The dichotomy in this business...

20 Replies

So I'm in the process of writing my business plan to start my real estate investing in a couple of years, once I build the connections, systems/processes and the capital to do so. While writing my business plan, I came across an interesting dichotomy that I'd love some input on.

I've gone through this forum quite a bit over the past six months and one of the things that many investors on here emphasize is that your business is, in fact, a BUSINESS and you need to run it like a well oiled machine that doesn't divert from it's criteria or make emotional decisions. While I certainly agree with that, it's also interesting that real estate is primarily a SERVICE industry in that our business model does rely heavily in part on acquiring and maintaining good tenants to provide consistent and timely cash flow each month. Without the tenant, the monthly mortgage payment and other various expenses would quickly eat any small time investor alive, unless they're heavily capitalized. On that note, in theory we should also provide exceptional and unique services to deserving tenants, to keep them coming back to our properties and staying as our tenant. For example, if a tenant comes across hard times or some other financial fallback, it would make sense that if they're a good enough tenant you might work with them on a payment plan or maybe even delay rent payments to keep them on. Even though this might affect the short term profitability of your operations, you've established a loyal tenant that could pay off in the long term for a number of reasons. This is one example of many that I'm sure landlords everywhere have stumbled across, so I'm curious...

How have you landlords out there established a good balance between running your real estate business like a business, but still focusing on the service aspect of the business? 

You might similarly describe the relationship between banks and homeowners they give mortgages to. Do they give the kind of service you describe? If not, why not?

Good Tenants will have savings in place and will not have a financial crisis.  Good Tenants will not make their problem your problem.   Have clear lease payment language in your lease.  Enforce your lease.  

Providing good service and allowing non-payment are two different things.

There is not a long term benefit with a resident that has a poor rental history. You are targeting the wrong customer and reinforcing late or non-payment.

Unfortunately, you are over-estimating recovery in these situations.  It's not about running a business or being unemotional...it simply doesn't work.

I have seen a lot of loyalty from granting mercy when appropriate.  I don't mind and actually have an undisclosed to the tenants 'policy' of waiving the first late fee if they've been with me in good standing at least 6 months. People appreciate that. I also give, granted lame, holiday cards to everyone that says 'I appreciate you!'

 I have a single mom that has owed me $385 in rent. For 5 years.  She got behind and could only pay half one month. Not a big deal to me. Meant the world to her at the time.

In exchange, she has kept the parking lot squared away, given us 'extra stuff' she had like a window a/c unit and yard items that I use at the property. I get a warm smile and how are you from her and her daughter when I see them. Etc.

I have also given leeway to rats that took major advantage of me. Pick your mercy. Big difference between a hand up and a hand out.  I like that you see there is a human side to running this very human business, Treivor.  Just be careful not to waive something for someone but not somebody else.  That's why I have my 6 months+ thing. I have to apply it to everybody. 

I raised rents on two of my units $5 a month on two units so far this year. I may be able to pull an extra $50-$75 month in rent, but the cost and risks of turnover is higher than giving them a break. Excellent tenants are gold and worth more to me than a few dollars. It IS a business, will always be a business but knowing when to be tough and knowing when to be lax can make a lot of difference. Most of my tenants LOVE me, and treat me like family. In exchange for paying timely and taking care of my  properties like their own, I give something back. I have recently demanded late fees from one tenant, with my intention of keeping them "trained" to pay timely. So, there has to be some balance. 

John Thedford, Real Estate Agent in FL (#BK3098153)
239-200-5600

Good and great tenants are the backbone of your business. Each year when I do my Schedule E, I notice that my most profitable properties are the ones with long term tenants who take care of my property i.e. make a home for themselves and who pay (CLUE-No turnover costs).  So, should one of them fall on hard times, I will work with them considering they have had no lease violations. There is another thread on here about an elderly couple who were good tenants for 5 years and ran out of money.  A lot folks said throw them out ASAP.  5 years and timely rent deserves some leeway.

However, you will have the types that will take kindness for weakness.  It is a matter of WHEN not IF you are going to get burned.  Now these types need to hit the road.  Also, if a tenant disrespects your place and you have a strong lease, then technically they are in lease violation.  I give less leeway with tenants who have had multiple lease violations.

