First-time and repeat home buyers may find it challenging to understand the terms and abbreviations used in the real estate industry, making it difficult to sell or buy a property. A sub-agent is one of the unknowns in this scenario.
While we’ve all heard of real estate agents, have you ever heard of sub-agents? If you haven’t, continue reading out guide on What is a Sub-Agent in Real Estate?
A licensed real estate agent or firm that another person or firm has appointed to represent them as sellers in a real estate transaction is a sub-agent in this context. For example, a real estate broker is a subordinate agent and acts in the agent’s place.
Because the sub-agents work under the supervision of an agent, they are responsible for all interactions and transactions with prospective buyers and sellers. Due to this, the establishment of a fiduciary duty becomes necessary.
In the legal world, a fiduciary duty is a promise or requirement that someone entrusted with a mandate over something must act honestly and with integrity on their behalf. This is the relationship between the sub-agent and the agent in this case.
A legal obligation exists between the parties to act in their mutual best interests. Unless otherwise stated, the sub-agent is the fiduciary tasked with the responsibility.
The beneficiary, or principal, is the other party to whom the sub-agent responds.
Key Point: All agents, whether sub-agent, principal-agent, or substituted agent, are bound by fiduciary obligations.
The fiduciaries’ responsibility is to account for their losses if they violate the contract. Even though they played no role in the mistakes, the principal is liable for them.
When two people agree to collaborate on a project, a fiduciary agreement should be signed, and both parties should acknowledge their fiduciary responsibilities in writing.
Additionally, there are fiduciary responsibilities to the buyer or seller, which include the following:
Unless ordered by a court of law, all information exchanged between the two parties should be strictly confidential.
The money and finances belonging to the client entrusted to the sub-agent must be appropriately accounted for and used as planned.
The client and the principal should expect the sub-agent to be obedient and refrain from engaging in illegal activities.
Both the principal and the client must share a sub-agent loyalty. There should be no use of information to their advantage, and no other interests should take precedence over those of the client and the principal.
Before you can answer the question what is a sub-agent, do you know how to determine the difference?
In most cases, you wouldn’t be able to tell whether your agent is subject to the directives of another agent within or outside the same company unless you looked carefully.
There may be tell-tale signs, such as business cards or direct information from the sub-agent, indicating that they are representing or working for someone else, which can be identified.
The most effective method is to sign a contract with the listing agent and agree not to work with their sub-agents. If you have a problem with your sub-agent, you can reassign it to another representative.
An exclusive contract is a type of contract that can be signed to ensure that you work with only one agent from beginning to end throughout the entire process. If there is a point of agreement between the two parties, you both sign the document for a set period to formalize the agreement.
A sub-agent in the real-estate industry
If you are buying or selling a house through a sub-agent, you may not be able to refuse to work with the agent.
Did You Know: There are several benefits to proposing a cash offer on a house? Read more here, where we outline the key advantages for both buyer and seller.
You should always check with the principal company’s regulations to see if the sub-agency is legal.
Hot Tip: You should also ensure that you follow the proper procedures in your transactions.
Don't worry, there are not many people who know the answer to what is a sub-agent simply because they are really uncommon.
Transactions involving a sub-agent are virtually unheard of these days for various reasons. Even though it may be more convenient to have someone assist you with your transactions, this may not always be the best option.
The sub-agents responsibility is to report to the agent, who is responsible to the principal. The hierarchy must be followed when a sub-agent is used in a transaction.
As a result, the principal does not have direct control over the sub-agent, posing a significant risk to their company’s reputation if something is discovered to be a mistake or omission. In addition, this is risky because the law is frequently involved in preparing legal documents and the transfer of ownership between the two parties.
Definition: Vicariously liable is when a person who hires an agent is held responsible for that person’s actions.
If a homeowner or buyer prefers not to work with a sub-agent, they can select their own agent to work with.
The homeowner may still conduct transactions through communication or confirmation with the original agent, even if a sub-agent is assigned to them in certain circumstances.
Sub-agencies are not permitted in some states. Uncertainty can arise when dealing with an agent representing someone else in the business world.
