How to work with a real estate investor and what to expect

Real estate investors and agents can deliver huge value to one another. Agents help clients efficiently overcome the obstacles of the buying and selling process while investors are knowledgeable at evaluating profit potential in homes. When you are working with investors, it is likely to close more deals and make more money while working with fewer clients. Also, there are countless

opportunities for repeat business and referrals.

Engaging real estate investors in ongoing business relationships can help you make a steady stream of income without suffering the marketing costs characteristically related to customer acquisition.

Though real estate investing is no longer just for the rich. Both baby boomers and millennials are moving away from stock market investing and into real estate investing. This article will teach agents on how to confidently work with investor clients by understanding key areas:

Transactional differences between investment real estate deals owner occupied and

Real estate investments are handled differently by the IRS. While you may not be a CPA, you still need to learn how the IRS deals with an investment of real estate. How depreciation works. Capital gains taxes. How taxes are paid when a property is sold. You should know that it is important for your clients to understand the tax break opportunities between Investment and Residential properties.

Primary Residence

The home where you live is regarded as your primary residence. With this in mind, there are a number of write-offs available for you to utilize. IRS Form 1040 features a number of line-item deductions that you can use to reduce the blow of your tax bill. These deductions consist of your property taxes, mortgage interest and even the interest on your home equity loan or line of credit for up to $100,000.

Selling Your Residential Property

There are bigger tax implications for selling your home. If you have lived in the home for two years out of the five preceding to its sale, you can make up to $250,000 in profit on it without having to pay any sort of tax. Anything over $250,000 is deemed as capital gains, which will incur a 15 percent tax. Married couples filing jointly can make up to $500,000 in profit without being hurt with the capital gains tax. You can sell a home that qualifies as a primary residence once every two years without any type of penalty or tax, as long as you have lived in that property for two out of five years preceding to the sale.

Investment Properties

While there are numerous immediate tax perks associated with having a primary residence, investment properties are not as fortunate when it comes to deductions and credits. Interest on secondary property can be written off for one building only. Though, if you rent your investment property, there are numerous write-offs available: for repairs, supplies, cleaning, for pest control, utility expenses and management costs. Insurance premiums are also deductible for real estate investments.

Selling Your Investment Property

Unlike your residential property, you will have to pay a capital gains tax on any profits you earn from the sale of an investment property. The IRS handles any property that you have not lived in for two out of the five years prior to a sale as an investment property, this means all profits will be taxed. You must report any profits after the sale. Or else you will risk being punished by the IRS. Yet, you can buy and sell multiple investment properties each year without waiting for a two-year window as you would with residential property.

Recognize the type of investors

Unlike conventional home buyers, investors are not looking for places to raise their families or to live; they are looking for properties they can use to make some money. The investor market is all about efficiency. Margins are squeezed and commissions are frequently compressed in the process. This is not the market for agents who need a lot of handholding, or for those who take a lot of time at each point of the transaction to get it right. You should come into the competition already knowing how to evade, tackle, kick and score.

So, your tactic to securing their business shouldn’t be the same as your sales pitch to those conventional buyers and sellers. You should make the effort and take the time to learn how investors assess a property.

Do not believe that a real estate investor only wants you to write up deals. You need to know where they are coming from, their ideal strategy and property type. An investor will be interested in a specific type of property or niches like single-family homes and apartment buildings.

You need to understand and recognize your client’s investment strategy; Buy, rehab and rent? Buy, fix and flip? And you need to know the investment prospects: the investor needs to sell this property before buying the next one, or is this a long-term hold with a 5-7 years profit window? The more you know about your investor’s goals, the more useful you can be in customizing your efforts to help achieve them. So, you can better predict how they will view a deal.

Investors characteristically fall into three categories:

Fix & flip investors

Learn the phases of a fix & flip and know who the final customer is going to be. Often, it will be another investor in rental properties, but fix & flippers are also selling to customers in the retail market. Fix and flip investors look for underpriced homes that can be re-listed higher than market value after repairs.

Rental-home investors

Rental-home investors want properties that will generate a positive cash flow. Price is always critical but think beyond buying at a discount. You will also need to know the rental market: What types of properties get high rents, and in which parts are they located? Learn how to do the cash-flow calculations to show that after the mortgage and other expenses, there will be money left over each month to carry to the bank. Even if you work mainly with fix & flip investors, you’ll need to understand rental cash flow since rental investors are frequent buyers of these properties.

