How to Advise an Investor - Begin with the End in Mind
by Stuart Neal
on Saturday, July 10th, 2021 at 10:32am.
If a real estate investor asked you to advise them on the appropriate selection of residential real estate for purchase, would you know how to approach it?
The title of this blog paraphrases a line by Steven Covey “begin with the end in mind”.
I suggest you advise your potential investor client to consider a potential real estate opportunity on three levels.
Can you think of any others?
1. How can they add value to the property along the way?
What can they renovate, improve, or change to increase the intrinsic value of the real estate?
2. How easily will they be able to liquidate the real estate when the time comes?
In other words, is there going to be a wide market and plenty of interested buyer candidates for the real estate when they decide to sell?
3. And finally, how much should they pay for the real estate given the rental constraints of the market?
Here is a simple step by step method to calculate an appropriate price.
1. Estimate the monthly rental
2. Discount it by 10% to cover maintenance
3. Discount it by 5% (or some other suitable measure) to allow for gaps in rental income i.e., vacancies.
4. Estimate what the net rent will allow them to borrow from a lender
5. Add their down payment, for example 25%
6. You and your client will arrive at the maximum amount they should pay.
Here is a working example:
Estimate of rental income $1500 per month
Property tax (varies) $200 per month
Net of maintenance allowance $150 per month
Net of 5% vacancy allowance $75 per month
Net Rent $1075 per month
The net rent would support a mortgage of around $185,000, (at 5% over 25 years).
If we add a 25% down payment ($62,000), the most they should pay for this particular investment would be $248,000.
If you need further assistance with the education and counselling of clients that want to make real estate investments, please contact me. We have a team of REALTOR® real estate investment experts who will be glad to help you.
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Want more information about becoming a team member or Associate REALTOR®with Ambergate? Call Stuart our broker owner at: 780-760-2014 ext. 3 or go to our Careers page - Ambergate Realty Advisors Careers.