- More often than not, real estate is a stable, worthwhile investment -- if it's handled properly.
- It's important investors know all their options, but without the help of a professional, it can be difficult to keep track of those options.
- Providing and organizing important information, ensuring a worthwhile investment and managing expectations -- these are the responsibilities of a real estate agent.
Plenty of people have made fortunes investing in real estate, but just as many people, if not more, have gone bankrupt in the process.
Often, those who come away from their real estate investment worse off than when they started have lost out to some unforeseeable circumstance, or they’ve overlooked a fundamental aspect of real estate investment.
But remember, as a broker or real estate agent, it’s your job to keep all the fundamentals at the forefront, while also keeping external circumstances at bay.
So, you must present it properly and make sure nothing is overlooked on the part of the client. To ensure a worthwhile real estate investment, here are six things your clients can’t overlook.
1. The down payment options
One of the most harmful myths surrounding income real estate investment is that you don’t need a lot of money at the outset. Make sure that your clients understand that this is a dangerous option.
Sure, in certain scenarios, they can get a mortgage with a low down payment, but they need to understand, from the get go, that these instances are quite specific and do not always make for the smartest investments.
It’s quite likely that your client will need a substantial down payment along with being able to demonstrate enough income to make monthly payments.
However, there is always a little flexibility when it comes to down payments, and it’s important that your clients understand their options and the results of those options.
2. The specifics of securing a loan with a rental property
If your client is looking to invest in a rental property that has four or fewer units, it’s best to advise them on a conventional loan.
Make sure the client understands that they’ll need a 20 percent down payment and good standing credit. Remember, they have options — this is where down payments come into play.
If your client is planning to live in one of the units of the rental property, they might be looking for a loan option that allows for a lower down payment.
Make sure your clients understand that a standard mortgage is achievable with a 5 percent down payment, provided they’re able to demonstrate enough income to make the payments.
These options only apply to smaller residential buildings; investing in properties with more than four units requires commercial financing, which is more expensive.
3. Experience never hurts
Are your clients current or previous landlords? As an agent or broker, this is perhaps the very first question you should ask.
As you know, demonstrating experience as a landlord (via a Schedule E on the most recent tax return) or a current real estate owner will always help you secure a loan.
If your clients have already invested in income property, and they’re looking to invest in another, make sure your clients understand that the lender usually won’t count the income from the current rentals toward the new mortgage if they don’t have demonstrable experience as a landlord.
If they can’t demonstrate experience, make sure they understand the need for a substantial down payment along with financials that are secure enough to make the payments.
4. The term ‘passive income’ is a bit of a misnomer
If a client is investing in income property, and he or she expect to see a significant return, make sure he or she understands that the investment will require some level of active management.
The idea that investing in a rental property allows for effortless income isn’t really true. If the client is looking to invest in a rental property, he or she will need to spend some time selecting the right tenants or hire a management service to do so.
And once tenants are in, your client will likely have to interact with them and provide the maintenance necessary for them to live or work comfortably.
Yes, a rental property management service is an option, but doing this will cost an average of 10 percent of the property’s income, which might mean the client will have to reassess the investment.
5. Technically, breaking even counts as success
It’s important that clients understand that a break-even property is still a great option as it can still provide them with an income. When you invest in an income property, the rent paid by the tenants can offset some or all of your mortgage payment, taxes, etc.
Today’s rates are low enough that it’s possible to have a relatively small down payment and still collect enough rent to cover expenses, but this is not typical.
When clients do their taxes, make sure they claim the income and expenses on Schedule E of your return.
Here’s how to break down the investment for your clients: the rents collected over the year, minus operating costs, interest and depreciation, will give your client the Total Rental Real Estate Income (or loss) — that’s the income their taxed on!
6. Professionals are there to help, not to make money
There’s a lot to keep track of when investing in an income property, and it’s not likely investors can handle it on their own.
Between all the tax implications and loan requirements, they’ll need to consult a professional at some point for assistance, and it’s crucial to your success as a broker or agent — and their success as investors — that they trust you.
You’ve got to have their best interests at heart. Plus, it takes proven market insight and experience to secure a loan that allows for the most lucrative investment.
For instance, does your client know that equity can increase at a quicker pace than the property’s value with the right mortgage? Without a professional’s help, they might not.
The list here includes some very simplified explanations of what can’t be overlooked when investing in a rental or income property. There’s always more to learn and more to keep track of, and therein lies the responsibility of the agent or broker.