Do you want to know the secret to becoming a successful real estate investor?
It isn’t in making the trendiest upgrades. Or having the sharpest marketing strategy. Or setting the best price once you’re ready to rent or sell.
Real estate investing is a numbers game that’s won or lost when you pick an investment property to purchase.
If you’re planning to flip your investment home, you’re gambling that you’ll be able to sell for significantly more than it cost you to purchase and fix up the house.
If you’re planning to buy and hold the home as a rental property, you’re betting that you can rent it for enough to cover the monthly mortgage payment and pay back the capital you’ve invested.
In both cases, if you don’t purchase a property at the right price, the odds of making a profit are against you.
So, how do you stack the deck in your favor? Hire an investor-friendly real estate agent.
What is an investor-friendly real estate agent?
Simply put, an investor-friendly agent is one who understands the ins-and-outs of investing in real estate, including: the tax implications, the return on investment (ROI) calculations, and most importantly — how to find the right investment properties.
What are the benefits to working with an investor-friendly agent?
When you’re sinking your savings into a real estate investment, it’s not enough to just have a good agent in your corner, no matter how experienced and highly-recommended they come.
You need an agent who has direct experience with real estate investing. According to Monica Graves, an investor-friendly agent with a Resort Second Home Property Specialist (RSPS) certification, and 25 years of experience investing in real estate herself:
“The best investor-friendly agents are those who invest in real estate themselves because they have hands-on experience navigating the complicated process. They know how to calculate returns, work to deadlines, and find their investor clients the best deals on properties.”
Need more convincing? Consider all the benefits you’ll receive by hiring an agent with investing experience. An investor-friendly agent will:
1. Help you identify profitable properties
Every agent has access to the multiple listing service (MLS), but only investor-friendly agents know how to analyze the data for the profitability of the all-important buy.
Flippers need their agents to know which neighborhoods have the greatest property appreciation, and what upgrades are on-trend among buyers, such as paint colors and countertop surfaces.
“Before advising on the profitability of a property, agents look at the current market analysis and look up what we call ‘after repair value’ properties so that our investors don’t over-leverage themselves,” says Graves.
Similar to the comps all agents pull to determine a home’s value, the after repair value (ARV) is the average sales price of nearby homes that were recently upgraded and refurbished before they sold. The difference is, the ARV only looks at the sold data from recently upgraded homes, rather than all recently sold houses.
The ARV allows you to project how much you’ll be able to sell your flip for once it’s fixed up. So when you calculate your potential return, you’ll know how much you can afford to pay for the property and repairs while still making a return on your investment.
Trends in the cost of rent
For buy and hold investors, investor-friendly agents follow trends both in the home sale market and in rental markets. They’ll know what other owners are charging in monthly rent for properties similar to the house you’re looking to purchase.
That data helps you calculate how much you can afford in mortgage payments so that the monthly rent you charge will cover it and provide you with cash flow.
Competing with traditional buyers
This insider info is important when you’re investing in a healthy real estate market where there’s plenty of properties for sale. And it’s absolutely vital when you’re searching for investment properties in a hot market.
“Investing is tricky when you’re in a seller’s market where there’s low inventory, and more buyers than sellers. When you’re bidding against buyers looking to purchase property as a primary residence, they’re willing to pay more for the property than an investor can afford to based on their ROI calculations,” says Graves.
“However, buying a property at list price isn’t necessarily a bad deal for an investor if it’s a seller’s market, because the property is appreciating. You just need an agent to look at the statistics and appreciation percentage to help you decide if it’s a smart purchase.”
2. Give you access to more properties
An investor-friendly agent not only has insider data that can boost your bottom line, they can offer you access to a wider array of properties — like homes that aren’t even on the market yet.
“Investor-friendly agents are better positioned to find off-market deals because of our relationships with other investors,” says Graves. “We also work with wholesalers who are knocking on doors looking for homeowners willing to sell their properties to investors for cash.”
Working with an agent who brings you unlisted properties to buy makes real estate investing more affordable because you won’t need to outbid the masses.
