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Trend Spotter: Real estate investors ... the $141 billion market

Gibran Nicholas
Jun 11, 2010

Investors currently account for 19 percent of all home sales according to the National Association of Realtors (NAR). This means that real estate investors are purchasing one out of every five residential homes being sold today. In fact, it is estimated that a whopping $141 billion of non-owner-occupied investment property loans will be funded in 2010. What if you could capture more business from this lucrative segment of the market? Finding qualified real estate investors The first step to working with qualified investors is to find them! I’m not talking about a “wanna-be investor” with a 520 credit score who wants to buy a foreclosed property with no money down. I’m not talking about a “speculator” who wants to flip properties by buying today and selling tomorrow. No; I’m talking about an “investor” who is defined by the financial dictionary as being: “A person who purchases income-producing assets. An investor as opposed to a speculator usually considers safety of principal to be of primary importance. In addition, investors frequently purchase assets with the expectation of holding them for a longer period of time than speculators.” So, where do you find true, qualified investors who frequently purchase or would like to frequently purchase income-producing real estate rental properties? When you go fishing, it helps to fish in a lake or stream where there are a lot of fish. The same idea applies to “fishing for qualified investors.” This is as simple as establishing referral relationships with CPAs, attorneys, financial advisors and Realtors who specialize in working with real estate investors. After all, who uses a CPA? Business owners and/or people who pay a lot of taxes; and remember, you don’t pay taxes unless you are making money. Who uses a financial advisor? People who need advice or help in managing their money; and remember, you don’t need financial advice or money management services unless you actually have money to invest. You get the picture. Adding unique value and capturing the business In order to capture your share of the $141 billion of annual loan volume from qualified real estate investors you need to find out what is important to them and their financial advisors. Then, you need to find a way to deliver this value in way that is more unique and effective than your competition. What is important? When we go back to our definition of “investor,” we discover that investors are looking for income and consider “safety of principal to be of primary importance.” Put simply, in order to capture the business, you will need to show investors how working with you and implementing your strategies will result in: ►More safety of their principal ►More income and a higher rate of return on their investment How do you deliver unique value? Consider this loan comparison prepared for an investor who wants to purchase a $200,000 property with 25 percent down: Cash flows   30-year fixed 15-year fixed 7-year interest-only ARM Value of property $200,000 $200,000 $200,000 1st mortgage balance $150,000 $150,000 $150,000 Interest rate 5.250% 4.625% 4.750% Monthly payment  $828.31 $1,157.10 $593.75 Term Amortized Amortized Interest-only Points 2.000% 2.000% 2.000% First mortgage closing costs $2,400 $2,400 $2,400 Total points & costs $5,400 $5,400 $5,400 Monthly taxes & expenses $525 $525 $525 Gross monthly rent $1,500 $1,500 $1,500 Monthly cash flow $146.69 -$182.10 $381.25 Cash needed to close $55,400 $55,400 $55,400 Rate of return   30-year fixed 15-year fixed 7-year interest-only ARM Current value of property $200,000 $200,000 $200,000 Current mortgage balance $150,000 $150,000 $150,000 Equity invested plus costs (PV) $55,400 $55,400 $55,400 Rate of appreciation 3.000% 3.000% 3.000% Value of property in seven years $245,975 $245,975 $245,975 Mortgage balance in seven years $132,580 $92,700 $150,000 Equity in seven years (FV) $113,395 $153,275 $95,975 Monthly cash flow (PMT) $146.69 -$182.10 $381.25 Annual internal rate of return (IRR) over seven years 12.58% 12.17% 14.38% Most investors think that a 15-year mortgage carries less risk than a 30-year mortgage, and a 30-year mortgage carries less risk than an interest only adjustable-rate mortgage (ARM). However, one of the biggest risks with income property is that the property goes vacant. In that case, if the investor fails to make their mortgage payment, the property will go into foreclosure and the investor will lose all their principal investment. As you can see from the illustration, the seven-year interest-only option in column number three will result in more safety of principal. This is because it carries a much lower monthly obligation and allows the investor to maintain their payments and/or set aside more capital reserves in case the property goes vacant. A 10-year interest-only option could even be used as a variation to this strategy if the investor’s time horizon for the property is greater than five to seven years. The interest-only option also results in greater monthly income and a higher rate of return than either the 30-year option or the 15-year option. In other words, if you were trained and equipped to calculate and compare IRR for your investor clients, you could show investors and their CPAs, financial advisors, and Realtors how working with you and implementing your strategies will result in: ►More safety of their principal ►More income and a higher rate of return on their investment As an investor, wouldn’t you much rather deal with a loan originator who is trained and qualified to help you preserve safety of your principal while enhancing your income and rate of return? As a CPA, financial advisor or Realtor, wouldn’t you feel more comfortable referring your clients to a loan originator who can make you look good by “wowing” your clients, and helping them make smart real estate investment choices? Remember, Realtors make more money the more transactions they close. If you can help their investor clients make more money with less risk, the investors will buy more properties, and the Realtors will make more money. CMPS certification equips you with unique knowledge, training, tools and resources to help you and your clients calculate and compare IRR, and implement the seven keys of profitable real estate investment. It’s time for you to capture your share of this $141 billion market! Gibran Nicholas is the founder and chairman of the CMPS Institute, which administers the Certified Mortgage Planning Specialist (CMPS) designation. The CMPS Institute has enrolled more than 5,500 members since its founding in 2005. Gibran is also the chairman of Published Daily, a customizable online magazine, newsletter and marketing service that helps professionals transform their clients and prospects into a referral-generating sales force. He may be reached at (888) 608-9800, ext. 101 or e-mail [email protected]
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