How To Be An Investment Real Estate Agent
If you want to be an investment real estate agent, you must become educated on 4 important segments:
- Financial Analysis / Formulas
- After Repair Value
- Highest & Best Use
- Portfolio Growth / Exchanges
Analyzing The Financials / Formulas
If you are going to be an investment real estate agent expert, you must understand the financials associated with income real estate.
One important aspect of income property is that of proformas. When you request financials from a listing agent or seller, sometimes they will provide you what is called a proforma.
A proforma is simple an estimated guess on income and expenses on what it could be. With that said, it is imperative if you are an investment real estate agent to dissect these numbers with other like kind properties to determine if these proforma numbers are in the ballpark.
Let’s say, you are representing a buyer and got a proforma on a 40 unit apartment complex.
This property has been neglected over the years and is 50% occupied. Because the property is in poor condition, rents are lower. But the listing agent / seller provides you “what rents could be.” as well as current expenses on the P&L.
However, these current expenses are based on 50% occupancy. We will have to adjust for the expenses as we found out the owner pays the water bill for the complex.
The best rule of thumb is to question every line item on the Profit & Loss Statement.
Profit & Loss Statement
As an investment real estate agent, you will likely analyze dozens of P&L’s on a weekly basis.
My recommendation right now even as a new agent is to start searching your income property of choice (IE Apartment Complexes), call listing agents, request the financials, study them, meet the agent at the property and ask questions.
The profit and loss statement is simply a list of all income minus all expenses to get you your NOI (Net Operating Income).
Investors as well as investment real estate agents use a variety of formulas to quickly determine if the property is even worth spending more time analyzing.
For example… The Cap Rate. Capitalization rate is simply taking your NOI (Net Operating Income / Purchase Price). Keep in mind your purchase price should take into consideration any renovation budget.
Another readily used formula is Cash on Cash Return. This is simply taking the (NOI / Cash Input). Cash input is how much you put down for financing as well as your renovation cost.
Again, using these types of formulas as an investment real estate agent will make you more efficient with your time in valuing income real estate.
ARV (After Repair Value)
Investment real estate agents will also be on the search for properties that investors can add value and resale for a profit. Also known as buying and flipping. Or for the purpose of a cash out refinance.
For example… A 40 unit apartment complex was purchased at a 7% cap rate based on real income / expenses.
They renovated each unit and invest $10,000 per door. They, get the property 95% occupied and now it is a 15% cap rate based on what they have into it.
You market the property for sale at say an 9% cap rate for the new buyer and the investor moves on to the next.
This can obviously be done on a small scale with single family homes as well.
Highest & Best Use
Investment real estate agents need to develop their relationship with new investors to find out their appetite for investments.
As an example… An investor might want to pick up a warehouse in an up and coming area. The warehouse is leased and cash flowing. However, your investor is into retail and later levels the warehouse to make room for a retail shopping center.
This turns out to be the highest and best use for this property.
One very important items I want to touch on if you intend on being an investment real estate agent is to always work on your clients growth of their portfolio.
You may want to check out this video regarding the growth of a rental business and its importance of portfolio growth.
For example… You meet Bill. Bill currently has 4 duplexes and one triplex. 11 doors. His goal is to have 100 doors over the next several years.
You and Bill meet at all of his existing inventory. You consult with Bill to make some upgrades to the properties and raise rents another 10-15%.
This takes about 4 months and you list his portfolio of 11 doors. With renovations and purchase price he has $30k into each ($330,000). Because of condition, market rents and being full occupied, you listed and sold the package at $75k a door ($825,000).
You find Bill his next project and he does a 1031 Exchange into a 40 unit apartment complex at $50k a door ($2MM). Upside potential to sell this project is around $80k a door.
You start the process all over again…
1031 Exchanges / Direct Exchanges
In order to be an effective investment real estate agent, you must know these strategies to help grow their portfolios.
By using a 1031 exchange the seller defers paying any taxes on the gain of the sale. This will give the investor much more buying power. The gain on the example above was almost $500k. If he paid 20% taxes on that, it would equate to $100,000.
Investment Real Estate Agent’s Clients
Look, if you intend on making this your niche focus, you do not even need that many clients to make good commission dollars so as long as you are looking at their real estate portfolios as if they were your own.
This is also a prime opportunity to learn the ropes as you begin building your own portfolio.
Much success –
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