3. Assist you in calculating your potential ROI
With the right data, your agent will use a simple calculation to determine the potential return on your investment (ROI).
Let’s say you want a 20% return. First, you determine the ARV based off of the sold prices of nearby flips, then multiply that amount times 0.8 or 80%. That tells you the price you should pay for an as-is property in the same neighborhood — minus the amount you’ve budgeted to spend on repairs and upgrades.
For example, if your agent calculates an ARV of $200,000 for recently-sold flips in the area you’re investing in, then you’d need to buy at $160,000 for a 20% ROI. But if your as-is property needs $15,000 in repairs, then you’d need to buy at $145,000 to hit that 20% or $40,000 ROI.
Accounting for unexpected costs
The flip would need to go perfectly for those numbers to work. Unfortunately, most properties have hidden problems that you won’t have budgeted for.
“I tell newer investors to shoot for a 30% ROI so that the budget isn’t so tight,” advises Graves. “Otherwise, unexpected expenses that arise may put them in over their heads financially.”
This is known in the flipping world as the 70% rule.
So, if you’re shooting for a 30%, or $60,000 return (and still budgeting $15,000 for repairs), you’d need to purchase your investment property for $125,000. That additional $20,000 will cover any unexpected expenses, like a new HVAC and roof, and still leave you with a respectable $40,000 or 20% ROI.
ROI on flips vs. rentals
The calculations to determine the profitability of a rental property is more complex.
“There’s a difference in the way you calculate ROI for houses you plan to flip versus those you intend to buy and hold as a rental property,” says Graves.
“You have to create a spreadsheet that calculates all of the annual expenses, like property taxes, management costs, and maintenance, as well as the initial costs, such as the down payment and closing costs. You also need to calculate for the different types of ROI, such as the monthly rental income and property appreciation.”
In other words, your agent needs to assess both the short-term and long-term numbers.
When you first purchase a rental, you’ll have short-term expenses, like the mortgage down payment, closing costs, and repairs needed to get the house ready for tenants.
In the long term, you need to calculate for things like the monthly mortgage payment, and property taxes. Plus, you’ll need cash reserves to cover the housing expenses in between tenants.
Rental ROI calculations are just as complicated. Along with the monthly income you’ll get in rent, your agent will factor in things like equity build up, investor tax breaks, and property appreciation, to give you a projected ROI over the course of several years.
4. Advise you on whether flipping or rental investing is right for you
Maybe you’ve got your mind set on flipping houses. Or perhaps you’re aiming to build up a portfolio of rental properties. Investor-friendly agents know to run the numbers for both scenarios so the data can tell you which path is in your best interest.
Because sometimes that decision needs to be made on the fly.
For example, let’s say you bought a house to flip with the expectation that you’d be able to sell it at $200,000. However, while you’re in the midst of rehabbing the house, the market dips and nearby properties are now selling at $180,000.
Instead of selling for $20,000 less than you projected, your investor-friendly agent can help you calculate if it’s wiser to rent out the house.
With rental income from a tenant covering the monthly expenses, if may be more affordable to hold onto the house for a few years until property values rise and you’ve built up some equity.
5. Offer advice on investor tax benefits (like 1031 exchanges)
If you thought calculating your personal income taxes was difficult, just wait until you add investment property income to the equation.
The bad news is that adding investment properties to your asset portfolio is going to complicate your tax returns. The good news is that most investors are eligible for some great tax breaks.
While you own the property, you won’t need to pay FICA or self-employment taxes on the rental income. Plus, even though the property is probably appreciating in value (and your equity is growing as you pay down the mortgage), the IRS allows deductions for depreciation on the property due to wear and tear.
However, when you’re ready to sell, the IRS is going to want its cut of any money you make from that investment property. Assuming you sell at a profit, the IRS will collect taxes on that income via depreciation recapture.
You’ll also pay a capital gains tax on any income that isn’t taxed via depreciation recapture.
