What to know - a few things that I believe, if understood beforehand, will help residential agents better prepare to sell rental income property.
- What to refute - a misconception that generally keeps realtors from selling rental income property.
- Money. Selling investment property can be one of the most financially rewarding transactions a broker or agent will ever experience because their selling price commonly exceed those of a single-family house and that means a higher commission. I closed escrow on a one million dollar shopping center six months after I obtained my real estate license and collected a fifteen thousand dollar commission (a lot of money for a newbie, especially back in 1978).
- More transactions. Real estate investors are prone to own more than one investment property at any given time. That means the likelihood for multiple transactions with one buyer over a short period of time. This is almost always the case. Real estate investors are typically always open to selling and buying.
- Referral business. Many residential agents gladly refer their rental income property business to agents who are engaged with investment real estate, and, of course, that means more business. I closed on some great properties thanks to my colleagues.
- Instant potential customers. Every buyer you sold a house to is a potential real estate investor. So it's at least probable that any one of them might become a rental income property customer—not to mention your family, friends, neighbors, and church community.
What to Know
- The objective - unlike residential property where amenities such as kitchen size and school district commonly influence a buyer's decision, real estate investors buy cash flow and mostly consider only what affect amenities have upon the property's ability to generate cash flow. In other words, real estate investing is all about the numbers. So prepare yourself to address the investor's primary objective, “How much money does it make me?”
- Some terms - there are a host of terms and formulations that apply to real estate investing
you will encounter when
working with rental property, but here's a couple that should help you to at least get started.
- Net Operating Income – the amount of income remaining after all rents are collected and reductions are made for vacancy and operating expenses. It pays the mortgage.
- Cash Flow – the income made available to the investor after the mortgage payment.
- Capitalization Rate – the return widely used by appraisers, investors and other analysts to measure and compare property values. Mathematically: net operating income divided by property value.
- Cash on Cash Return – the yield an investor might expect to collect during a given year on his or her initial cash investment. Mathematically: annual cash flow divided by initial cash investment.
- The APOD - an acronym for "Annual Property Operating Data", the APOD provides investors with a good “first look” at a rental property’s financial performance for the first year of ownership. Just one of many reports used for real estate analysis but arguably one of the most popular. Preview a sample...
- Market analysis - research your local market area to see what smaller (2-4 units) and larger (5+ units) have sold for during the past year. Pay particular attention to Cap Rate but also consider the dollar per unit. This is a bare-bone evaluation but at least gives you an idea about rental property value in your area.
- Your presentation - whatever reports you decide to create for your presentation, always use numbers that are realistic. The last thing you want is to tarnish your credibility with the real estate investor by using skewed data.
What to Refute
A common misconception amongst residential agents is that investment property requires a specialized skill reserved only for commercial brokers.
But that's not necessarily true.
Yes, there are aspects of commercial real estate that do involve special training, but that's not the type of property I'm alluding to here. I'm suggesting that rental income property is well within the scope of any broker or real estate agent. So if you've been proficient enough to sell a house, than you can also sell rental investment property.
Here's to your real estate success.