What You Should Know To Sell Income Property
As a former Realtor who listed and sold rental income property almost exclusively for thirty years, I would like to pass along some nuances I learned about real estate investment property that hopefully will be helpful to the rest of you thinking about making the transition from residential to income property.
Before we get started, though, 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.) and more specifically by rental income property we mean residential real estate (i.e., apartments).
Okay, let's begin with a couple of reasons why real estate agents commonly even consider selling rental property.
- The 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.
- More transactions. Real estate investors are prone to own more than one investment property at any given time and that means the likelihood for multiple transactions with one buyer over a short period of time.
- 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.
- 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.
What to Know
Here's a list of a few things I believe, if understood beforehand, will help residential agents better prepare to service investment real estate.
1. 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?”
2. The Terms
Naturally 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 iinvestment. Mathematically: annual cash flow divided by initial cash investment.
3. 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. It's just one of many reports used for real estate analysis but arguably one of the most popular so worth becoming acquainted with.
4. The Market
Research your 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.
5. The Presentation
Whatever reports you decide to create for your presentation, use numbers that are realistic. The last thing you want is to tarnish your credibility with the real estate investor.
Rule of Thumb
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, and 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.