Because the earnings are based on commissions, the sub-agent may decide to raise the prices to create a profit window for themselves.
There is also a duty on the part of the sub-agent to the principal-agent.
The authority granted to an appointed agent to act on behalf of the principal-agent in the transaction is referred to as a real estate agency. When the agent reports to the principal, they are considered to be under their authority.
The principal may be a representative of the agency or the agency itself. Moreover, because they represent their employer’s brand, real estate agents are held liable by the company they work for.
A sub-agent is a delegation from an agent, whereas a substituted agent is a delegation of a specific task another agent carries out on behalf of the principal.
Extra Information: Do you dream of becoming a real estate agent? Check out the guide for some extra tips and figure out just how long the process takes!
How do they come about?
We will look at the Latin maximums to better understand the difference:
"Qui facit per alium facit per se."
Put another way; it means that someone who does something through another is responsible for the other person’s actions.
As a result, if an agent reports to the principal, a contract completed under the principal’s name subjects the principal to any lawsuits or suits brought against the principal, even if they did not complete the contract.
"Delegata potestas non potest delegari."
When translated, this means that no delegated powers can be transferred to another party under any circumstances. This is true unless the agency allows it to happen or it’s a common occurrence in their business environment.
The following is an example from the real estate industry: a real estate agent is accountable to the sales agent as a sub-agent. However, the sub-agent has landscaping and interior designers responsible to them. In contrast, a substituted agent is accountable to the principal, which is the real estate corporation.
When attempting to determine the answer to What Is a Sub-Agent, there are various factors to consider.
A sub-agent is subordinate to an agent. The agent commands the project over which the sub-agent has been entrusted with responsibility. All directives are communicated to the sub-agent through the agent for which the sub-agent works.
The principal cannot give directives to the sub-agent directly; instead, the commands must be routed through the agent.
Whereas a substituted agent is directed and assigned by the principal in all aspects of the job.
An agent can only appoint a sub-agent per the nature of the rules of the real estate company in question. It is only possible if the agency permits delegation of authority to third-party agents.
A substituted agent is appointed by the principal when the agent in charge of completing the project requests that the principal appoint a different agent.
This is most common in situations where the agent cannot complete the project due to a lack of necessary skill sets, such as when a real estate attorney is required to handle legal issues in the transaction.
The sub-agent is compensated by the agent with a commission on the final payment that has been agreed upon. This is funded by the agent’s portion of the commission.
The principal is responsible for paying the substituted agent directly.
In contrast to the substituted agent, the sub-agent can’t sue or be sued by the principal directly.
However, if there is a legal violation against the principal or the sub-agent, the rules may differ.
In the event of a dispute or miscommunication, a substituted agent is liable to the principal, whereas the original agent is not.
A sub-agent is delegated agency responsibilities by another person tasked with performing the responsibilities but who was not delegated the responsibilities by the clients.
When a third-party acts on behalf of another party at their request, this is a sub-agency.
Investing in a run-down house and then selling it for a profit is an exciting prospect, but one obstacle that must be overcome is a lack of financial resources.
As a beginner, obtaining funding for your transaction can be extremely difficult. Most money lenders require some prior experience, which you are currently gaining through your current job.
So, continue reading our guide on fix and flip loans for beginners to get you started on your new journey!
Fix, and flip loans are short-term loans that real estate investors use to purchase and repair houses before reselling them for a profit is, known as a bridge loan.
This type of loan provides investors with the funds they require to purchase and renovate a piece of real estate. The sale proceeds can pay off the loans taken out to buy the property.
It is impossible to use the loans for other types of investments, such as school construction, because they are only available for residential real estate investments.
Most properties are purchased at a low cost to maximize the profit-to-expense ratio. The loan for the fix and flip is included in the expenses.
Some of the houses purchased were obtained through foreclosures or auctions conducted by the owners or banks.
The loan lenders must determine whether or not the house will generate a profit, as well as your financial standing.
The loans are provided to allow:
The borrower can buy the house from a quick seller and put it back on the market at a higher price.
