Why a Good Realtor Is Critical:
Having a good realtor is absolutely critical if you’re going to invest in real estate. Here are a handful of reasons why:
1. A good realtor will be (or should be) an expert on the market you want to buy in.
When you first start out in real estate, it’s likely that you will know very little about market conditions. The general market area, or the metropolitan statistical area (MSA), is typically broken into hundreds of smaller communities or neighborhoods, and each one will have different reputations and attributes that may be unknown to you. A good realtor should be able to help you understand the diverse market dynamics. He or she will likely understand the MSA and what’s happening with pricing, buying pressure, and the market’s overall environment.
2. A good realtor will often have a sense of how well a unit will rent and what units are worth renting.
Because a good realtor understands market conditions, he or she will also be able to determine how well a unit will rent in its specific neighborhood. Such a realtor can also give you advice on setting rent rates. There have been times when my realtor has corrected my assumptions and expectations about how I should rent a unit. Sometimes, he will let me know that I should raise my rental prices, and other times, he will suggest I lower the rental prices—both based on market conditions.
A good realtor should also be able to point out what units or neighborhoods have a bad reputation and aren’t worth investing in. A realtor’s familiarity with the MSA is priceless as he or she can help you make smart buying and renting decisions.
3. A good realtor can give you access to the best listings.
Most of the time, the best listings never make it to the general market and are instead held and given to the regular customers of a realty firm. If you’ve established trust and understanding with your realtor and proved yourself as a reputable customer, your realtor will call you with thesepocket-listings (listings that never make it to the MLS, or multiple listing service). The opportunities your realtor can give you with regard to listings is priceless. As your realtor begins to understand your market interests and builds trust in you as a customer, he or she can help you be selective when identifying your target properties.
Finding a Realtor:
I think the best way to find a realtor is through recommendations. Ask other professionals in the rental industry, friends and family, and other people you know who have had good experiences with a realtor.
Another way to find a realtor is to drive through the neighborhoods you’re interested in and see what signs are out. From those contacts, you may find a great realtor who’s already familiar with the area you’re interested in buying in.
When Working With a Realtor:
While it’s true that a good realtor is critical to your success in real estate, you will only keep a good realtor if you establish and maintain a good relationship between the two of you. Below are some key points to consider when building that relationship.
1. Be specific as possible about what you’re looking for.
Quite frankly, you will be a bad customer if you can’t provide your realtor with a reasonably-sized target market. If you have the attitude that you can just sit back and wait for your realtor to bring you listings, you won’t find a successful relationship. A realtor’s time is incredibly valuable, and it’s your responsibility as a good customer to know what kind of properties you want. The more you can help your realtor, the better results you will get.
I recommend outlining a list of criteria for rental properties you’re interested in. Once you have this list, you can go over it with your realtor, which can be an extremely helpful tool within your working relationship. This list should include a minimum of two things: your financial parameters and your physical parameters. To provide an example, I’ve included some of my parameters (they will likely vary for you):
Financial Parameters:
- If I put 20% down on the property, I would like it to produce about $200-250 a month in free cash flow (to learn more about free cash flow, click here)
- The property should produce long-term appreciation. This might vary by market or even by locations within a market. The point here is to be aware that not all properties are equal when it comes to their increase in value over time.
- I would like to get a minimum return on investment (ROI), which varies from market to market and different profit expectations. A standard expectation would be 12-15% cash-on-cash ROI. I’ve seen some markets that produce much more than that and others that produce much less.
- I would like to get a minimum debt coverage ratio of 1.5. This too can vary by market.
Physical Parameters:
- Preferably in the county I live in. I prefer within a 20-minute drive of where I live and/or work.
- Gross rents at least $950, varying by market
- Units between 1,000-1,500 square feet
- Preferably entry level homes
- Unit can be a single-family residence (SFR), a duplex, a townhouse, or an apartment
- Primarily 3 bedrooms, 2 bath units
- If property is in a rural area, it must be on pavement and public water
After sharing a list like this with your realtor, you should be able to narrow down your target market significantly. It’s much easier to buy a property if you know what you’re looking for. Also, if you work hard in the beginning to make a list of criteria, you’ll be confident when it comes time to make an offer on a property. I’ve seen investors falter and second guess themselves during a deal, and I think this is partially due to their lackof due diligence to identify what kind of properties they actually want.
A side note—You can also add this list to your business plan and use it in your presentations with the bank (more on this later).
2. Partner with a realtor that can get you connected to a property manager.
Your relationship with your realtor will be even more beneficial if it includes a connection to a property manager. In Arkansas (and several other states), professional property managers are required to have a realtor’s license so they can understand the legal complexities of their responsibilities. In smaller towns or more rural areas, property managers will often use their relator’s license to buy and sell properties, so you may be able to find a property manager that doubles as a realtor. As you enter larger markets,there will be more specializations, so this double nature may not be the case.
Personally, I think a property manager is critical for the long-term success of a rental property business. The realty group that I primarily use has my property manager as one of their team members. When you’re looking for a realtor to work with, he or she will most likely have a property manager in-house or have a property manager recommendation.
3. Establish a win-win relationship.
Buying real estate can be incredibly competitive. That being said, you need to strike a balance between competition with the market and cooperation with those on your team. For long-term relationships, cooperation should always win out over competition; there’s no reason to beat up your realtor in a deal. You should be just as concerned with your realtor’s profit as you are with your own. With this level of concern present, both parties will be able to maximize the success of a deal and future deals based on mutual trust and respect. If you can prove yourself to be a good partner, you will gain access to opportunities that would have gone otherwise unmentioned.
In Summary:
- It’s absolutely critical to have a good realtor if you want to be successful in real estate. A good realtor will help you understand the market, rent rates, and neighborhood reputations. If you prove yourself to be a trustworthy customer, a good realtor can also give you access to invaluable pocket-listings.
- Don’t waste your realtor’s time. Be specific with your target market and establish a win-win relationship with your realtor. A good realtor partnership will connect you to a good property manager.