And that goes with aggressive rent increases.  If you are a hot market, then great you can do this.  In slower markets, is that $10 a month rent increase worth a couple grand in turnover costs and all of headache to find another great tenant?  Sometimes not raising rents is a BUSINESS decision! 

Originally posted by @David S. : In slower markets, is that $10 a month rent increase worth a couple grand in turnover costs and all of headache to find another great tenant?  Sometimes not raising rents is a BUSINESS decision! 

 Even if there is no rent increase, I give notice of one every April.

I'll raise the $10, but also attach a discount memorandum of $10 for paying on time and being awesome.   May sound silly, but they appreciate it, and if they don't pay on time or get complained about, the $10 (or however much) is in effect.  Just an idea.

Originally posted by @Steve Vaughan :
Originally posted by @David S.: In slower markets, is that $10 a month rent increase worth a couple grand in turnover costs and all of headache to find another great tenant?  Sometimes not raising rents is a BUSINESS decision! 

 Even if there is no rent increase, I give notice of one every April.

I'll raise the $10, but also attach a discount memorandum of $10 for paying on time and being awesome.   May sound silly, but they appreciate it, and if they don't pay on time or get complained about, the $10 (or however much) is in effect.  Just an idea.

Great idea Steve!

So basically the late payers or the one's with lease violations would get the increase while the one's who play by the rules get the same rent.

Also, could be similar to the 80/20 rule.  Those 20 percent (or less) cause 80 percent of the work.  Therefore, you should be compensated for it. Or manage them out.

Originally posted by @David S. :

Great idea Steve!

So basically the late payers or the one's with lease violations would get the increase while the one's who play by the rules get the same rent.

Also, could be similar to the 80/20 rule.  Those 20 percent (or less) cause 80 percent of the work.  Therefore, you should be compensated for it. Or manage them out.

For me, everyone gets the discount memorandum to encourage good behavior. For some the discount is equal to the 'rent raise'.  Lets them know we are experiencing increased costs, but because you are awesome, we'll absorb it for you.  But if you pay late or otherwise aren't in good standing, you can't take the discount.

The discount can be bigger and take the sting off of a larger increase.  For instance, a $75 rent raise is a big deal and I have to do that sometimes.  But offering a discount of $25 for paying on-time and being in good standing takes the sting off and is better than a straight $50 increase.  Whew! At least it wasn't $75!  Have some folks that have been with me over 13 years and are $200+ below market.   I need to bring them up a bit every year, but don't want to lose them.

At the bottom of the '5-star loyalty discount' memorandum it says I am proud of them and appreciate them.  Also says I will not raise again for 12 months as long as I'm still managing, even if they are m-m.  

@Dale T. I agree to an extent, if it's obvious that a tenant doesn't have their personal finances together and is constantly paying late, or doesn't keep good care of the property or is constantly asking for things to get fixed in a short period of time...then no, that tenant doesn't deserve the benefit of a doubt and I wouldn't put my business' profitability on the line for a tenant with that track record. However, like someone else pointed out, great tenants can certainly come across large unexpected financial issues....like a medical bill or some other act of God that they aren't monetarily prepared for. Surely that has happened before in your experience? Do we just kick out a tenant that has been paying on time for the past three years because they snapped their leg in a car accident and can't work or incurs large medical bills? Obviously, this type of leniency is only worth it as an investor for so long, so do you just judge a decision like that based on opportunity costs?

@Mike Dymski I agree with not becoming lenient with renters with poor history, as mentioned above, I totally get that. I'm talking specifically about tenants that have a proven track record of being a solid renter. Could you elaborate a little more on your "it simply doesn't work" statement? 

@Steve Vaughan very insightful info here! I don't want to completely become the heartless landlord, I feel like I would want to be reasonable whenever a tenant has earned the right historically for me to do so. And I would set certain criteria that would make it very clear whenever a tenant has "earned" the right for treatment like that, to a certain extent...I would not tolerate it from a renter that is chronically late or doesn't take care of my property though. I love the distinction you make between a hand up and a hand out...that is an awesome mentality! Do you lay out the criteria for when a tenant earns your right to a "hand up" in your operating procedures, to avoid liability issues with the FHA of '68?

