Spencer Sutton -
Wednesday, December 9, 2015
In the Real Estate Investor world there’s a lot of noise.
It seems that everywhere I look on social media or coming through my inbox is THE BEST way to find/buy/flip a house and make a quick buck.
If you want proof just take a look at two of the 30 emails I’ve received in the past couple of months about real estate investing.
Did you catch that? “YOU NEED THIS LIKE AIR!!”
And this one…
But I’m not here to knock ‘buy/fix/flip’ course sellers or even those who do it day in and day out. I used to be one of those guys.
From 2003 to 2008 I was buying houses and selling them to other investors who either rehabbed them and held them or sold them retail. I owned a Homevestor franchise here in Birmingham and used their system to find investment property around town.
It was a great way to make a living and we ended up picking up several rental houses along the way.
But the owners who use gkhouses.com as their property manager seem to be more interested in the buy and hold method.
So what does a successful rental portfolio look like and how do you actually make money in this business over the long haul?
I had the privilege of sitting down with Robert Locke of Crown Realty in Atlanta one Friday afternoon at his house to find out the secret he discovered to long term wealth in the rental business.
His answer surprised me at first but then as he explained, I began to see his point.
He explained to me that the secret to a successful rental portfolio is simple and straightforward…but that landlords and property managers don’t do a great job of it.
The secret to long term success is this….keep your tenants for 20+ years.
Think about it…when do you as a landlord spend the most money on your rental home? It’s when the tenant moves out for whatever reason. That’s when the turn takes place and you may need to replace carpet, paint the walls, etc.
You’re usually writing big checks during a turn and it’s money that you’re not going to recover easily…if at all.
We see investors often put most of the emphasis on their rental property. That’s good but it becomes a problem when you begin to neglect the true asset – your tenant.
Robert’s been in the business 35 years as both an investor and a professional property manager. He loves helping others succeed in this business and actually speaks at a number of NARPM conventions each year.
How did Robert learn this important lesson? Purely by accident.
He learned it when a tenant who had been in one of his rental houses put in a notice after 21 years! He didn’t start that relationship thinking of ways to keep them that long, it just happened that way.
Imagine that…one of your tenants staying in a rental house you own for 21 years. That would probably end up being one of your most profitable rental investments.
So I asked Robert to lay out his strategy for keeping tenants 20+ years.
That afternoon he gave me 8 keys to keeping a tenant 20 years.
In this post we’ll discuss the first four and in our next post we’ll look at the other four.
1. Buy the Right House
Seems simple, right? But as Robert explained, it’s not so obvious to a normal investor. He explains:
“Many times, investors buy a house because it’s convenient or because it feels like a discounted price when it really isn’t. They’ll buy strange floor plans…maybe something that a bored doctor built for his daughter and he forgot certain things like enough doors or completely left closets out of bedrooms and maybe the windows are in weird places. You know the houses I’m talking about…really strange floor plans. They’re funky, they’re dysfunctional floor plans. And, many times, those houses might look like they’re being sold at discount but they’re really not a discount.
It’s a price adjustment for an irreconcilable defect.
Think about other situations like buying a house on a busy street.
Someone may give an investor a $10,000 ‘discount’ for being on that busy street…but it’s not a discount, it’s a price adjustment for an irreconcilable defect!
So, new investors get tricked into buying something because nobody else will buy it…
Sometimes the public are buying houses smarter than investors who will buy things that are dysfunctional for the area. Split foyers are popular in some areas. In many parts of the US, a split foyer is dysfunctional. Nobody wants to walk into a landing and then go up or down or carry their groceries upstairs.
You see town homes with two story steps up to the open door to go into the main level of the house. They learned that didn’t sell very well, so they put the steps on the lower level but the lower level is a garage and a utility room.
They still have to walk up steps to get to the living area and they still walk up another steps to get up to the bedroom. People who live in those houses figure out pretty quickly that they don’t want to live there.
The ‘wrong house’ in my model in Atlanta could mean a steep driveway. Any potential tenant who moves to Atlanta from the North wouldn’t buy a steep driveway because they think about the difficulty of snow and ice on a steep driveway.
We actually had a steep driveway that people parked up the on street and always walked down the driveway and then up steps into the front door. In their third year in the house, the brakes weren’t set and the car rolled down the driveway into the rec room. It went right into the furnace and into the rec room where they were sitting.
