While working with investment clients, your responsibilities should go well beyond helping your clients complete a transaction for an investment property. You can add a great deal of value to your clients by educating them on their investment strategies.
Your value should extend to imparting awareness to your clients about the best investment strategies based on their goals and financial situation. While working with your clients, you will realize that many of them will be inclined towards purchasing properties for the prospects of appreciation in the property’s value. They may not be bothered about the cash flow.
Whatever investment strategy a client adopts will depend on his or her investment goals, which you will need to clearly learn about, prior to advising your clients. As a real estate agent, you will also need to explain why cash flow should be one of the most important factors to keep in mind when your clients buy investment properties. You can add a great deal of value to your clients’ portfolio by stressing upon the importance of cash flow prospects.
Here is why keeping in mind the cash flow prospects is important when buying a rental property:
Appreciation is subject to market conditions
It doesn’t mean that cash flow from a rental property is not subject to market conditions. Fluctuation in the median rental values in a neighborhood can affect your cash flow, but there is no doubt about the fact the prospects of appreciation are more affected by the market conditions. Given the current market conditions across North America, buying only on the prospects of appreciation can even be very risky.
Cash Flow takes care of the investment
Cash Flow can sustain your investment for many years. Your client may be planning to sell the property in the next 10 years when it will have appreciated in value and built equity, but to look after the property’s maintenance and upkeep, you need to ensure positive cash flow. If you have to spend out of your pocket to keep the property, it will definitely be a very bad investment strategy. Even if you manage to sell it after a few years for a profit, the expenses you’ve incurred over its upkeep will cut into your eventual profit to a great extent.
Always discuss with your client how much cash flow is acceptable to them. Some people say cash flow is not the priority, because you only get a couple hundred bucks a month which is next to nothing compared to what you can make from appreciation. You can be either one of those people and choose which one you like or feel more comfortable with. You will need to provide a full forecast of monthly costs, any potential expenses and any additions they may make to the home to increase the property’s value. The more facts and figures that you and your client will have the better the ability to make a decisions to yield better results, whether it is for the short or long term. The exit strategy is also something important to consider, determining how long they plan to have the property, will there be any minor or major renovations or will this be the beginning of many rental properties. If they are unsure, provide some flexibility or a buffer to make decisions in the future.
Buying for the prospects of appreciation is particularly not a good idea for long term investments. This investment strategy can suit speculators or flippers because they sell the property for a profit in the least amount of time. Contrary to that, a long term investment is a completely different strategy. Cash Flow of even a few hundred dollars can help your clients sustain their investment in the long run.
As their real estate agent, you will need to be sure that your clients thoroughly understand the difference, and circumstances between cash flow and appreciation. Obviously, the ideal situation would be to have great monthly cash flow and a property that has greatly appreciated in value, which is not impossible. However, you must be very careful when you set the rental price, to be competitive in your rental market. You will also need to remind your clients that the market condition they purchase their investment home in, may or may not be the same in the future. There is a great deal of research you can conduct for both cash flow and appreciation, which includes researching your current rental market and future predictions about the mortgage. Did you realize that the word predictions is highlighted? That’s because it’s not a guarantee. There are risks, but also there are rewards. As long as your advice is based on facts and knowledge, and your clients understands the risks and rewards, your clients can greatly benefits.