Also love the discount memorandum thing...I'm definetly going to be using that in the future :)

What I'm realizing from this thread is that, yes, tenants are an essential aspect to your business and it would definitely be worth it in terms of opportunity cost and the reflection on your brand in some cases to potentially be lenient with tenants that have earned that right to. However, I also think that it's still a business, so you have to set firm criteria for how you will implement this and also set guidelines for when the line needs to be drawn and a tenant needs to move on...if not for your own business strategy, for liability reasons as well. I've got a lot to think about, but this has been an awesome thread to follow! Thanks for all the great advice!

Treivor, one quick answer is to actually buy an aged LLC or season a LLC as a legitimate business, go into commercial real estate, and always hire management companies to deal with the service side. But in reality, that can take years of saving large down payments, building business credit while moving personal debt to the LLC to boost DTI, unless you have cash resources to be able to buy off the shelf credit products from firms like DnB. Feel free to message me if you want any free advice on leveraging an entity's credit in your business plan or click Business Credit on CreditBoards.com for more info. For a multi-millionaire running businesses who says he never recommends "termites, tenants & toilets," search Grant Cardone (not that I agree with everything he says) on YouTube who has 4,000+ doors that he DOES NOT manage to see how the big boys play. But again you will find little info. on YouTube about building LLC credit. Corporate credit and entities are one of the secrets of the rich and wealthy.

Originally posted by @Treivor Cashion :

How have you landlords out there established a good balance between running your real estate business like a business, but still focusing on the service aspect of the business? 

 I have more mercy than many, not as much as a few.  However, I wish I had less. 

Generally, I look at it as a employer/employee relationship.  After a few years working a 9-5, I learned it's folly to expect too much loyalty from an employer.  An employee can produce twice as much work as another employee in an 8-hr day, can be the first to volunteer for holiday shifts, can pitch in and help with holiday parties, can come in early skip lunch and work late into the night.  And the employer may truly appreciate those efforts.  

However, when the employer's profits sag dramatically, employees will be laid off.  Whether the employer "wants" to or not.  Bottom line, money dictates actions.  Being a good employee only helps ensure you won't be fired while business is profitable.  When the money dries up, so too does your job.

Likewise with the landlord/tenant relationship.  Being a good tenant ensures I generally treat you well. It doesn't ensure I keep you on when the money has stopped flowing.  

No dichotomy.  Just simple economics.

Originally posted by @Treivor Cashion :

@Dale T. I agree to an extent, if it's obvious that a tenant doesn't have their personal finances together and is constantly paying late, or doesn't keep good care of the property or is constantly asking for things to get fixed in a short period of time...then no, that tenant doesn't deserve the benefit of a doubt and I wouldn't put my business' profitability on the line for a tenant with that track record. However, like someone else pointed out, great tenants can certainly come across large unexpected financial issues....like a medical bill or some other act of God that they aren't monetarily prepared for. Surely that has happened before in your experience? Do we just kick out a tenant that has been paying on time for the past three years because they snapped their leg in a car accident and can't work or incurs large medical bills? Obviously, this type of leniency is only worth it as an investor for so long, so do you just judge a decision like that based on opportunity costs?

@Mike Dymski I agree with not becoming lenient with renters with poor history, as mentioned above, I totally get that. I'm talking specifically about tenants that have a proven track record of being a solid renter. Could you elaborate a little more on your "it simply doesn't work" statement? 

@Steve Vaughan very insightful info here! I don't want to completely become the heartless landlord, I feel like I would want to be reasonable whenever a tenant has earned the right historically for me to do so. And I would set certain criteria that would make it very clear whenever a tenant has "earned" the right for treatment like that, to a certain extent...I would not tolerate it from a renter that is chronically late or doesn't take care of my property though. I love the distinction you make between a hand up and a hand out...that is an awesome mentality! Do you lay out the criteria for when a tenant earns your right to a "hand up" in your operating procedures, to avoid liability issues with the FHA of '68?

