What Every Real Estate Agent Needs to Know About Cash Flow
Positive cash flow, certain formulas and how to market to investors are the most important aspect that new real estate agents need to know of income producing real estate.
Without positive cash flow you will not sell real estate to an investor. Without the necessary formulas to analyze, you will not get the investor’s attention. And without marketing to these investors, you will not get any calls.
So, keep reading as I have a plan formulated for you that has worked, tried and true.
Do you plan on working with investors?
Real estate agents must figure out what niche target market they will be concentrating on and aggressively go after it. You can review the different niche markets in our article 52 Niche Markets For Real Estate Agents.
Targeting real estate investors can become an incredible real estate career for you. Also, if you are good at what you do, these investors will rely on you as the trusted source with their portfolios.
If you want to concentrate on marketing to real estate investors, there are a handful of simple formulas you need to know moving forward.
But First… Who Are the Investors?
In this article, I am not talking about commercial investors. This is primarily about investors who buy single unit investments like condos, single family homes or multifamily under 4 units. They buy these, many times fix them up and lease them out. Now don’t get me wrong. We can lead them to bigger and better with 1031 exchanges. More on that below.
This can be your neighbor down the road who just wants 1 or 2 properties, midsize investors with 10-30 properties or can be a large institutional investors like Blackstone (a public corporation) buying up thousands of single family homes.
Quick Story – My St. Pete Contact.
This is the power of meeting people. In a previous article I talked about a package of mobile home parks I sold. One was in St. Petersburg, Florida. About 2 hours north of us. The new owner / investors asked if I would assist in changing out management and turning the park around. I agreed. I usually would stay downtown St. Pete as there were things to do all within walking distance. Great place to check out if you haven’t been.
I was staying out there approximately 2 weeks of every month for about 7 months. I wanted to save costs and came across a rental on Cragislist where I met Jeremy. A real estate broker fairly new to the business. At the time he had a small handful of properties he leased for clients so I usually stayed in one of his properties. We met from time to time over a beer talking real estate ideas.
He wanted to grow his rental business and I gave him everything that my sister Jennifer and I did to grow our Rental Division. He was very appreciative. Eventually the mobile home park had new management and I no longer needed to be in St. Petersburg. Jeremy and I talked I believe twice since the call…
Steve, we need to meet up!
This is the power and importance of your Sphere Of Influence!! Jeremy called me roughly 7 years later. “Hey man, we got an opportunity in your area and need to meet up. Are you interested?” (Yes – What is it about.) “Let’s Just Meet!” (OK!)
Jeremy and his partner Thad came down the next day. They had exclusive rights representing the buyer, Invitation Homes, which was owned by Blackstone. A publicly traded company. They bought over 500 properties in their area and were coming south. Long story short. We sold them over 120 single family homes to rent out mostly in Cape Coral, Florida. The main goal for these acquisitions was to lease them and provide shareholders a return. To boot, my sister rented almost all of them including acquisition properties in Charlotte county.
It was a wild and intense ride which happened literally over a 10 month period. This is the power of the people you know. But also the loyalty from an investor even the size of Blackstone.
Investor Specific
Now Blackstone and all the other investors we worked with all had different formulas and criteria they would like to use. This is important to understand as no two investors are the same.
This also doesn’t rule out providing the investors alternative options outside of their focus. More on that later.
What are the Common Formulas you need to know as a Real Estate Agent?
An easy way to learn these formulas is to practice. My suggestion is to pull duplexes or triplexes up from your local MLS and begin and use these formulas. Hopefully the listing agent provided the annual income and expenses.
Start with Cap Rate with a handful of properties until it becomes easy for you. Also, who knows… You may come across a stellar deal that you can blast out to your Sphere of Influence. Once you master cap rate, move to the next. There are two main formulas that I use as a real estate investor. Cap Rate and Cash on Cash Return.
Cap Rate
The capitalization rate is a common formula used to scrutinize property on the fly. This is calculated by taking the NOI (Net Operating Income and dividing it by the Purchase Price. **Purchase price is to include any reno costs).
Example: $40,000 (NOI) / $400,000 (Purchase Price of $360k + $40k Reno) = 10% cap rate.
It is as simple as that. Some investors want a really high cap rate like 15-20% but many times those rates can come with some serious problems and headaches. Other investors want a “Class A” type property like a vacation rental condo where they are perfectly fine with a 7.5% cap rate such as Bonita Beach and Tennis Club in our area. These usually have solid management in place and the investor gets money deposited into their bank account each month without lifting a finger.
Cash on Cash Return
Is simply taking the annual NOI (After Mortgage if any) divided by the amount of cash invested (Includes closing costs and renovations). This is before taxes.
Example: NOI = $50,000 and the mortgage is 20,000 (50k-20k = 30k). Cash Invested = Downpayment = $70k. Closing Costs = $10k. Reno = $65k. (70k + 10k + 65k = $145k)
$30,000 / $145,000 = 20.6%
Now this drastically changes if the investor pays cash. This is why many savvy investors will leverage with calculated debt. Take a look. Let’s say the purchase price is $500,000 using the same numbers above and they pay cash.