The borrower can purchase a house, renovate it and sell it for a higher price.
The borrower can reconstruct a house by demolishing parts like the kitchen and then building a better one. They can, after that, sell it for a better price.
Depending on your credit, experience, and financial goals, there are various loans to choose from.
When trying to obtain a fix and flip loan, the goal is to get money to complete your project, and there are a variety of loan options.
You need to look at the interest rates and working terms of lenders to find the cheapest and best option to make you more profit.
Below we’ve laid out the suitable fix and flip loans for beginners:
Bridge loans are the most common type of fix and flip loans. It is helpful to bridge the gap between buying a property and securing long-term financing.
It is easy to qualify for one and offers loans with low-interest rates.
Some bridge loans don’t include renovation and construction funds. It’s a little complicated in that the borrower can sell the property off to another real estate agent who will do the renovation.
For this reason, fix, and flip loans can be categorized under the larger category of bridge loans and not the other way round. It is simply because fix and flip loans include renovation and construction funds.
This loan is used by a reputable investor who has several successful flips under his belt.
Hard money lenders are not affiliated with a bank. Your friend or an online lender may be able to provide you with the funds you require, but the interest rates are often high, and the repayment terms are short.
Although this type of lender may not provide you with as much money as you would like, they can quickly provide you with the capital you require.
🔑Key Insight: Obtaining a conventional loan may be complicated. For instance, for people who have poor credit scores, this type of loan is a convenient option for obtaining a conventional loan.
This is the process by which you finance an existing property to raise funds for your project.
This option takes advantage of the equity that has accrued in your home over time and provides you with cash in exchange for taking out a larger mortgage payment. You can use part of the money to pay off your mortgage and keep the rest for yourself.
💡Delve Deeper: The option to receive a quick cash exchange has several benefits for fix and flip loans for beginners and when a seller is selling their house. Check out our article on the benefits of accepting/producing a cash offer!
Alternatively, you could invest the extra money in your house flipping project. The amount you receive is determined by the value of your home, which is typically no more than 80 percent.
The borrower and seller strike a deal on their terms and conditions. A payment plan and a contract are decided upon, after which the seller can fund the borrower.
There is, however, a significant risk for the seller, who needs the money from the buyer and investigating more money into the project can be tricky. Therefore, the interest rates are usually high with a short payment period.
🔥Hot Tip: This type of loan option should be your last option if the other sources fail.
The three steps below are used to obtain most fix and flip loans:
The lending agent will determine whether or not the project meets their requirements and is financially viable.
The agent will also look into your financial history, credit history, and work experience. As a beginner, you shouldn’t be concerned because this is a background check to ensure that you can handle the money responsibly.
If all of their requirements are met, you will be approved for funding.
There is a little paperwork to be filled in before the money can be given to you.
Once you have filled it in and completed it to the agent’s satisfaction, you are eligible to receive the funds.
Some agents might develop a draw schedule for the loans with you. It is a staging system where money is distributed to the borrower after completing a particular stage.
An inspector confirms that everything is in order after every stage, after which more funds are transferred to the borrower till project completion.
The benefits and drawbacks of fix and flip loans
There are various options when choosing your perfect flip and fix loan; however, they have advantages and disadvantages that you must always consider before making a financial decision!
| Benefits of Fix and Fix Loans: | Drawbacks of Fix and Flip Loans: |
| ✔️Quick Funds: Flip and fix loans take a short time to acquire compared to traditional home loans, which may take weeks. | ❌Short Period: Typically, the loans are over a short period, but if the flipping process takes a long time, it can be risky. Furthermore, the renovation or selling process may be long, imposing additional risks. |
| ✔️Flexibility: There is little paperwork, and fixed conditions are met with fix and flip loans. Borrowers can acquire the loan without meeting the loan’s qualifications | ❌Cash burden: As loans don’t take a long time to be approved, the planning time is limited meaning things such as utility cost may not be considered. |
| ✔️Fewer risks: Most flip and fix loans work with the property itself, reducing the chances of losing your home or assets. | |
| ✔️Property diversification: The loans allow quick expansion of their property for upcoming real-estate investors. It boosts their portfolio and achievements. | |
| ✔️Quick returns: Flip and fix loans have a short term, often 6-12 months. It allows the investors to see a quick return over time and allows other projects to begin. | |
| ✔️Big profits: If the process goes through, a large profit is usually incurred. The greater the number of renovation activities, the greater the potential profit received. |
Renting out property can be one of the best ways to make both passive and active income. And as with almost any other investment, high risk can lead to high reward, but how much profit should you make on a rental property?