So while you might get better prices for these considerations, don’t mistake them for a discount…and don’t let your investors get tricked into buying them.
They’ll buy something that’s been on the market a long time and they think they’re getting a discount. When they get ready to resell it, they’re going to have to give the same price adjustment for an irreconcilable defect.
So, the public is sometimes smarter than investors. They want vanilla. They want floor plans designed by national builders. CalAtlantic Homes, Pulte Homes, D.R. Horton. They have tried and tested floor plans.
They know what the public likes and what the people like to walk and flow through.
In this town, Eastern Airlines used to be strong here. Pilots were making a lot of money and could only work 10 days a month, so they had a lot of free time. And one of the things they did is go out and build houses.
Now we’ve got houses in this town where you’ll walk in and face a wall and you either have to go left to the living room or right to the bedrooms but you’ve got this great big wall in front of you. Crazy!
We’ve had houses where there is a forty foot hallway and eleven doors coming off it. We’ve got them where they call it a bedroom but there’s no closet and there’s no room to build in a closet. We’ve got them with kitchens in the lower level.
So, the first thing if you want to keep a tenant 20 years is buy the right house because if you buy the wrong house, you’re gonna have trouble renting it.
Then, when you turn around getting ready to sell it, you’re gonna have trouble selling it because you’ve got the oddball.
And if for some reason you find a tenant to move into that kind of house, they won’t renew the lease because mom is complaining about walking up the long stairway to get to the main level of the house.
Another big consideration that most of us know instinctively is the that the school system matters. If you have a house that’s identical to the one down the street but the other house is in the good school system, you’ll never get the same rent they’re asking.
You’ll end up accepting discounted rent because it’s in the wrong school system.”
So what about you?
Have you bought or considered a home that probably isn’t the best house because you might get a good discount? So step one, most important…buy the right house.
2. Get the House in Great Shape
A lot of investors like to save money.
Actually, we all like to save money so that our investments give us greater return.
The problem comes when in our effort to ‘save money’ investors put a few bandaids on their house. They clean up the dead dog in the backyard, have the yard mowed and put tape over a hole in the wall.
Robert explained to me that putting the house in pristine condition is critical to getting the right tenant in your house early in the process. If a tenant walks in a house that isn’t really well cared for, their assumption will be “It’s not going be well cared for while I’m living here either.”
“If they don’t put it in great condition before we start showing it – ripping out the green shag carpet or cabinets that came out of a trailer – then the tenants that will be attracted are going to be substandard tenants who just don’t care because they perceive the owner doesn’t care.
The evidence is there because they didn’t even bother to put it in good shape.
And even if you do get it rented, they will most likely not be long time tenants…they’ll eventually move into a house that an owner and property manager actually care about.
A lot of investors say, “I’ll finish the rehab as soon as you get an application.”
That’s probably the worst idea.”
At gkhouses.com our Leasing Agent does a walk through before it can be shown to the public. There’s no sense in putting a bad product on the market because it’s likely not going to rent fast.
The best tenants aren’t just looking at one house…they’re looking at six, eight or ten and they will compare those houses and choose the one that’s best.
So if they walk into your house that isn’t ready, that’s not a good thing. The sink is sitting in the middle of the living room floor. The ceiling fans are laying in boxes in the corner. That isn’t gonna work for them…or you.
3. Put Time and Effort Into Curb Appeal
Robert and his team at Crown have survey new tenants whenever they move into one of their houses. They are always asking, “Why did you rent from Crown? Why did you choose this house?”
Over 35 years they’ve accumulated a database of responses and one of the most common responses they here is, “When we drove up and saw that the house and yard was cared for on the outside, we wanted to see inside.”
Street appeal is incredibly important.
Their research shows that if the mailbox is hanging off its hinges and tilting over, the shrubbery in the front of the house is dead, the lawn not well taken care of and the shutters need painting…you should be prepared to sit on that house a while. And not only that…a tenant who puts an application on that kind of house is likely not the tenant who’s going to stay for 20 years.
