What An Investor’s Realtor Needs To Know

Prices of Real Estate are at all time lows in many parts of the Bay Area, especially in the East Bay.  However, just low prices don’t necessarily mean a property is “good buy”.  Also, high cash flow does not always mean a “good investment”.

I give you an example on the “High Cash Flow” first.  What initially occurs to me is how many Realtors do not know how to calculate cash flow.  Some of them don’t even know what that means.  I’ll get my “gasps” out of the way early.

Cash Flow simply stated is an investor’s (typically annual) return on investment.  Cash Flow would be calculated as follows:

Purchase Price plus annual property taxes and insurance = Annual Investment

Annual rent minus annual expenses or vacancies = Pre-Tax Net Income
Pre-Tax Net Income divided by Annual Investment = Annual Cash Flow Percentage (or Return on Investment)

Example:

A detached home cost $250,000.

Annual Property Taxes are $2,625

Annual Insurance is $600

Total Annual Investment is $253,225

 

Monthly Rent is $1,750

Annual Rent is 21,000

Annual Expenses are $500

Pre-Tax Income = $20,500

 

$20,500 divided by $253,225 = 7.89% Cash Flow or Annual Rate of Return (this assumes a cash purchase).

There are obviously other factors that come into play regarding each person’s tax situation that will affect their Net Return.  By the way, the above Rate of Return does not take into account any appreciation on a Rental Property over time.

Before we can answer the “good” Vs “bad” investment question, your realtor needs to know a few things:

  1. Which areas are better than others for obtaining better quality tenants?
  2. Which areas are safer than others?
  3. How to do a lookup on the Megan’s Law database for sexual offenders.
  4. How to estimate rents for a given property.
  5. How to calculate Cash Flow on a given property.
  6. Your Realtor should now how to effectively use GOOGLE.  (Example: I had just previewed a property that had an incredible remodel and would probably have rented for a tidy sum.  However, I heard via the grapevine that there may have been a murder at that property in the last few years.  I just “Googled” the address and the word “Murder”.  Sure enough an article came up about an elderly woman who was murdered in that house by her caretaker just 2 years ago.  Needless to say I did not recommend this property to my investor.
  7. For Condos, it’s important to check for any HOA Restrictions on the maximu number of percent of rental units in a complex.
  8. It’s also very helpful for your Realtor to understand trends for different neighborhoods.  Which ones are likely to attain better appreciation over a period of 5 to 10 years?  And can they provide you with data to support their assumption.
  9. Most importantly, your realtor needs to be intimately familiar with the short sale process which varies amongst Banks and how different Banks have different processes for buying their REO’s (or foreclosures).  Some Fannie Mae REO’s preclude investor’s offer on their REO for the first 13 days the property is marketed.

I’ve covered a couple of important points that an Experienced Realtor representing Investors needs to know.  However, there are a lot more “THINGS” that can come up with specific properties that you will need even broader degree of expertise than those mentioned above.

Ultimately, a “good” Vs “bad” investment requires enough information and the ability to analyze that information for an experienced Realtor to properly advise his/her client.

 

Interested in buying or selling a home?  Do you just want to know what is going on in the market around you?  Give us a call today!

© Copyright 2018 Cary Amo..Your Lafayette Real Estate Pro | Powered by Stratosphere Marketing Solutions