$50,000 / $565,000 = 8.8%
($50k NOI / $500k cash to purchase plus $65k reno)
Now these formulas will change as well if we can create value thus potentially increasing revenue.
What is Value Add?
Value add is when you purchase a property and add value in equity and or cash flow. For example, if we were buying and flipping a property and added a new kitchen and bathroom that increased equity by $70,000, that is the value add.
Cash flow value add maybe simply buying a 4-plex where the landlord has not raised rents in 10 years. Current rent rate is $700 and the market is around $1,000. Assuming you renewed all leased at the current market, you created an additional $1,200 of monthly value add rents ($14,400 a year).
This works very well on larger income properties like an apartment complex. Let’s say it is a 100 units. All below market of $125 a month. Over two years you get all tenants up $125. That is $12,500 a month ($150,000 a year).
Now the bigger play on value add. Let’s say that property is trading at a 8% cap rate you just created an additional $1,875,000 of equity into the deal. ($150,000 / .08). That building you picked up for $8,000,000 now goes to market for $9,875,000.
Opportunity to Grow the Investor’s Portfolio
As mentioned if you are looking out for your investor, they will use you time and time again. It will get to a point where they will send you a property to analyze and have you write the contracts up.
As a real estate agent you want to sit down and talk about their wants and needs. Do they want to manage the property themselves? What kind of return are they looking for? Who is the ideal tenant? What kind of property do they want to acquire? Where do they want their portfolio to be in 5 / 10 years?
Once you gather this information you are ready to start scouting properties on and off market. More on off market properties below.
1031 Exchange
A 1031 Exchange is a tax law that allows investors to defer the gain on their investment property. Get educated on this! Many investors (especially early investors) do not know how they work and think they are complicated. However, if you can help them, you will save / make them tens / hundreds of thousands of dollars.
What does this mean for you? You sell their investment. And find them another property. And you keep doing this consistently improving their portfolio. Many times much larger than they have dreamed of.
Example: You meet an investor who has a 4 unit complex. You talk to the investor and they say they want to buy another 4plex. They have owned this one for a couple years. You asked them to meet you for lunch. You talk to them about a 1031 exchange.
The new scenario. You list and sell the 4 plex for $350,000. Which had a $100,000 tax deferred gain. You find them the next property which is a 20 unit apartment complex valued at $1,000,000. They take approx $700k of debt. You just made a commission on $1,350,000.
Then the investor does some renovations and works to get rents up like mentioned earlier and list this property 18 months later with you. Now you get them into a 50 unit complex. You keep repeating this cycle.
And best of all. You are learning on how to be an investor yourself!! So you too should invest these commission dollars. Consider making a video like the one below and push out to your Sphere of Influence, Social Media, Email campaign, etc.
Also, feel free to download and replicate your own FREE 1031 Exchange E-Book Here.
Let’s Not Forget About Buying Real Estate with your retirement accounts
Yes, there are millions of people terrified from the stock market. However, they just do not know what to do with their funds. So they leave it with some guy they never met before to handle their families future. Well most people do not know that they can move the money from their retirement accounts and into a tangible, cash flowing piece of real estate. Have monthly seminars on this!
How to Target Market Investors
There are a variety of ways to target market investors. You can hold seminars in your office. Post on Social Media and send to your Sphere Of Influence. “FREE Real Estate Seminar. Learn how to invest in income producing real estate. We will also be evaluating certain cash flow deals with a 10%+ cap rate.”
Mail absentee owners where you know there are heavy amount of rentals. Don’t know? Search your MLS for rental properties and see where many of them are located. You can even mail to those that are expired rentals or in “rented” status from MLS. So as long as they are not in any active or pending status on MLS, it is fair game. Provide a simple message: “I know you have real estate investments in Cape Coral, Florida. I wanted to talk to you about some other properties that you may have interest in. Give me a call at ….”
Another way is to use Bandit Signs….
Good Old Fashion Cheap Bandit Signs
When we were going after the Short Sale market, these worked extremely well in getting listings. They had FORECLOSURE with a big X through it. And below it said Short Sale Is An Option.
Once you have a couple investors who can pay cash and buy quick, consider buying these Bandit Signs from Amazon. You will get 100 in this bundle. Such an inexpensive way to make big returns on your investment.
Take a look at the text pic from one of my agents. We sat down the other day to brainstorm a target market. I told her she lives in a gold mine area and needs to drum up business there. She is targeting single family homes in San Carlos Park. She just started and her phone has been blowing up.
She also uses Blank Bandit Signs. She hand writes something along the lines: 3/2 SF House. Distressed Seller. $189k.
** Be sure to talk with your broker on certain disclosures that are needed to be written on the signs. Also check with your local area on sign restrictions.
In our area, code enforcement will pick them up and toss them. You want to be strategic on placement where people will see them but areas where inspectors don’t drive by frequently. Just monitor it and you will figure it out.
As always, we appreciate you reading the content on this site and hope this has helped you. Don’t forget to check us out on YouTube for more FREE content!