Here are some great tips on making sure the outside of your houses are attractive to the right tenants:
- Use ground cover – You will want those ground covers that don’t require water and will keep weeds down. The more you cover with mulch, bark, gravel, pine straw or wood chips, the more money you will save on water and yard maintenance. These low cost ground covers don’t require much upkeep besides a new layer every year or so. They’ll also reduce the amount of weeds that spring up while adding a nice touch to the look of your yard. It’s the simple things like this that can attract a tenant to your house over the one for rent on the same street.
- Plant flowers – This is something easy and anyone can do it. It’s best to avoid tropical plants and other non-native plant species. This is simply because these plants require more water, soil additives and greater care to keep them looking their best. This will ultimately eat into your rental income…especially if the new tenants expect you to keep them looking great after they’ve moved in your house.
- Trim any shrubbery in the front yard – At first glance, unkempt shrubbery can signal that the inside of your home may be unkempt as well. You can easily change that perception by taking the time to prune any ‘out of control’ shrubs.
- Put out an American Flag – We believe that patriotism is a GREAT thing! At gkhouses.com we are all fans of this great country. It will likely send a positive message to a prospective tenant if you put an American flag on the outside of the home.
- Cut your grass and repair any dead areas – During the summer months it’s going to be extremely important to make sure that your grass is cut and any bald areas are being addressed with sand/soil mixture. A well manicured yard is a sign to a prospective tenant that you’re serious about giving them a good product and that you pay attention to details. If you arrive to show your house and the grass hasn’t been cut in a several weeks the inner dialogue the prospective tenant has might go something like this – “If I need work on this house, how soon will they get to my request?” or “What kind of things inside the house need to be taken care of if they can’t even take the time to cut the grass every once in awhile.”
- Lay trim around any flower beds or mulched area – Landscaping timbers are a an inexpensive way to improve the look of your home. These can be bought for as little as $3.50 for each 8ft timber. You could also look at bricks of some kind that would add a nice bit of curb appeal.
- Regularly pick up any trash outside of the house – This may seem elementary but it’s extremely important…especially if you’ve had contractors working on your house.
- Pick up any regularly scheduled news or mail service – If there is a regular service still coming to the house – like newspaper and mail – it’s important that you make sure these things are picked up regularly or cancelled. And as we probably all know that piled up papers or mail is a signal to less than desirable folks that a house is vacant and could invite vandalism.
- If you have a front porch, it’s important that this area be free and clear of debris – This may seem like a no-brainer but we’ve seen many landlords try to rent properties that have previous tenants ‘junk’ dumped on the front porch. We can tell you that this property will quickly slide to the bottom of the tenants ‘most wanted’ rental house list.
4. Create a Strong Maintenance Response System
Now that you have a tenant in your house, let’s shift our focus to keeping that tenant 20 years.
At Crown every tenant is sent a “How did we respond and handle your request?” survey after a maintenance call.
Robert’s crew sends a standard email that says, “Please rate: How did this maintenance request get handled?”
Their numbers are pretty impressive:
- 83% – Excellent,
- 12% – Acceptable
- 5% – Not Acceptable (you can’t please everybody)
So what does Robert attribute their good ratings to? Simple…a quick response system. Especially on emergency items.
“When a tenant calls and air conditioning is out, it’s likely an emergency. Especially if it’s July. If it’s in October, probably not as big of an emergency.
If you’re a professional manager or an owner with a lot of houses, you need a maintenance priority schedule. What is urgent? That’s a half day response system. What is important but not urgent? For Crown, that’s a two day deadline.
What if the faucet is leaking but it’s not really affecting your tenant’s lifestyle? That is a one week response time.
And for those times that it’s not a big deal, then it’s usually ok if you take a look at the issue next time you’re out at their house. It’s usually not worth the trip just to repair a crack in the bathroom tile floor.
The last one for issues that just aren’t that important is, “You’re gonna have to take care of it yourself.” Sometimes tenants will call in with silly requests like a bird nest on the front porch. These things tend to they can take care of themselves.
The key to remember is that your maintenance response should always be proportionate to how the problem is affecting the tenant’s lifestyle.
If the air conditioner doesn’t work in December, it’s probably not going to bother them very much. If the furnace is out in December, that’s a different problem.”
I believe we all instinctively understand how important it is to take care of maintenance calls in a timely manner. It’s important for the landlord with one house and as equally important to the management company with 1,000 houses.
For the rest of the tips, take a look at How To Keep A Tenant 20 Years Part Two.