Also love the discount memorandum thing...I'm definetly going to be using that in the future :)

What I'm realizing from this thread is that, yes, tenants are an essential aspect to your business and it would definitely be worth it in terms of opportunity cost and the reflection on your brand in some cases to potentially be lenient with tenants that have earned that right to. However, I also think that it's still a business, so you have to set firm criteria for how you will implement this and also set guidelines for when the line needs to be drawn and a tenant needs to move on...if not for your own business strategy, for liability reasons as well. I've got a lot to think about, but this has been an awesome thread to follow! Thanks for all the great advice!

Allowing non-payment of rent does not work (and it leads to burnout).  Residents don't catch up.  Will a few catch up or will they catch up for a little while?  Yes.  Do the rest?  Absolutely not.  I learned the hard way.

You will also have to be comfortable with discrimination and violating housing laws, which many landlords are but it gets problematic as you scale (as does administration).

@John Acheson that's eventually where I want to go, but not anytime in the near future! I'm planning on self-managing for the first 8-10 properties and then eventually shifting over to PMs from there...and then after I establish a large enough residential real estate portfolio, I'll be 1031 exchanging or disposing of underperforming assets into commercial properties later on. But this is 10+ years out from me for right now, but it's good to know those types of things like corporate credit...start with the end in mind! :)

@Randy E. also excellent advice! Everything does come down to the money whenever s*** hits the fan, so I believe this is certainly the bottom line...what I'm realizing though is that if opportunity cost dictates that it might be worthwhile to "invest" in the tenant to avoid turnover costs, marketing and other related costs to finding a new tenant, it would certainly be worth it to establish a system for standing out among other landlords or PM companies by providing some sort of "loyalty discount" or something along those lines and establishing a brand that tenants will view as customer-service oriented. Again, in my mind, I would want to clearly define when I would do this and the types of circumstances I would consider doing so, but only to the point that the benefits outweigh the costs. So you're right, it seems to be a monetarily driven policy that is subtly disguised as a customer-centric service that would hopefully establish loyalty and a good image for your brand as a whole. Thanks for the wisdom!

I have a daytime business, that happens to be working with RE and I run it as a business.

However, my own RE is not a business it is an investment.  I am not in the landlord business.  I both self manage and use outsourced services.  My RE goal is to be completely passive.  I am willing to miss out on the last dollar to free myself up to chase the next deal.  I provide a safe, clean, good value for my tenants.  I believe there is enough money to be made with out being shady.  I sleep better at night as a result.

RE is a capital intensive and has a high cost of entry with a limited supply.  It also bears resemblance to a commodity and can be fungible.   Fining deals and money is a far greater problem, then managing properties.  I spend more time and effort on finding deals and financing than any other activity.    

Lesley Resnick, Real Estate Agent in FL (#sl3322996)
(904) 316-4306

@Treivor Cashion Each landlord does it differently. I've learned from property management companies. My style is just to be direct and put everything in writing. I don't really like to do the back and forth with calling and leaving messages. Though I do respond in a timely manner especially when it comes to maintenance and repair items. Best of luck on your real estate investing business! 

@Treivor Cashion

Providing exceptional service while also running your business like a business doesn't sound like a dichotomy at all! 

I think I get the point you're laying out though. 

It looks like everyone here has already made a great case for the difference between great service and enablement. 

It doesn't sound like you're advocating enablement at all, and the great thing about starting your own real estate business is that you can try these things out for yourself and see what works. Every situation is different, and you'll have plenty of decisions to make once you get going in this new path you've chosen.

 Also don't take years to get started like I did. You can get started more quickly than you think.

Good luck!

I appreciate Mike Butler's perspective on this (and his book on landlording is great). What if you thought of tenants as employees? They work for you. You manage them and provide them the resources they need (housing).
Managing people is an art as well as a science. You need to be aware and comfortable that there is a power difference, you are in the more powerful position. (I can imagine people saying something about tenants having the power to destroy property, yes, but you have law and custom on your side saying that's wrong) There are as many different styles of management as there are people, however the best managers whatever their personality are fair, legal and respectful.
Maybe think about what have been the best and worst elements of supervisors you have had and let that help your decision making.

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