“It’s Not My Fault They Keep Trashing My Unit” – Actually It Is…

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Real estate has been creating fortunes for as long as there has been dirt. We all know this and that is why we are here. Although there are seemingly endless flavors of real estate investing, I belong to the camp of investors who believe that true wealth and financial freedom in real estate is created by holding property long-term. Exactly why I believe this is perhaps a good subject for a future post, but for the purposes of this article let’s just assume that you agree – we need to hold property long-term in order to fully unlock the power of real estate to its’ fullest.

The strategy of holding property long-term, however, necessitates renting it out in most cases, which is a scary proposition for a lot of potential investors. The thinking is: if I have to hold this little house long-term, then I have to fix it every time tenants bit it up, which I’ve heard happens with regularity. They’ve made movies about that for crying out loud, so it must be true…

It Doesn’t Have to Be So.

Well folks, I am here to tell you that landlording does not have to be quite as much pain in the neck as those stories and the movies would have you believe. While there are no guarantees in life, there certainly is a method and a process of selecting your long-term holds in a way that addresses this issue proactively.

Since 2006, when I first entered the wonderful world in which tenants and landlords play their game of cat and mouse, I have come to the realization that the manager’s ability to place “responsible” tenants, those tenants who are not likely to trash your unit, is 90% a function of the property itself and only 10% of the management and/or the tenant screening process. Simply put, if repeated “trashing” of the unit occurs, it is almost always a result of this unit attracting the type of tenant who thinks that it is OK to destroy someone’s property. You’ve bought the wrong kind of property, and now you are paying for it!

“The fault, dear Brutus, lies not in our stars, but in our selves…”

~ William Shakespeare

What Do They Want?

Therefore, the question becomes – what type of a unit is desirable to and will attract the kind of tenants who are not going to give us grief? Before itemizing some of the specifics, allow me to give you a piece of generalized advise. If you chose to follow it, you’ll save yourself a lot of heartache. Here goes:

When considering a potential acquisition, don’t ask yourself – will my tenant like living here? Instead, ask yourself – would I enjoy living here? If you, a responsible and well put together person wouldn’t want to live in a dwelling for one reason or another, why should any other responsible and well put together person want to? Guys – responsible and well put together tenants are our kind of tenants; this is who we want to attract! Now, a few specifics:

Location

No matter where you live in the US, there are parts of town where you could buy an entire block for a smile and a handshake. But WHY? As investors we want to own that which is desirable to the widest possible cross-section of population. This is how we achieve stable income and appreciation, isn’t this the point?

It seems to me that most of us want the same things out of life, more or less. We want to walk out of our front door and take a stroll down a shaded ally with our children and friends to a local coffee shop or ice-cream joint. We want a couple of nice restaurants, shopping centers, and a barber shop where they know you by name. We’d like a park for our kids within a short walk and a movie theater within a short drive. We want to be close enough to where we work so that we don’t have to spend two hours in the car each way; but we don’t want to be too close! Are you seeing this location in your mind? This is what most of us want; these are the things make our hearts sing. This is what life is about – our own personal “Heaven on Earth”. If you are a landlord, it would be nice to own property there…

Price Point

There is one little problem with that however? As you were reading the paragraph above your mind likely wondered into the most wonderfully romantic, but the most expensive part of your city – didn’t it? Question – if the median annual income in your town is $34,000, does it make good sense to own property which needs to be rented for $1,400/month in order to make it a viable investment?

Probably not! Even though lots of people will want what you’ve got, most couldn’t afford it. Thus, as an investor you must find a balance between the principals of “Heaven on Earth” and affordability. Where are the locations in your town that possess qualities of romance, but at a price that a wide cross-section of the populace can afford? Those are the locations where we want to hold long-term investments! Those are the locations that will attract people who will pay on time and will not trash your property; who will think of it as home and not just another rental; who will help their neighbors clear the snow in the winter and plant flowers in the spring. Furthermore, in such a location the values are going to be stable and sufficient so that it will make economic sense to spend money on improvements to the physical structure, thereby ensuring that it is desirable and stays full now and forever!

In my own portfolio, all of which is within a 30-mile radius from Lima, Ohio, this means that I deal in the $550 to $800 monthly rents. My units do not attract the executive-types who prefer a fireplace, whole-house surround sound, and granite countertops, and who are willing to pay $1,200/month. But my units do attract young professionals, retirees, and young families who are starting out and want to be in a well-kept unit which does not necessarily possess all of the bells and whistles, but is clean, convenient, comfortable, and functions well. Hint – there are a lot more of them in my town than there are people willing to spend $1,200 on a rental.

There are elements such as unit make-up, unit layout, interior and exterior amenities, finishing products, tenant screening, property management, and much more that needs to be discussed in the context of this conversation. May be next time – this is, after all, a blog post not a manual!