How a 1031 exchange can help
Luckily, you can postpone paying capital gains if you intend to use the profits to purchase another investment property. The IRS refers to this transaction as a like-kind exchange, meaning that you’re swapping one rental property for another — even if the properties differ in areas like size or value.
In the real estate world this property swap is known as a 1031 exchange—named after the Internal Revenue Code Section 1031 that explains the procedure.
“1031 exchanges are really popular right now, because the tax depreciation on investment properties decreases the longer you own the property,” says Graves.
“So, investors will sell an older property and use that money to purchase a new investment property through a 1031 exchange, so that all of those tax depreciation benefits start over again.”
Sound complicated? It is. That’s why you need to work with a great certified public accountant (CPA).
A CPA can advise you on how to best use like-kind exchanges while building your investment property portfolio, however, you’ll still need to hire a 1031 exchanges company to guide you through all of the tax laws and rules that you need to follow.
These companies charge a fee of around $850 to $1,200 to cover setup costs, which typically covers one exchange, which includes the sale of your investment property and the purchase of another one. If you’d like to make additional exchanges, you’ll typically pay $300 to $400 in administrative fees.
If you find the right investor-friendly agent, they can help you funnel your investment earnings into more than one property.
“Investor-friendly brokers can teach newer investors how to build wealth through buying and holding rental properties,” advises Graves.
“With the right strategy, you can use the rent and equity of your first property to purchase a second one, then use its income to pay down the first, and so on. If you do it right, you could have seven rental properties all paid for within 15 years.”
How do you find an investor-friendly agent to work with?
It’s easy to understand the benefits of working with an investor-friendly agent. Unfortunately, finding one isn’t so easy.
Investor-friendly agents are the unicorns of the real estate world because there are so few of them. It’s true that the best are investors themselves — which means that they’re making good money from their own real estate investments.
Once they start making big bucks from their own properties, there’s really no need for them to take on other clients.
Luckily, there are ways to find these elusive agents. When you begin your agent search with HomeLight’s agent finder, you’ll get to talk with a HomeLight concierge about your individual needs.
Armed with your investor goals, your personal concierge will scour our database for investor-friendly agents in your area.
One way they’ll identify the best agents to suit your investment needs is by searching for those with the Certified Investor Agent Specialist (CIAS) designation.
CIAS agents have gone through rigorous training on how to develop investment strategies, how to use 1031 exchanges, how to calculate capitalization rates and ROIs, and more.
You may meet an investor-friendly agent through your own networking efforts.
If you’re serious about developing your real estate investment portfolio, you’d be wise to join a local real estate investment club or group. These organizations offer education, lectures, and networking opportunities to both amateur and experienced investors, for a modest membership or attendance fee.
However, don’t confuse these education-minded organizations with other types of real estate investment clubs and groups that require a substantial investment. Members of these clubs or groups pool their money to invest in real estate together—which doesn’t always work out.
What questions should I ask to vet potential investor-friendly agents?
Just because an agent has investment experience or has earned the CIAS designation,
that doesn’t necessarily mean they’re the right agent for you. That’s why you’ll need to ask a few questions before you make a commitment.
Here’s what you need to know:
- What experience do you have working with real estate investors?
- Have you invested in real estate yourself?
- What were the profit margins on the last three investment property purchases you worked on?
- What is your process for finding profitable investment properties?
- Can you recommend several good general contractors who know how to meet the tight deadlines of a flip?
- What is your investment strategy advice for building up a portfolio of rental properties?
- How will the current market conditions impact my profit margins if I’m planning to flip a property? If I’m planning to purchase a rental property?
- Can you recommend a good CPA who understands how to utilize the tax benefits of 1031 exchanges?
Investor-friendly agents: The best-kept secret of successful real estate investors
Sure, pretty much any agent can pull together the paperwork if you’ve already assembled a top-notch investment team that includes financial backers, a real estate attorney, general contractors, a great CPA, and other experts.
However, when you hire an experienced, investor-friendly agent you’ll get benefits like the insider information, and know-how that can make your investment profits skyrocket.
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