Cash Flow: Real vs. Realtor

by |

I recently met a real estate agent at a networking meeting. He was a likeable guy but nothing really stood out about him.  When he learned that I had a number of rental properties and had been investing in real estate for many years he suddenly “specialized” in working with investors.  I had the feeling that if I had stated that I was in the market for a Himalayan mountain property to start a vacation retreat for Yetis he would have specialized in that too.  After exchanging business cards we both moved along.

The Phone Call

A few days later the agent called me.  Was he being smart and suggesting that we meet for coffee or lunch in order to establish a networking relationship?  Not a chance.  He was excited because he “suddenly” came across a property that he knew was perfect for me and I should jump on it right away.  Though tempted to quickly dismiss him, I didn’t because he was a nice guy just trying to make a living.

To be clear, in our brief conversation a few nights earlier he never asked what kind of property I invested in.  He didn’t ask what areas I invested in or if I was in the market for more properties.  All he heard was that I was a real estate investor.  It was obvious that his only aim was to make a sale. 

The Pitch

As I politely listened, he made the following statement:

Everyone knows that if the rent equals 1% of the purchase price, it’s a good deal.  This is even better!

With that, what little credibility he had flew out the window.  He went through the details of this “cash cow” and it was evident that he knew absolutely nothing about rental properties.  It’s not totally his fault.  Real estate agents are almost universally taught that rent – PITI = cash flow.  If that were true, his deal worked.  Unfortunately that doesn’t pass muster in the real world.

I’m certain that after meeting me a few nights earlier he set out to find a deal.  I could picture him scouring the MLS in search of something he could sell me.  Novice investors frequently fall for the 1% myth or the rent – PITI fallacy.  Unfortunately many real estate agents truly believe it as well.  That would change in a hurry of they ever owned a rental.

The Education

When the agent finished his pitch I told him that it was a dog with fleas that was certain to lose money.  I asked if he had ever heard of the 50% rule and he admitted he hadn’t.  When I explained that the rule simply stated that you could expect the property expenses to be about 50% of the gross rent (40% if you self-manage) he was flabbergasted.  He insisted that the rule didn’t apply here; if it did you would never find a rental property.

I took him through his “deal” and asked him about the things he forgot.  Based on rent – PITI it was positive a few hundred dollars a month.

My questions and his answers:

What about vacancies?  “You’ll always be able to rent it quickly.”

What about maintenance?  “The property is in great shape.”

Evictions and tenant damage?  “That’s what the security deposit is for.”

What about utilities paid by the landlord?  Business taxes and fees? Tax returns? On and on it went. 

By the time we were done he realized how little he really knew.  I suggested that if he wants to become an expert in investment properties, he should own one.  

Education is a progressive discovery of our own ignorance. – Will Durant (Historian)

Photo Credit: Jim Epler

About Author


  1. Jeff Brown

    Classic, Richard. Ive been feedin on those specialists for decades.
    .-= Jeff Brown#180;s last blog ..a href= rel=nofollowReal Estate Investors – Avoid the Accidental 5-Figure Tax Bill/a =-.

  2. Great story!! And one that I am sure most real estate investors can relate to … but actually the deal your realtor sent you sounds a lot better than the deals some realtors we meet send us!! The Vancouver market is so expensive that realtors think a condo selling for $300,000 that gets $1500/month in rent is a good investment. And I suppose if you’re not getting a mortgage it is!! 🙂

    It’s tough to find a really good realtor as a real estate investor – so if you find one make sure you treat that realtor like gold … because that is what he or she will be worth to you over time.

    Anyway – great post!!

  3. I agree Richard, this is a great story! On the flip side, talking as a REALTOR, good investors are like finding a diamond in the rough. From my experience 99% of so-called real estate investors are people who watched a trump seminar or just read a book. When you find a good, educated(real) real estate investor you take care of them. I have a very small amount of investors I currently work with and it took me over 8 years to find them.

  4. Unfortunately, most Realtors are just not educated enough in real estate investments to pass congruent advice to investors. And well, I can’t say that it’s NOT their fault, after all, if they claim to specialize in investments properties then they should be professional enough to actually study the field and the intricacies involved. Nonetheless, great post, Richard.

  5. Every property will have a different debt service depending on who is buying it and if cash or financing is involved.

    In my opinion you always want to buy low enough so that you can rent at the smaller end of the spectrum. So if rent for a 3/2 in your area runs 600-800 a month you want to buy based off of anticipated rent rates of 600-650. Anything above that is cake but you are not basing numbers of if you don’t get the 800 a month you are out of luck.If there is no income you buy based off of sq ft and rentable space and expected rents.I deal mostly with commercial real estate so what most investors understand is the CAP RATE.

    Just like home buyers renters want to get the nicest place for the best price and that’s true for even credit challenged buyers.

    Many investors bought during the boom times and are now stuck with underwater dogs that even when the market recovers won’t reach the levels of 2005,2006.

    Many lenders and banks do not have much appetite for investment loans as their books are full of it.They want to make conservative loans moving forward to offset anticipated losses from existing loans funded 3 to 4 years ago.

    I agree that BOTH some agents and investors do not know what they are doing.The problem I see on Loopnet and Costar is principals and or brokers PUMPING the numbers and calling it the actual cap rate. If you puff the numbers the buyer will find out and just terminate during due diligence anyways. It’s much better to lay it all out on the table good and bad so the buyer makes an informed decision. I have 5 apartment complexes right now at a 10 CAP. I have all the numbers from my seller to back it up. I have had 12 interested parties since I listed it 6 days ago and expecting a few offers this week.

    People need to really ask themselves if they are qualified to help someone or if they are chasing a commission at any cost. For instance I DO NOT do property management. I have no interest in it whatsoever.No what you are strong in and passionate about and strive to become an expert in and focus on those clients to help.

    I am much more bullish on commercial investing than on residential currently. I see much more upside. It is much easier to maintain 1 ten unit apartment complex than ten houses scattered about all over a county or multiple counties.

Leave A Reply

Pair a profile with your post!

Create a Free Account


Log In Here