Can a property manager help me evaluate a potential real estate investment? Or is this better suited to a CPA? Or a real estate agent?
An experienced property manager who has run properties similar to your potential investment can give you a lot of valuable information.
A property manager who’s been around the block a few times can give you a very realistic assessment of some of the key assumptions you’re going to have to make when you are doing your due diligence on the property and calculating your expected returns.
What are the real-world repair costs? Property owners and investment managers are notoriously bad at forecasting what it takes to maintain a property. A wizened, grizzled property manager with decades of experience is going to be able to give you a much more realistic assessment than you’ll be able to come with on your own.
What is the rental delinquency rate? The rents in the newspaper are one thing: The rents actually collected are quite another. A property manager can give you a rough idea about your likely rental delinquency rates, the number of evictions you may realistically have to plan on given the number of units, price point and neighborhood, and of course, the number of faithful but late payers. You need to know this for your cash flow planning.
What is the market rent? Guess too low and you leave money on the table. Guess too high and you will have properties sitting vacant, and collect nothing for them. A property manager with experience specific to your area can help you hit the mark.
What is the likely vacancy rate? Again, the neighborhood and price point, as well as competing properties, will have a lot to do with your vacancy rate, as well as the rent you charge and how effective you are at marketing. A property manager with experience in the area – preferably on the same street – can tell you what the normal vacancy rate is for that specific area. Citywide vacancy rate figures are ok, but not as good as intelligence specific to your block, if you can get data down to that level.
All these items are key data points you will need for any investment decision, but they aren’t ones you want to make in isolation. A locally-experienced property manager is going to be the most accurate source of information you can ask for.
Certified public accountants generally don’t have any specific expertise that sets them up to due diligence on property, or that qualifies them to provide investment advice on them, beyond the taxation, amortization and depreciation aspects.
They will know very well how to depreciate an investment property on your books, and they can explain to you the tax ramifications of said depreciation. And that’s very important, too, to planning the after-tax cash flow of your investment. But that’s only part of the process.
A CPA is certainly an important part of your team, but he or she shouldn’t be the make-or-break factor in your investment decision. Your CPA just owns a couple of important pieces, but he or she isn’t qualified to put together the whole picture alone. (The best CPAs know this! The worst ones will pretend to have expertise they don’t have).
Real Estate Agents
Real estate agents frequently do have a lot of valuable insights to share. They will generally know their neighborhoods and price trends very well, and they’ll know what sells and doesn’t sell in a particular neighborhood. They’ll also know how to get a property financed. After all, their livelihood depends on it.
Not every real estate agent is well suited to the kind of due diligence you’re asking about. Not all of them like to crunch numbers the way an investor does. Yes, a lot of agents have great careers selling young couples on the dream of homeownership and the scent of apple pies baking in the kitchen.
But the agent you want has a very different skill set and mindset. The best agent for you is probably one who makes a practice of working specifically with rental property investors. This agent isn’t selling the pitter-patter of little feet and a white picket fence to a young couple. The agent you want is selling return on investment and has ice water running through his or her veins. He or she also has a client list full of other investors, just like you.
Certified Financial Analyst
The certified financial analyst, or CFA, is probably the most numeric and analytical of all the financial professions, except maybe insurance actuaries. They have the expertise to build the best models for cash-flow projection, risk, and projected returns. The problem is that these are just models. The models require you to plug in the variables, and as we all know, garbage in equals garbage out.
The CFA coursework and exams are extremely challenging and successful completion speaks very well of someone. But the average CFA is not very well equipped to guess the vacancy rate of a property, or the eviction rate, or other site-specific factors.
But if the investment is large enough, a CFA can be an important part of your team – especially if the individual has done a lot of work with real estate before.
What I’m getting at is this: There is wisdom in a team of professionals that you can’t get by working alone, or with just one person, looking at the investment opportunity from a single perspective.
And none of them, save your accountant, perhaps, is going to look at this investment taking into account your overall investment strategy, retirement needs, liquidity needs, and opportunity costs. That’s going to be the realm of a financial planner, such as a Certified Financial Planner (CFP), a Chartered Financial Consultant (ChFC) (this trademark is less successfully marketed than the CFP, but in my view the qualifications are just as good or better.
ChFCs usually come from the insurance world, where CFPs are often investment types, converted stockbrokers or career changers from other fields. This isn’t negative, though, as experience in other career fields could make for a valuable perspective!), or in some cases a Registered Investment Advisor (RIA).
I wouldn’t rely on input from any one of them. I’d want input from all of them.
And then once you’ve made your decision, buy the property at a discount from its intrinsic value, and do not cut it close.
Writing about personal finance and investments since 1999, Jason Van Steenwyk started as a reporter with Mutual Funds Magazine and served as editor of Investors’ Digest. He now publishes feature articles in many publications including Annuity Selling Guide, Bankrate.com, and more.