Why Realtors Should Consider Selling Rental Income Property
At one time or another, almost all real estate agents express a desire to sell rental income property; and some, in fact, pursue that opportunity to service investment property alongside their residential real estate business very successfully.
How about you? Are you a real estate agent who has been thinking about servicing rental income property but are still on the fence? If so, then allow me to offer you a few tips that might encourage you to take the leap.
1. Money. Selling investment property can be one of the most financially rewarding transactions a real estate agent will ever experience because their selling price commonly exceed those of a single-family house, and that means a higher commission.
2. More transactions. Real estate investors are prone to own more than one investment property at any given time. That means the liklihood 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.
3. 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 referrals from my colleague.
4. 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.
1. If you've been proficient enough to sell a house, than you can also sell rental investment property. Reject the misconception that investment real estate is a specialty business limited only to commercial brokers. Yes, there are some commercial properties best left to commercial real estate specialists, but this is not about high-rise office buildings. What's in view here are properties "mom and pops" typically invest in to supplement their income for eventual retirement such as duplexes, four-plexes, and smaller apartment complexes.
2. You already have potential buyers. As a realtor, it's highly probable that you're surrounded by potential real estate investors. Because the buyers for residential income properties are the same people who buy residential property. In fact, they could be your previous home-buyer customers, relatives, friends and neighbors, or perhaps even someone who surfaces unexpectedly during a cold call. Here's how to win them over:
3. Real estate investment properties can generate multi-million dollar transactions. In some cases you can close a rental income property deal (say a small 10-unit apartment complex) equal to three or four house transactions. So you have a golden opportunity to bolster your annual earnings.
1. Know the real estate investor's 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. Know some investing terms. There are a host of terms and formulations that apply to real estate investing you will encounter when working with rental property. 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 after reductions are made for vacancy and operating expenses. This income 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.
3. Know how to run the numbers. Having the ability to correctly run cash flows and rates of return for real estate investors will not only convey the impression that you're not a realtor only concerned about a commission, but a realtor who genuinely cares about the investor's money and is prepared to adequately assist the investor in making prudent investment decisions.
4. Know how to present the numbers. Once you run the numbers your next step will be to present that data to the investor with clear and concise reports such as an APOD*.
*APOD is an acronym for "Annual Property Operating Data". It 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 APOD...
5. Conduct a 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.
6. Create a sound property 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.
Show yourself engaged. First impressions are the most lasting, therefore the more engaged in investing you initially appear to an investor, the better your opportunity to gain his or her confidence that you're a notch above the average residential broker and the better chance you'll gain long-term loyalty.
Act like a partner. Convey by your actions and deeds that you are as committed as they are to protect their nest egg and really do care how their money gets spent. Be selective. Listen to what your investor's investment objective is and resist the temptation to simply forward information on every rental income property available for sale. Check the numbers beforehand. Present only those properties that you personally have evaluated and determined are compatible with the price, profitability, and returns set in your customer's investment goals. Be willing to lose a deal rather than having your investor get into a bad deal. The idea is not to be a salesperson that's only in it for the commission. As a "partner" to your investor, your desire should always be your investor first.