Wholesalers

Wholesalers work to find amazing deals from motivated sellers, sign a “purchase and sale agreement” with that seller, and then assign that deal to other investors for a fee (depending on the deal can range from $2,000-$10,000) In a way, they are doing comparable jobs to what you are doing, by receiving money for bringing together a buyer and a seller. While you will not generally have to do a lot of work with a wholesaler, since characteristically they are looking for properties to buy and sell without involving an agent, it’s still a good idea to understand what a wholesaler is and how they work. You are most likely going to work with a wholesaler when one wants to offer on a house listed on the MLS, which does happen quite often.

Listen carefully when they tell you their niches, strategies, processes, and formula so later you can create a system. Be available by phone, email, and text and respond rapidly.

Remember to let the investor have the final word. You offer advice, but let them analyze the property and your suggestions and come to their own decisions.

Speaking the “investor” language

Investors speak a different language than you or I in the regular residential real estate world, from when you are marketing houses to owner-occupants. You need to understand terms like “internal rate of return”, “cap rate”, “hurdle rate”, and “income vs. capital gains,” and have a rock-hard understanding of how 1031 exchanges work. Your knowledge of real estate math has to be greater than just a mortgage calculator.

Investors do not think like everyone else, which is where the detachment often happens. Many real estate agents are so familiar to first-time homebuyers or other shoppers that they misinterpret what an investor really wants. For example, an agent may tell an investor:

• This property is perfect for a large family
• This house is located in a really great neighborhood
• Aren’t these countertops just gorgeous?

While these are important topics for conversation, most investors would rather hear:

• The seller is very motivated – the house has been listed over 6 months!
• This house could produce $250 per month in passive cash flow
• You’ll definitely want to check out this house – it has a terrible smell, which is scaring off the competition!

The investment property sale is a very different process than a residential sale to an owner-occupant. With owner-occupants, you are selling the dream. You’re selling the home-sweet-home. Tap into that dream and the client’s bought.

With investors, it is a completely different situation. The thriving investor has ice water in their veins. You are selling ROI, not a dream. If the number is there and it smashes the investor’s hurdle rate, and you get the timing right, then you should have a sale.

The risk your investor clients need to know about

As it is a huge investment to buy a home, real estate companies have a lot to lose or gain from each sale. That also means that if anything goes wrong, for example the buyer and an agent get in a disagreement, there could be harmful consequences for your small business.

Efficient Systems need to be built

Investors love to find deals because that is how they get paid. If they can get a great deal it will allow them to make more money on a fix and flip or increase their cash flow on rental properties. The way to on an investor’s good side is to find them deals that will make them cash. The answer is speed.

Investors do dozens, even hundreds, of deals a year. They are buying and selling rapidly. In a bloodthirsty market with lots of offers floating around, a wonderful property can be snatched up in the blink of an eye.

Investors want to make lots of offers, some ludicrous because it is a numbers game for them: they make 10 offers just to get one deal. When you are first interviewing the investor, ask how many offers they classically make.

Decent deals get picked up quickly and investors value a steal. If you want to work with investors, set up a process for quickly alerting your investor clients when a new property hits the MLS, a listing price is reduced or a property is sold. Once you know what interests the investor (location, income potential, cap rate), set up automatic emails to get them the information they need fast.

Another system you can set up is the offering process. With most investors – you will not need to schedule a time to sit down with them to write up an offer, carefully explaining each word on the 1,000,000 MLS forms. In its place, you’ll be able to email over the same form, allow your investor client to sign it on their iPad or mobile, and submit the offer all during your lunch break. The beauty here is that technology makes it easy, do a one-time setup and the information just flows. In addition, every alert they get reminds them of your value.

Working with investors regularly means a high volume of deals and associated paperwork. Avoid getting caught up in paperwork by streamlining your process for creating counter offers, purchase offers, and contracts. Going paperless, document-sharing with clients and using a real estate transaction platform can cut down the delay of waiting for relevant parties to review and sign forms. The faster you can send deals, show houses and write contracts, the more likely an investor will be to use you as their agent. If an investor has to wait two days for their agent to write a contract, they may have already missed out on a fantastic deal. The quicker you can expedite transactions, the more deals you and the investor can close.

Also, remember that investors are not usually looking for homes to live in, so consider markets outside your local area or in other states. If there are deals to be made, many investors are willing to go where the bargains are.

Lastly, it is important to be aware of a home sitting on the market for 6 months due to being priced too high. This type of deal can be financially devastating for an investor. Keep these in mind so that you know what and how to provide your offers.