Well, it is not so simple to answer the question.
The landlord should have a clear understanding of the market to undertake high-risk investments. But it is vital that they know it is likely that for a long period he or she will have to invest large chunks of money into the real estate before any real reward comes.
As such, it is important, as with any investment, to be patient and set your expectations realistically. If the landlord's investments are more down-to-earth, they may receive less reward, but likely much faster and their income may be steadier.
Therefore, it is up to you to decide what kind of investor you want to be. And if you were wondering how your profit levels will be determined, how much profit you are likely to receive, and what to look out for when considering investing in rental property, just keep on reading.
Firstly, let us introduce what we are talking about today- profit. In general, profit refers to a financial gain. In particular, it is the sum of money left over once all costs are subtracted from the income you, or a firm, have received.
In the case of rental property, rental profit, therefore, refers to the financial gain which remains after all the landlord's expenses are subtracted from the rental income they have received in a given period.
Before you can consider how much profit you make, considering what good investment even means is the first step. As already explained, higher-risk investments usually lead to higher rewards.
However, there are precise ways that are typically used to calculate your return on investment and help you keep the property profitable over time.
The two most popular methods for gauging profitability are Cash-on-Cash return and Capitalization Rate.
In this section, we will explain how these two methods work to help you to determine the profitability of your property.
Cash-on-Cash or CoC return is a metric widely used to calculate real estate investment profitability. Essentially, it determines annual return based on net cash invested and net operating income
Most experts advise for a CoC which lies anywhere between 8% and 12%. However, it is important to keep in mind that CoC will substantially differ depending on how you are financing your property. For example, whether it was bought by solely your savings or using a loan.
Definition Breakdown: Net Cash Invested: All the cash invested into the property, Net Operating Income: Rental income after operating expenses are deducted- this does not include interest rates and taxes
Another type of metric used to indicate the rate of return on investment is the capitalization rate.
It is calculated as net operating income divided by property value.
This metric type only accounts for the initial value of the property and does not account not for fluctuations of value over time as the market changes.
Or for additional expenses which will inevitably come as a result of owning property, such as repairs, and any other potential expenses resulting from the ownership of the property, i.e, mortgages.
Unlike CoC, there is no ideal capitalization rate as it largely depends upon the type of property and the market the property is within.
Therefore, use the capitalization rate rather as a helpful tool for deciding the possible potential of the property rather than a determinant of its actual profit rates.
Remember: However, keep in mind that this metric should be mostly used only as a consideration of the potential income of a rental property before purchasing it, rather than over time.
Although the two formulas mentioned are very good indicators to build an answer to the question; How Much Profit Should You Make on a Rental Property it is important to know that the potential level of profitability will still be dependent on numerous other factors.
Essentially, the profitability of the building will depend upon the expenses that come with being a landlord.
The rent you can charge will vary based on:
In this section, we will consider these additional factors in detail and add some tips on how best to indicate a profitable property.
Landlords typically tend to follow the 1% rule or the 1 rule in real estate as it is sometimes referred to.
Formula: Monthly Rent multiplied by 1% of Total Investment (including additional expenses, mortgage, etc.)
This has proven to be the general setting stone for an ideal rental rate within the real estate community, and many landlords follow it.
Of course, you should use it more as a guideline rather than a given formula, as your rental rate will also depend upon factors such as the location of the property, demand for it, rental rates of similar properties within the area, and many others.
When these are taken into consideration, the rate is likely to be anywhere between 0.8% and 1.1%.
You Should Know: Nonetheless, this metric is still vastly useful as it should help you create sufficient profit rates to have positive cash flow, cover all your expenses, and keep some of the income.
