A Real Estate Professional must posses a good working knowledge of Financial Principles.
Investing in Real Estate either as a home or as a money making venture is basically a financial decision. The Real Estate Agent acts as a financial advisor to both the seller and the investor. Both parties look towards the agent for good financial advice and an agent is apt to give poor advice if she doesn’t understand the basic principles of financial planning.
Basic principles that the agent should understand are:
- Cash Flow
In this article we would try and provide brief notes on these principles as it relates to Real Estate.
The most important principle of Real Estate Finance is Cash Flow. As the words say, it is the flow of cash one way or another. When there is more money flowing in, than there is flowing out, one can say there is a positive cash flow and vice versa.
Real Estate is an asset when it can provide and increase in wealth either through appreciation in value or through a net positive cash flow.
Real Estate is a liability when it depreciates in value over time or causes a net negative cash flow.
Therefore, Real Estate can either be an asset or a liability. The mistake that many make is that they assume Real Estate is always an asset.
Many celebrities become bankrupt because they purchase “bling” Real Estate when they are making an immediate large income. But often the property produces a net negative cash flow and doesn’t appreciate in value in the short or medium term. It is a huge liability. The result is that the net negative cash flow becomes an unbearable burden when the income dips.
As a Real Estate Agent it is important that we bear this in mind when advising on a purchase. Why is the buyer purchasing the property? Is it intended to be a family home? Is it a money making investment?
If it is to be a family home, would it appreciate in value? If so, over what period of time? How long does the family intend to live in this property? Would it appreciate in value over this period? Can the family safely afford the negative cash flow in the short run?
If it is to be an investment, how is the purchaser intending to make a net financial gain, through appreciation by ‘flipping’ the property or through positive cash flow via rent? How can the Real Estate Agent advise the potential investor on rental prices or resell values if it is upgraded?
The Real Estate Agent is also an advisor to the seller . What is the best price that the property can fetch? Approximately how long will it take to sell? Can the potential buyer reasonably expect to close the deal by obtaining a mortgage? How long will it take to obtain the finances and how long to close the sale?
As you will see from the foregoing, the Real Estate Agent is a financial advisor.
The questions posed above also brings into focus the need for the Real Estate person to be, not only a financial advisor, but a financial advisor of Integrity.
The Real Estate Agents should not be focused on getting a sale at any cost. The hallmark of a professional is integrity and honesty, the ability to give sound advice, the ability to serve both the buyer and the seller in their best interests, by putting a good deal together. And this requires sound financial literacy.