Working with investor clients is a totally different ball game than working with conventional homebuyers. Investor clients aren’t interested in finding a home that they like. They want a house that will make them money. They want facts and figures, not a story about all the things they’ll appreciate about the new home and surrounding area.
Here are a few key concepts to familiarize yourself with when working with investor clients.
This metric should be on your mind if your client is thinking of buying property to rent. Particularly if they aren’t paying cash. Cash flow refers to the amount of money they can expect to generate from their rental properties compared to the amount they will owe on the mortgage, insurance, property taxes and any repairs or maintenance.
While some investors focus on cash flow, others are more interested in finding properties that will appreciate in value in the coming years. Such clients are looking to find properties that are not highly-valued now but will be in high-demand in the near future. For instance: properties in up-and-coming neighborhoods or, even better, a neighborhood that has not yet attracted attention but that you believe will become competitive in the coming years due to population growth.
Cash on cash return
Cash on cash return is a term that real estate investors throw around regularly. Simply put, it’s the amount of cash income divided by the amount of cash spent in a year. For instance, let’s say an investor buys a rental property for $1 million, but he only puts $100,000 down. At the end of the year he has invested $150,000 into the property for the downpayment, the first mortgage payment, insurance and some maintenance costs. During that time, he has brought in $50,000 in rent from tenants. So the cash on cash return (150,000/50,000) = 0.333 or 33%. It is usually expressed as a percentage.
Internal Rate of Return
Many investors focus heavily on IRR, which is a means of projecting how much profit an investment will create in a given amount of time. It’s a way to distinguish between investments that have a high likelihood of generating profits quickly compared to those that will require a longer wait.
To quote Investopedia, “The capitalization rate is the rate of return on a real estate investment property based on the income that the property is expected to generate.” Let’s say your client buys a property for $1 million but is counting on making $100,000 a year in rental income. The capitalization rate (100,000/1 million) = 10%.