You should estimate that at least 40% of your rental income will be directed towards expenses on the property. These can include property taxes, insurance, property management, and any possible vacancies which are inevitable to crop up.
Now, do not forget that repairs or exchanges are always going to come up. Furniture, appliances, and decorations will face wear and tear and in some instances, your washing machine may break down. If you are to include this in your estimation, then the proportion of your rental income directed toward expenses will be even higher than the recommended 40%.
Keep in Mind: Repairs and changes will inevitably be needed, even if it's only a minor repair, try to account for those in your estimation of expenses.
Unfortunately, the expenses do not end here. There is likely to be another set of expenses that are not connected directly with the property itself.
You probably purchased the rental property using a loan, and thus there will be a set of monthly mortgage payments which need to come from the leftover 60% of the rental income.
However, if you have purchased the property using your savings, there is no need to worry about this part.
Now that we have established how to determine whether a property has the potential to be profitable in the first place, let's look at how much profit you will receive.
Let illustrate this with a step-by-step example:
After this is all added up, you can see that even a smaller profit per month can generate a large amount over time.
Building upon this, you might be questioning whether investing in real estate is worth it for you. However, only you can know this as it depends on the rest of your cash-flow/income situation.
It also depends upon how you want to use the investment, whether solely for profit to add to your income, use it as a source of your main income, or perhaps as a tax shelter if you are already in a high-paying job.
Lets say you would be using the given rental income as a source of additional income. Well, in that case, one can generally say that profit below $100 per month is arguably not worth it. You might think to yourself but why?
Surely any additional income is always good?
Well yes, but, when you take into consideration the unexpected expenses that come into play, then making below $100 per month may not help to cover those expenses.
The likelihood that something will break or end up needing a repair in the property, whether it be water or an appliance you need to have funds to counter for these defects.
Even if there are no major damages, fees on the property may increase, such as property taxes you have no choice but to pay- if you wish to keep your property.
However, profit above $100 per month is arguably worth investing in - $1,200 is still a sizable annual passive income.
Bear in Mind: Investing in real estate properties is solely your responsibility and is not a one-off expense.
As with any investment, being patient and setting your expectations realistically is the first step you need to take before anything else.
As there are multiple factors to bear in mind when trying to grasp- How Much Profit Should You Make on a Rental Property? , the returns you make from real estate investment may vary from one rental property to another.
Remembering to consider things like the location of properties, condition of properties, and demand for properties are some of the key aspects that can cause a variation in the amount of profit generated.
Keep in the forefront of your mind, that rental property investment is not a speedy process to generate massive profits. It's a slow process, so set yourself a clear plan and define your goals and stick to it.
Things may not go to plan the first time around, so jot down your mistakes, learn from the experience! If you are ready for your next adventure, then pick out your next real estate deal and you'll see the improvements!
Profit is the financial benefit gained from an activity like, renting out properties, that surpasses the expenses, taxes, and costs involved in the activity.
In general, there are two main metrics used to determine the financial potential of a property: cash-on-cash return and capitalization rate.
The first refers to the annual financial return of a rental property based on net cash invested and net operating income.
The second metric is capitalization rate, which refers to net operating income divided by property asset value, and is expressed in percentage terms.
Both, however, only point to the potential of a property and other factors will influence property profitability.
The general rule is that a landlord should charge around 1% of the total sum they have invested into the property per month. However, based on different circumstances, this usually varies anywhere between 0.8% and 1.1%.
You should count that at least 40% of your rental income will be directed towards expenses on the property- which does not include mortgage payments and any unexpected costs from repairs
And as profit is calculated by subtracting total costs from the rental income received, your profit levels are not likely to exceed 60% of your total rental income.
Generally, anywhere below $100 of profit per month is not worth investing in. This is because if any unexpected costs occur, you might not only have to spend all your profit on the costs but may end up enduring a loss.
When it comes to profit levels above $100 per month, whether investing in rental property will end up paying off is largely dependent upon personal circumstances and the purpose of the rental property.
