Doubling My Doors

12 Replies

Well. almost, I have a 4 family and a single, so that's 5, and I'm going to 9.

I've just bought another 4 family. A small step for many here, but a big step for me, I am a little anxious...I've got a small "team", ie, a good handyman, good painter, good furnace man and landscape guy. I do the simple things but hire out the big stuff.

Nice place, short sale. All brick, big units, all 3 br's, all individual central air, 4 1/2 concrete block garage. Wouldn't mind living there myself.

I am 56, retired, and while I'm far from rich, I'm comfortable, so the prospect of dealing with more tenants wasn't an easy decision, but what the hey, let's see how it goes. To the disdain of many here, I'm a "gentleman" landlord...forgoing maximum rents for long term tenants and the benefits that entails...I'm on a first name basis with all of my tenants.

My friend with many more properties calls me crazy for not maxing out the rents, but I see how much more work it is for him, with people coming and going.

My Father always told me, "People tell me how much rent I should be charging, but I see "For Rent" signs in front of their buildings, and my building is always full."

Congrats, nice looking building.

Congratulations on the new property Arnie, it looks fantastic! Interestingly, regarding your rents, there was a good article talking about minimising vacancies here on BP's last week or so and one of the ideas was on offering more reasonable rents for longer term tenants.

http://www.biggerpockets.com/renewsblog/2014/03/21/factors-to-help-minimize-vacancy-rate/#comment-154176

Nothing wrong with offering fair rent for longer tenancy. Here in Japan we're blessed to have a tendency for longer term tenants so I can appreciate your wish to have same! Good luck with the new property.

Congratulations Arnie, that is a very nice looking building.

Regarding rents, my philosophy is to always charge a competitive market rent at first. If it is a good long term tenant, then I am relatively slow to raise the rent.

Most of my clients that are older with amassed wealth are risk adverse. Once you learn what it takes to build it you don't want to do something stupid to lose it going after a crazy yield.

"My friend with many more properties calls me crazy for not maxing out the rents, but I see how much more work it is for him, with people coming and going."

My thoughts are I am not in the maximize rents camp. Most markets across the United States are not in a rent market where demand is outpacing supply. In those areas yes you can keep strongly increasing rents and pushing the market to see where it goes. In stable markets with modest growth of 2 to 3 % a year you want to be in the middle of the market.

So if rents for a 2 bed are 450 to 550 a month you want to be around 500 and have a decent product. What puts more profit in your pocket long term is not pushing rents. Each time you have to rehab a property it costs money.

A big percentage of tenants you want what we call in the business the "loyalty factor". So if you have 50 tenants at a complex and 35 to 40 have been there years and years that is pretty good tenant seasoning and stability.

Of course even 100% properties will have some turnover as people die, relocate to nursing homes, get married and need a bigger place, job relocation, etc. So you will always have some turnover. The key is to be middle market rents. If you charge top market as your buildings and units get older tenants will move to brand new places or fully rehabbed. The mentality will shift to " This landlord is charging me really high rent and they don't fix anything and the place is old looking.Let's move somewhere else !"

If you keep the place taken care but it is older tenants will want to stay as they see the rent even with increases each year as a good deal in the marketplace. Not the cheapest but a fair rent to pay. Most of the larger apartment owners I know who have owned for decades do not push top market rents. When you accumulate wealth you want stability and not headaches and turnover.

I believe except in some micro markets that this approach works best. It's just like a business in that it is much cheaper to keep an existing customer happy then to go out and find a new customer each time. Apartments are the same with a lot of costs (lost rent, re-tenanting a place credits, re-conditioning to re-rent, etc.).

Medium allworldrealtyJoel Owens, All World Realty | [email protected] | 678‑779‑2798 | http://www.AWcommercial.com | Podcast Guest on Show #47

Originally posted by @Jon Klaus :
How much was it? And the rents? How much under market are you on the rents?

Geez Jon, you get right down to it, doncha?!

The price was very good, not great, but very good. I've been looking for a while and I got it for about 5K less than I was ready to pay, based on all the others I've seen.

How much under market on the rents is a little bit of a grey area, but I'm satisfied with my rents. Again, I'm not a hardball landlord. My tenants have my personal cell number, I'm on good relations with all of them, I always address them by their first name...You know...Say something nice when I see them, "How are you today?"...

Could I get an extra 20, 30...40 per unit? Maybe. Let's put it this way...You know the thing about $9.99? How much more appealing that sounds than $10? If the going rate in my neighborhood is $600, I'd go $580 and be happy. Recently that very thing happened. The 4plex next to mine and I were vacant at the same time. He was asking 6, I was at 580. He rented a month after me. So he lost $600. How many months does it take to make up $600 at $20 a month?

Real Estate is not the focus of my life, I have many other interests.

