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…
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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:
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…
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!