Good management can fix problems in the right kind of property, but if the property is wrong, no amount of management will fix it!
Photo:jessicareeder

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About Author

Ben Leybovich has been investing in multifamily residential real estate since 2006. His area of expertise is creative finance. Ben works extensively with private as well as institutional financing. Ben is a licensed Realtor with YOCUM Realty in Lima, Ohio. He is also the author of Cash Flow Freedom University and creator of a cash flow analysis software CFFU Cash Flow Analyzer.

29 Comments

  1. Ben,

    I like your thoughts on attracting quality tenants with a quality product that cashflows.

    Do you believe that good tenants can be found across most economic class areas of the city?
    Areas on 1 to 10 scale that are 3-10.

    Jason

  2. Good tenants are everywhere Jason, but in order to attract those good tenants the property must be in good repair, and this is the real issue. I can spend 30k on virtually any potential rental unit (that has a foundation) and make it nice for my tenants. But would I be willing to do this if in the end the market valuates this property at less than my cost? Predictably – No…This reality pushes me into higher-priced property, within reason. Good comment Jason.

  3. Here comes the view from the landlord on the other side of the tracks. I own lots of units everything from 4 studio units to 1/1 houses to 4/2 houses and I wouldn’t want to live in any of them, I like my golf course view and free standing home. That being said I am proud to own nice affordable homes in the lower income part of town and provide good quality housing to my tenents. I have had tenents who have been in one of my units since day 1 and others who have left after 60 days. I have had units returned to me ready to rent and others that have had holes in every wall and door.

    At this point I am so cynical that I expect the worst and celibrate the nice ones. However I don’t know where I can buy houses that cashflow this well in nicer areas so I will deal with the screw ups and spend the income to buy more just like these.

    • Andy,

      I think it comes down to time vs. money. It sounds like even though the houses are cheap and the cashflow is good, they are a bit more high-maintenance than my target neighborhood. I *could* buy properties in the next town over that would cost significantly less (and rent for only a little less) and would probably produce more gross cashflow…but if I’m not renting in a neighborhood where people take pride in where they live, I am more likely to be stuck with more repairs, resulting in less net cashflow. Not to mention the time factor, if I were doing repairs myself. That’s great that you take pride in your rentals, I’m sure that shows! =)

      My rule of thumb is to never buy a property that I wouldn’t want to go to at night (if there was an emergency). There are bad neighborhoods and there are also bad blocks in good neighborhoods. It helps to know your area well.

      If you want a good deal, you could always do what I did and buy the scariest house in a decent neighborhood from a slumlord and evict the deadbeats. Fix it up and you have instant equity, voila! I live in my triplex and the best part about owner-occupant landlording is that you get to pick your neighbors! Lol.

  4. Brandon Turner

    Great article Ben! I have some properties that I like to say are “cursed” but in reality – they welcome the kind of problem tenants I get. So I accept it as a consequence of my poor purchase!

    I look forward to seeing more of you on the blog here. I think you bring a great new perspective to the blog!

  5. Ben, I’m a big fan of your forum posts and I think your first blog is excellent and insightful. I fully subscribe to your way of thinking and and it absolutely drives me crazy when people employ the “it’s just a rental” attitude to offer a unit that is in poor condition or cut corners. (“Why should I replace the nasty stained carpet, it’s just a rental.”) Keep up the great blog posts. Look forward to reading them.

      • John,

        It looks as though I may have missed a response to your comment – sorry, and thank you for the reassurance. Interestingly, I bought a 10-unit in which I am evicting a pro-bum and I have other tenants burning up my phone telling me they want the updated unit at $75/mo. increase when it’s ready. This is exactly what the moral is in this article: take care of the building and the units; have the best interest of the tenants in mind, and the units will attract the very best of tenants…

  6. Thank you for the kind words John. My basic attitude on life is to treat people the way that I would want to be treated – this is important to me! In real estate this attitude translates into upkeep of my units.

    I never know how people will react to my thoughts since I tend to see things differently from most. I really do appreciate you relating to me on this – may be I am not as crazy as I think. Just because it’s cheep doesn’t make it right, and just because someone doesn’t have a lot of money doesn’t mean they should be living in a unit which is anything less than clean and functional.

    Jeff, thank you for the welcome! I came across BP a few months ago and just jumped in without a formal introduction. This is a great platform indeed!

  7. Love this post Ben, really hit home. We provide tenant placement services as well as representation for residential porperty investors and I’m going to share this with everyone on our team. Thanks.

  8. Hey Ben,

    I’m a college student looking to invest in my first property this summer. I want to start off by saying thank you. I’ve read so many of your articles and learned so much. I am looking into buying a 3-5 unit MFH. I know you’re a supporter in investing in multi family homes. Do you think it is a good idea to do this while being a college. I live in New Jersey and I plan on investing in Philadelphia. I am worried that I will not have the time to manage my tenant’s problems, and dealing with repairs, while being in school. Moreover, I don’t want to wait until after college to start investing because I want to take advantage of today’s low prices.

