How to Think Like an Investor
A property’s income production often is more important to investors than appreciation
By Dr. Ken Rich, investor
In today’s commercial real estate market, one thing seems clear:
The true value of any property should
be based solely on its income-production
capability. Including anything more than
that in determining a property’s value often is a gamble.
Commercial mortgage brokers should
understand this and work diligently with
investors to evaluate properties. They also
should examine prospective borrowers
There are numerous things brokers
should keep in mind when working with
investors, from how to best examine clients’ investing acumen to what best practices investors follow.
investment-property situation, however, if
renters lose their jobs, they move out, and
the investor often can find another renter.
Even if comparables indicate that a property’s fair market value is $500,000, consider an investor’s point of view. If a similar
property rents at an average of $1,800 per
month, that means that most people in the
area can pay $1,800 per month to live in
that house — nothing more.
Some investors make the mistake of
looking at the top rent, however. Rather,
they should look at the lower third of the
market rental rates to best determine a
property’s income-producing capabilities.
What’s a good investment?
Generally, investors who purchase single-family residences look to houses that are
smart investments — meaning that they
make money as income-producing rentals.
They typically don’t worry about appreciation, although it’s certainly a bonus if its
Say the investor buys the house for
$120,000 total (i.e., purchase plus rehabilitation costs). Depending on the loan
type, a loan for $120,000 may be less than
$800 per month. The investor rents the
house out and has a net income of $1,080
per month after expenses. This results in
a positive cash flow of almost $300 every
month. This therefore covers full debt service, all expenses and has extra safety cash
Some brokers and lenders think that
investment properties aren’t as secure as
owner-occupied properties. This isn’t so,
however. If owners lose their jobs, they often stay until they’re foreclosed upon. In an
Dr. Ken Rich is a retired physician and a professional real estate investor. He
was a commercial real estate broker and worked with savvy, profitable investors
before entering the medical field. He works on deals where he can buy low, rehab to prime condition, set up government-subsidized rental income for a large
positive cash flow, and turn many of them over to other investors. Reach him at
seniordirector@IHLPro.com or (562) 694-8060.
Other tricks of the trade
When working with investor clients, it
helps to think like them so that you can
best advise them.
First, look at the property’s true income
potential. Look at rental comparisons, not
sales comps — and be sure to look at the
lower end of those comps.
Next, subtract a reasonable expense
from income to arrive at the bottom line
you really need to consider as net spendable income for monthly principal and interest payments.
Third, base the loan on those numbers.
Let the investor take advantage of having
found an underpriced property. The investor certainly should put money down, but
make it worthwhile to work with you and
your lender partner (say, 5 percent to 15
percent). You can base this on how much
below the market rate the investor is getting the property for, who is going to manage the property and how much positive
cash flow will be left over each month.
Brokers and lenders may wonder how
they can verify the numbers an investor
gives them. It’s simple: Call other brokers
in the area, check rental rates on online
trading Web sites, call the local rent-sub-sidy board to see what’s covered and how
it works, and ask for a different inspection and rehab proposal from an inspector of your choice. Doing these things can
help ensure that your client is proposing
a solid deal.
Many brokers avoid working with clients who invest in single-family homes
because they feel these clients are riskier
than others. If you work with savvy investors, however, you’ll find great opportunities to help them fund their deals and to
build your business.
New Home – Same Prompt, Superior Nationwide Service
1-866 EF 2 FUND (1-866-332-3863)
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