Should a real estate investor blindly accept the numbers about a rental property like price, price per unit, and cap rate upon which the investor is expected to make an investment decision, or should the investor question the numbers?
This is not a trick question. Of course, an investor should question the numbers, and likely will, but this article wants to go beyond that and touch upon the more subtle questions a prudent investor should be asking about the rental property.
Say, for example, that you’re told by a real estate agent about an apartment complex touted to be a great opportunity, with lots of upside potential, and in a good part of town, how should you respond? Well, none of that directly addresses the profit you might earn from owning that rental property and it appears obvious that the agent presenting that information is merely shuffling some listing agent’s data, so you clearly need to know more.
Let’s try another one. Suppose the agent describes and apartment complex as “beautiful”, what then? If you’re astute, your response will probably be similar to that of one of my investors. “Only women are beautiful,” he said, “what are the numbers?”
The point is that real estate investing is all about the numbers. Whether or not the rental property has a good location means little unless that location enables the property to command higher occupancy and rents. Likewise, terms like “great opportunity” and “lots of upside potential” are only credible when the bottom line supports it. In other words, you should expect the agent who presents you investment property also to present you with enough hard numbers to back those claims.
Okay, but beyond lofty claims made about a rental property, I’m going to suggest that you question numbers given to you from real estate professionals.
It’s not a moral issue. Most brokers are honest, but bear in mind that a listing agent often uses the rents and operating expenses supplied by the seller, and only in rare cases actually substantiates those numbers. Besides, listing agents tend to be over zealous and optimize the numbers.
Conversely, I would question a realtor trying to sell me investment real estate if he or she does nothing more than passes me information gotten from the listing broker.
For me to be satisfied I want to see more than what appears in a typical listing. I want to see before and after tax cash flows and rates of return based upon my marginal income tax rate so I can see my taxable gain or loss and underlying returns, a comparable sales report that would support the property price, a proforma income statement with revenue projections, and so on. That is, I would expect a broker to “partner” with my efforts and provide me a full rental property analysis I can compare against my investment plan.
I look at this way. If I’m going to invest hundreds of thousands of dollars and let a realtor share in the booty, the least he can do is invest several hundred dollars on real estate investment software that would provide me with the type of analysis I need to make a prudent investment decision; the least the broker can do is to care how I spend my money.
If you find a real estate agent able and willing to stand alongside helping you crunch numbers, then half your battle is won. If not, then obtain your own real estate investment software and run the numbers yourself. Remember, all the numbers associated with real estate investing are like peanuts, you don’t swallow until you crunch.
After all, it is your nest egg at stack. And come hell or high water, with or without the help of a realtor, you must be resolved to comb through the numbers on any rental income property until you are fully satisfied that you are making the wisest investment decision you can to safeguard that nest egg.