Help Investors Develop an ROI Strategy

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Recent research from Mynd, a property management company, shows some young people are jumping into real estate investing as a means to build wealth—even before they own a primary residence. (See: Growth of the 'Rentvestor') But new investors don’t always know which strategy is best for reaching their financial goals. Should they fix and flip? Own short-term rentals? Buy a multifamily building for long-term ROI?

Working with inexperienced investors takes a different set of sales skills than working with primary home buyers, says Shane Morgan, a broker with Inhabit Real Estate in Portland, Ore. “You spend more time upfront [with the client], getting started with research, checking numbers, determining estimated value after renovation, looking at rental caps and figuring in upgrade costs,” he says.

Refer these clients elsewhere unless you are prepared to knowledgeably explain the options and talk about how they can reach their financial goals. If you do decide to offer your services to inexperienced investors, keep these six principles in mind.

1. Clients’ objectives will help determine their investment strategy. You need to know how much work investor clients are willing to do and how much they’re willing to spend to turn the property into a lucrative investment. If their dream is quick cash flow, then they may have to put more effort into getting the building ready rapidly. If the goal is steady income over time, they’ll need to think more about long-term maintenance issues. Before you show one property, know “who is your investor, what are their goals, and what makes a great real estate investment in your market?” says Tanya Salseth, CEO and team lead of Stateside Residential–Keller Williams United in the Washington, D.C., area, and principal broker-owner of All County Nova Property Management in Annandale, Va.
2. Knowledge of commercial lending is essential. You’ll need a network of lenders who specialize in commercial and construction lending. Knowing the current rates and financing terms is as important to investors as it is to primary home buyers, says Peter Lutts, partner at Herrick Lutts Realty in Beverly, Mass.—even to those who pay cash. “Many put debt on their purchase afterwards for remodels,” Lutts says. Sometimes traditional mortgage brokers aren’t an option, Morgan says, so be prepared to offer in- vestors different lending options, such as angel investors who are willing to provide financing in exchange for part ownership.
3. Market knowledge leads to better investment decisions. Besides being familiar with all the comps, you need to be out there touring homes and reviewing listings, Morgan says. He becomes inves- tors’ eyes and ears for all that’s going on in the investment world locally, especially for clients who aren’t from the area. If you aren’t an investor yourself, read books and listen to podcasts about investing, Salseth says, and build strong connections with local property managers. “Meet with them regularly for coffee or lunch to see what’s going on in your lo- cal market,” she says. Participate in city and county landlord groups, and get on their distribution lists. You’ll see real-time conversations on landlords’ concerns and be aware of changing laws and regulations that will impact renting in your area.
4. Financial analyses should be accurate but not overwhelming. Develop a cash flow plan that will show investors their expected return on investment. “Forecasting income is fairly straightforward. Most of the time, it’s tied to how much rent a specific property or unit generates,” Salseth says. Learn what an average studio, one-bedroom, two-bedroom and so on rent for in your area. “Expenses can be trickier and can include HOA or condo fees, property taxes, insurance, vacancy, capital expenditures, ongoing maintenance, utilities, city or county application and inspections fees, and property management and leasing fees.” Lutts’ firm offers a spreadsheet that investors can use to plug in everything from debt to accounting and property expenses. There are some good online cash flow calculators like DealCheck, Salseth says, but she cautions that some programs provide too many numbers, which can be overwhelming and lead to “analysis paralysis.” Focus on the key numbers that matter to your particular client, she recommends.
5. A good relationship with the listing agent is essential. “Negotiations can be different with investor properties,” says Morgan. “Every buyer wants to spend the least amount possible, especially when short-term profits are the goal,” he says. “Develop a good relationship with the agent on the other side. The more you know about the expectations of the sell- ers, the better things will go.” For instance, if a seller needs to close the transaction in a certain time frame, that can be an advantage to an investor with cash. Remember, if it’s a deal with great ROI potential, your client is likely not the only investor who’ll be interested. Work quickly to help your client make the first and best offer.
6. You can’t be an expert on everything. “Expert” is a term that should be used very sparingly. “Be helpful but know your limits and know when to refer out to other people,” Morgan says. Having a good team—commercial lenders, real estate attorneys, contractors, repair professionals, property managers and more—gives you confidence. “You don’t have to have all the answers, but your team does,” he says.

Your market knowledge can make you a great resource for investors. “Find what makes your market a unique and amazing place to invest,” Salseth says, “and what makes you uniquely suited to advise on those investments.”