Think like an Investor

Keep in mind that investors have different priorities and goals than a first-time buyer looking for a house to raise a family. Numbers are king; emotion is not as big a factor. Learn how each investor likes to make offers and the formula they use, for example, “all cash, X days close, X day inspection.” Feed this info into your offer system and streamline your processes.

Learn about common investment strategies, processes, formulas, and methods. Remember all the language. Review how to calculate cash flow, expenses, offer prices, and after repair value (ARV). Offers and deals will progress faster when you know the applicable investing concepts and formulas and always use efficient systems.

When you work with investors, you become part of a team. You have to be available with answers so investors can make quick decisions. You will need to have strong knowledge of the details of real estate processes, concepts, and markets to help you become a top real estate agent.

Ask: “How, exactly, can I help?”

An investor client may have some tasks in mind that is quite different than your usual role. They may want your broker’s license to handle renting and leasing, or they would like you to handle offers and have you strictly handling paperwork. They could even just want you as a consultant, especially if they are a new investor. It could even be something completely different.  It’s much better to establish the scope of the engagement at the beginning of the process than wait until the end. Concentrate on finding sustainable, win-win solutions up front. The best investors want that and will appreciate finding a reliable partner in their real estate practice.

Don’t Exaggerate

Don’t inflate the after-repair value. In other words, when dealing with an investor, be cautious to let them know the reasonable price a property will sell for, not a higher price just so the investor will work with you. Working with an investor can be a career-changing move because of the multiple deals you will get. However, if you exaggerate prices, you may display your inability to sell the property should they choose to use you and lose that client forever.

You’ve got to be where the Investors are

The hard part is finding the investors that do multiple deals a year. Then, convincing them that you are the right agent for them.  Many investors use multiple agents or have a real estate agent they have used for years. There is a way to get in with investors; make them dough.

Great deals attract most investors. They also care more about the deal than the agent. As an agent, go to where the deals are and you will find the investors. There are hundreds of real estate investor groups across the country. Most of these groups welcome real estate professionals as members. Joining one of these groups is an amazing way to find prospective clients, and to learn what investors in your area are looking for.

Find local groups on websites

REIALV.com, REIclub.com, and NationalREIA.com, these clubs and meetups are full of investors. Keep in mind, that not all clubs are the same. Some clubs simply prey on new investors and exist to up-sell expensive information and training. Others actually create a platform for new and experienced investors to network and learn. Rather than finding clients, I would recommend you focus on clubs that have the best networking abilities. Seek to provide value at these meetings, and offer to speak (if you have the chance). Show your expertise and you will attract attention.

BiggerPockets

The website BiggerPockets.com also has useful information for agents who want to work with investors. BiggerPockets is probably the highest concentration of investors anywhere online or in the real world. With over 820,000 members and growing quickly, there are no-doubt numerous investors from your area.

To find them, there is one tool that is especially helpful: The Keyword Alert Tool.

The keyword alert tool allows you to enter in certain keywords that you are interested in. You will receive email or SMS notifications when those terms are mentioned anywhere on the BiggerPockets Forums.

As an agent, this is extremely beneficial to you. You can set up keyword alerts for your city or town name. When a new member introduces themselves, you can jump in and greet them, welcoming them to the community. Or, when investors are talking about your local area, you can jump in and join the conversation. Use this chance to establish yourself as the expert in your area.

Search for these real estate investing groups in your city:

Auctions

Investors love auctions because they think they can find a great deal.

Foreclosure/trustee sales

Many investors frequent these sales.

Advertise other agent’s listings

Agents often advertise HUD homes. Many agents will let you hold open houses on their listings.

Create Your Own Investor

Real estate investing captivates people. However, most people do not know where to start, so they never do. However, as an agent, you have the unique ability to help aspiring investors become actual investors! One of the best ways to do this is by simply talking about the investment opportunities on your Facebook wall.  Don’t simply show off the prettiest homes on social media, show the undervalued ugly homes as well!

If you are a real estate agent, you should be networking non-stop.  At some point, if you are networking, you will meet investors.

These are all things to consider when working with an investor. Some investors will never buy a house and others may buy hundreds of houses. An investor buying hundreds of houses may become an agent themselves one day to save money.

An investor will be a great source of income if you can keep finding them deals. But remember investors are all about the bottom line. When you start sending those deals slower, send them fewer deals or get too busy for them. They will find a new agent in an instant. Never rely on one investor because things can change rapidly.