Real estate agents thrive on finding the perfect properties for their clients. If you’re working with an investor, a good recommendation could lead to more business in the future and more recommendations to their peers.
But investors use a different set of criteria when looking for a property than their homebuying counterparts. Rather than thinking about their family’s needs, the location’s proximity to work and aesthetic choices, property investors want to make a profit.
The problem is, there are two major ways to make a profit in investing, and each requires a fundamentally different kind of search.
Cash flow vs. appreciation
Cash flow and appreciation represent two different investing styles.
In cash flow, the goal is to buy a property that maximizes your monthly earning potential by giving you the lowest monthly costs and the highest monthly rent as income.
In appreciation, the goal is to buy a home with the highest-valued growth curve, targeting properties that can earn more than the average 5.4 percent annual return.
There are some advantages and disadvantages no matter which route you lean:
- Rental income gives you a more predictable, consistent stream of revenue over the long term, while property appreciation is a future play with less calculable results.
- Although both approaches carry some risk, because appreciation investing is speculative and dependent on more variables, it’s often riskier.
- In many cases, property appreciation comes with a higher potential long-term yield than rental income alone.
Of course, it’s also possible to find a middle ground between these two priorities, seeking a balance of both to mitigate risk.
Understanding your client’s needs
Some clients may come to you with a firm idea of what they’re looking for, but others will require a little guidance. If you need help figuring out what properties would be best for your client, ask them these important questions:
- What is your main goal as an investor? First, you should know your client’s main goal as an investor. Are they looking at this as a business venture, attempting to create a stream of revenue? Or are they trying to make long-term plays to protect their future and potential retirement?
- How long are you looking to be an investor? You should also know how long they intend to be a property investor. If they want to make a short-term play, rental income is almost certainly the way to go; investing for appreciation is a longer-term play.
- How much work are you willing to put in? You should also learn how much work they’re willing to put into the property. To earn a large volume of rental income, most properties need some additional work, whereas long-term plays need regular maintenance over time.
- How much money are you willing to pay upfront? If your client wants to maximize monthly cash flow, it’s a good idea to put more money down on the property to reduce monthly expenses. However, if they’re looking to snatch a property during a high-growth period, less money down is acceptable because they may stand to make more in appreciation than they’d pay in interest.
- What’s your risk tolerance? You should also learn your client’s personal risk tolerance; stable rental properties carry a lower risk than properties they intend to flip or even long-term appreciation-focused investments.
- How are you going to use your new income? How are they planning to use the regular monthly revenue they’ll get from the property? If your client is trying to live off the income, a cash flow-focused investment is a practical necessity.
- Are you interested in other properties? Is your client interested in buying other properties? If so, they may be able to hedge their bets by choosing one property with high appreciation potential and one with more cash flow.
With the answers to these seven questions, you should have a clear idea what your client wants and a blueprint to find an ideal property for their future.
Of course, you’ll need to learn other preferences, including location and aesthetic choices, but you can significantly narrow the field when you understand their main investment goals.
Larry Alton is the CEO of Alton Enterprises in Olympia, Washington. Follow him on Twitter, or connect with him on LinkedIn.