Rental Property Claims Real Estate Investors Should Take With a Grain of Salt

Real estate investors are typically open to hearing about any real estate investment opportunity that becomes available.

It's in their DNA.

To real estate investors, real estate investing is a business. Therefore it just stands to reason that they would have an open door policy that welcomes knowing about any income property they can acquire that might profit that business.

Fair enough.

However, as a result, real estate investors are routinely bombarded with financial data from owners and listing agents about rental properties they are certain the investor will have an interest - which is good for the investor because they generally want to know about potential real estate investment opportunities. Though it does mean that the investor is also likely to field a lot of unmerited claims about the property which will have to be taken with a grain of salt.

Therefore, because of so many solicitations, the real estate investor must keep a watchful eye on rental property presentations then proceed with caution.

A real estate broker who understands real estate investing and has clear knowledge of an investor's objectives can certainly advise the investor whether or not an investment is a good investing opportunity.

Most real estate professionals, however, neither have this understanding nor this knowledge. For them it's a force of habit. They're trying to sell you a rental income property and want your interest. This is not intended to be devious, but the claim is generally unmerited because it only address what you hope to find in a real estate investment opportunity and says nothing about the investment financially.

How much profit will you earn by owning that rental property? Does it produce a positive cash flow? What's your return on investment? How much cash must you invest up front to make the purchase?

A "great opportunity" must be substantiated. So you need more data.

Another common mistake made by many real estate agents is to try and peak your interest by doing a quick drive-by the property then describing it as “beautiful”.

But you must not be influenced by curb appeal. Real estate investing is only about the cash flow, rates of return and profitability associated with the property's financial performance. In this case, remind the agent that only women are beautiful, and ask to see the numbers.

A good place to begin is with an annual property operating data (APOD). This way you can get a good first-glance at the property's first-year revenue stream. It's not enough for you to make an investment decision, but it does at least give you an idea whether or not the property might be inline with your investing objectives.

No income-producing property is beautiful if it doesn't make you a profit. You want to know the numbers.

The idea being conveyed here is that the rents being collected on the rental property are currently low and can be raised.

Of course, this is great for you as an investor if it's true. Because it might mean the rental property can be purchased cheap based on the property's existing low rents and yet at the same time contains enough room for you to add value to the property by raising the rents.

But is there is credible evidence to support the claim that the rents are low?

Ask the person making the claim to present a rent roll so you can determine for yourself whether the rents are indeed below market rents and have "upside potential".

Other claims you might hear about a rental property is that is priced below fair market value and therefore presents you with an exceptional deal. But at first glance you have no idea whether the property is indeed under priced or over priced.

Ask for a comparative market analysis so you can what price other similar rental properties have recently sold and how their sales price compares to the rental property's price you are being presented.

Though I would consider the majority of real estate agents to be honest, the problem I find with many listing agents and sellers is that they tend to be over zealous and might optimize the numbers. In other words, because they're looking at financial data they "puff up" by their zeal, they come to conclusions about the bottom line that are not realistic.

Always check the rental property income and operating expense data carefully to be sure it reflects what the numbers really are for the real estate investment property.

Some Final Thoughts

1. I would expect to see much more than what appears in a typical listing. So ask the real estate agent trying to sell you the property whether they have run and substantiated the numbers, or are they merely passing on to me information gotten from the listing broker.

2. I would want to have my own real estate investment software so I can run the numbers myself. After all , I understand that the numbers associated with real estate investing are like eating peanuts. "I shouldn't swallow until I crunch".

3. Hey, this is my nest egg. And I do not plan to make a rental property investment until I comb through the numbers fully and am completely satisfied I am making the wisest real estate investment decision possible.

James Kobzeff is a real estate professional and the owner/developer of ProAPOD - leading real estate investment analysis software solutions since 2000. Create cash flow, rates of return, and profitability analysis on rental property at your fingertips in minutes! Learn more at www.proapod.com