One more thing, just because I'm not a hardball landlord on rents, "Don't mistake kindness for weakness." (A. Capone).

They do not walk all over me, they don't wait for repairs, and I don't wait for rent. My record for an eviction is 16 days.

The tenant at 600 will usually be much more demanding as well as they view they are paying "top dollar" where the other tenant getting under market rent thinks they have a good thing and will not want to "rock the boat".

Tenants with under market think they are getting a good deal so they want to take care of small things themselves.

I am not saying this is always the case but I see it often.

Medium allworldrealtyJoel Owens, All World Realty | [email protected] | 678‑779‑2798 | http://www.AWcommercial.com | Podcast Guest on Show #47

Arnie,

Nice looking building! Congrats!

I am not a frequent poster here but could not let your post go by unanswered. Granted, this is simply my opinion but I believe that your colleagues who are in the "max rent" camp are wrong. Real Estate is not a maximum rent or maximum profit business but rather a maximum revenue business. Your apartments are a perishable product. In other words, every day a unit goes by vacant is revenue you will never achieve. You cannot inventory an unsold apartment unit for resale later. In addition, real estate is a very high fixed cost business; taxes, insurance, debt service (really a liability but lets call it a cost for this discussion), payroll, etc. These costs are realized regardless if the unit is full or empty. If two of your four units are vacant then you will still have all the fixes costs associated with your asset. Your goal is to maximize the revenue over a given period. If you attempt to maximize your lease rents then you risk driving vacancy through turnover. Furthermore, turnover will increase costs due to turnover and make ready related items.

Now, with that being said it is possible to have your rents too low where you have very little, if any, turnover but you will not be maximizing revenue. Only you can make that determination from knowing your market and what other similar properties are achieving for rents. And your own comfort level.

Many big operators operate this way through the use of rent pricing software (Yieldstar, etc). Go shop a large (250+ unit) class A property sometime and tell them you want an apartment in two months. Then ask them what the price would be if you moved in next week. Most likely it will be lower then the price quoted two months in the future. The leasing agent or property manager has no say over the rent but is merely reading it off a computer screen. If you ask "what is the rent on a 2 BR" they will immediately ask "when do you want to move in". Large operators use software which have owner inputs that take into account current property occupancy, seasonality, competitive comps, etc to determine rental price. The goal of the software is to maximize revenue over a given period and not necessarily maximize the value on a rent roll for a given unit. Although this is too costly for someone with 9 units, you can still use the same principals in concept. Do you hold out for $550 rent or take $525? If holding out for $550 causes an extra month of vacancy and $525 can be achieved today then you are probably better off taking $525 today. $25 x 12 mos = $300. One month of vacancy would have cost you $550. By taking $525 you have maximized the revenue but have not maximized the rent on a rent roll.

Other industries that operate on a similar basis? Hotel rooms, rental cars, airline seats, etc. All high fixed cost industries with a perishable product that loose all revenue generating capability after the night is over, the day is over or the plane has left the gate.

Hope this helps. While your colleague is off turning units and chasing maximum rents you can be at the beach, golf course, etc knowing that your business might just be more profitable in the end.

The rental business is like any other business, if you offer a great product at a fair price you will succeed. My wife and I have about 60 rentals. Our buildings are C+ with great bones and our tenant class is solid B to B+. We don't gouge our rents and we also offer a very high level of service. For that we can be picky, we have lower vacancies than our competitors (We almost never have an idle unit, if a unit is down it's because we are renovating it), we get referrals, we don't get many complaining phone calls, our tenants stay a long time, they tend to take pretty good care of the place, they are vocal about trouble tenants, and they are great people to do business with. All-in-all, we probably revenue and profit more than if we pushed costs and expenses and our business is easier to run.

And, by the way, I think it would be difficult to run our business this way with a 3rd party manager.

Originally posted by @Jeff J. :
And, by the way, I think it would be difficult to run our business this way with a 3rd party manager.

I completely agree, Jeff - I'm currently using a PM for my rentals for a number of reasons, and I'm quite happy with their performance but if/when I take over managing the units, I will implement more of these types of strategies. A PM just can't "customize" as much.

Congrats on the units Arnie - what you do with them all depends on your strategy. For a long term hold, it makes sense to stay under market, offer better service and maintain revenue. Lots of stuff looks great on paper and pro formas but it's where the rubber meets the road in actual results that matters in the end. On my long term holds, I don't push rate and will usually agree to keep the rent the same for another 12 month terms....this is on my remaining single family units.

On shared housing and our investment/JV deals, it's all about max rate & max net rents. Every $50 I drop rent on a unit costs me $600 in value. Shared housing is a niche and since we include all utils, it's a great deal for our renters and they are paying us a premium rent but still at least half as much as they would have paid to get an apartment....before utils and deposits. Just for kicks, you might want to try our model when one of your units goes empty....nice looking property! Happy Investing!