    What do you think? I would appreciate you opinion!

    Ted

    • Hello Ted,

      I am glad you see value in my thoughts! You come across very intelligently in weighing your options. Starting out early is a great thing. But, you are right about the time commitment side of things, especially the first time around…

      More than the time commitment, I am concerned about you buying in one market, and then relocating into a different market and becoming a long-distance landlord. When I buy, I know that if I had to own the thing for 20 years, this would be just fine with me. In other words, selling is never part of my strategy – too many ifs and buts. Thus, if you would need to sell after you are done with college, I would strongly caution you. We can’t predict the markets…

      I own one 6-plex 45 minutes away from my house, but everything else is within 10 a minute drive for me, which is the right way to do it in my opinion. If you are going to be able to instill in your tenants the attitude of responsibility, then you must be present. At least this is my philosophy.

      On the other hand, aside for the long-distance issue I would support your decision to own while in college. You’ll make the time if it’s worth it to you! Having said this, in my opinion you’ve got time. The FED is likely going to keep interest rates down for a while longer. I don’t know this for a fact, of course, but I am betting this way. So, even if you waited 4 years you would likely not have missed the boat.

      Thank you Ted, and please let me know if I can help you further in any way!

    • Ted,
      Keep in mind that while 2- 4 units is considered residential, 5+ is considered “commercial” and requires a different type of loan. I live in Jersey as well and I know a lot of investors who are investing in Philly due to the low taxes over there (they are doing single family though). I don’t know the Philly multi market, only the Jersey one so I can’t offer any experience there. I do know that the landlord-tenant laws are different, so learn your market.

      As far as time spend tending to tenants, that is up to you, to a large degree. If you set your leases up properly you will have little maintenance to do once you have good tenants in. The most time consuming aspects of landlording are (or at least, should be) finding new tenants and rehabbing units (before or possibly between). Other than that, from my experience, if you screen right and get good people in, the most time you will be spending is depositing your rent checks at the bank. And I even know landlords who have their tenants do that for them! Lol. So it all depends on how active you want to be, and how much rehab you do upfront. I rehabbed one of my rentals so it has newer everything so I am not spending much time at all fixing stuff. In a unit with older appliances, etc., there would naturally be more time spent doing this stuff. Also, you will find that balance between time and money…for example, choosing to paint a unit yourself or hiring it out. I chose to hire out the 2 bdrm painting so it would be done while I was at work! But for the 1 bdrm (since it is much smaller), I painted it myself over a weekend. Hopefully I will be able to get by with touchups in between tenants for awhile now. Besides good tenants, a good trick it to keep things simple. Use one or two paint colors (plus white for trim)…in all of your units, use the same faucets, carpet, etc. etc. Then when something does need to be repaired it is a much easier process!
      If you buy right, you will be ahead of the game and maybe even be able to retire early! And if you buy right and find that you don’t have the time to manange your proerty, you could always hire out the property management until you gradute. You have lots of options. Good for you for thinking outside the box!
      =)
      TriplexLady

      • Kelly,
        Thank you for your input. I appreciate your help. I will definitely take your points into consideration.
        Ted

    • Andy Teasley on

      Ted,
      Wow I wish I had started in college, you have a great head start! Some thoughts;

      1. Always remember the post-apocalypse bicycle rule which states “only buy rental housing where you can ride a bicycle to collect the rent after the big one”. Do you know where you will be settling post college? Are you going away to grad school? How will that affect the post-apocalypse bicycle rule?
      2. As I stated above I am not suited to deal with tenents so I always use a property manager, for 7-10% of the collected rent your property manager should provide you with well screened tenents and handle the day to day opperation of your units. If your budget doesn’t allow for a property manager then I don’t think it is a good buy.

      Once again, congratulation on starting the race early!

      Andy

      • Andy,
        Thank you for your advice. I thought about using a property management company. I think that is a really good idea. I think I should hire a property management company until after I finish college, then start doing it on my own. Although this does take away from my profit, the main objective for me right now is to gain equity in a property.

        Thanks again Andy. I appreciate your advice. I will take the bicycle rule into consideration.

        Ted

  9. I buy houses in depressed area that are working class areas that I would not live in now however I did live there when I was younger but would not raise my kids there because the school are not very good. But I can buy houses all fixed up for $20K-$25K. And look really nice. I make the house look almost ask good as if I’m fixing it to sell. Tan walls, white trim, the works. The rent is $800-$900. The money I make with these houses are so much more than buying in a good area for $100K renting it for $1200. It’s still worth getting these cheaper houses even though it comes with more headaches.

    • JC – thanks for your comment!

      My argument is not that of income, it is relative to economic feasibility. If I can afford to buy the house plus rehab it well enough to attract quality tenants and still be within my criterion relative to valuation and CF, than by all means.

      However, it is paramount to me that the house is fixed up to a certain standard which is desirable to the tenants I want. This is not always possible…

      Thanks a lot!

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