If You Want Great Tenants… Don’t Forget This One Rule

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Why do we buy multi-family properties?  If I were to frame the answer in very romantic terms, I’d say that the two reasons are Financial Freedom (which is a function of Passive Cash Flow) and Financial Wealth (which is a function of Net Worth).

In my view, the order of importance is: One – Financial Freedom, and Two – Financial Wealth.  The reason behind my perspective is a medical diagnosis of Multiple Sclerosis (MS).

I won’t bore you with the details here suffice it to say that MS will likely significantly impair my capacity to move as time goes on.  This reality creates a problem – I can’t very well go to a job if I can’t move…

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Solution to the Problem

I am not at that place yet; I can still move.  However, with this in the back of my mind at all times, everything I do in my professional life has a narrow focus on addressing the reality of needing to create a circumstance whereby the money comes in regardless of my capacity to perform work.  Simply put, my life in real estate represents a solution to this problem; I buy assets which generate passive cash flow, and thereby alleviate the need for traditional employment / self-employment.

Therefore, by definition in my consciousness real estate represents a vehicle toward Financial Freedom; not by choice, but by necessity…  Not financial freedom in a sleazy guru selling you on a dream kind of way, but something a lot more profound than that – do you understand?

Therefore, the romantic ideal of financial freedom translates into reality in terms of Passive Cash Flow which when large enough will cover the cost of living.  Buy enough assets which throw-off cash flow and you can be financially free!

Couple of Things to Note

There are several important distinctions to be made here.  First of all, buying investment property is easy – anyone with some money can do it.  But the fact is that not just any property will provide you with stable cash flow. Also, in order to fully capitalize on all of the available advantages, we must remain in the game for a long time to allow market forces such as appreciation to do what they do.  In other words, we must not “burn-out” on management of our assets.  If there ever was a statement of truth, it is this:

Your longevity in this sport is a function of the type of tenants you attract – period!

And having said this you must note another statement of truth, perhaps even more profound than the previous:

YOU are very limited indeed in what you can do to attract tenants.  It is not YOU who attracts tenants; it is YOUR PROPERTY…

Therefore, the question becomes –

What Type of Property Attracts the Right Tenants?

The main driver of value in a society based on free markets is Desirability – if people want what you have then they will choose to pay you money for it; in other words, desirability drives demand.  This is no different in real estate from any other commodity.  Thus, if I had to crudely summarize in one sentence my thoughts around what it takes to succeed in real estate investing, I would say the following:

Buy only those assets that are deemed desirable!

Well – in principal it is as simple as that, however, in practice things are a bit more complicated.  Here is the problem – not everyone involved in the life-cycle of an asset deems the same attributes desirable.  In fact, what is desirable to one party is often undesirable to the other.  So, the problem of choosing the right building becomes a three step process:

Step 1: Define all of the parties of interest.

Step 2: Define what each deems desirable.

Step 3: Buy property which represents a compromise.

Relative to income-producing real estate, the parties involved in the life-span of the asset are:

  • Tenants
  • Owner
  • Buyer (when the owner is ready to sell)

That was easy.  Unfortunately, this is where “easy” ends and difficult begins, because what we have to do now is to understand which features will be considered attractive and desirable to each of the three groups, and how to isolate the type of property which represents an acceptable compromise for all.  Let’s focus our thoughts a bit more…

Basic Thinking Goes Like This:

  1. If you can buy a property which is attractive to potential tenants, then you won’t have any trouble keeping the building full of good tenants who pay on time and are respectful of your property and their neighbors.  This means that you will be generating consistent income and have the ability to reinvest into the upkeep of the structure making it easier to manage.
  2. If the tenant base is easy to manage, and the physical property is easy to manage, then you as the owner will like having the building in your portfolio.
  3. If you like owning this property, then your potential buyers will like owning it, which will drive the value of the property up over time and guarantee options down the road.

Options are What we Want!

Well –  this pretty well covers it.  All that is left is to define and itemize desirability as it relates to everyone involved.  I think 20,000 words may do it but I’m saving it for later…  Thoughts?

Photo Credit: house42

About Author

Ben Leybovich

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.

16 Comments

  1. And keep your tenants happy! Nit-picking a $10 issue (even a $100 issue) and losing an $800/month tenant is not worth it. A happy tenant won’t leave, and those that leave cost money. But keep a fine line between keeping a tenant happy and letting them walk over you.

  2. Ben –

    I have written about the subject of building a” lifestyle business” on numerous occasions. In most cases this is a lifestyle that is chosen. In your situation that isn’t the case; you are building a lifestyle business out of necessity. My hat’s off to you.

    This only goes to prove that you can tailor this business of real estate investing to meet your needs today and in the future.

    Sharon

  3. Ben,

    Thank you for this article. It is the first I’ve read, here or elsewhere, that acknowledges that the bottom line is not, for all of us, the sole motivation for getting into real estate investing. For some, it is a matter of survival. I completely understand that REI is a business, but it is sometimes isolating, for me at least, to hear it discussed only in terms of cash flow, ROI, exit strategies, the 2% and 50% rules. For me, there is an underlying imperative, and that is to provide stability and security for my children and myself in the near-term first and foremost.

    My husband died prematurely and completely unexpectedly four years ago. I was left with a decent life insurance settlement. I was in no place to make any rational decisions at the time, so I put it in the hands of a trusted wealth advisor who has served me well. I did not dip into it. We lived off my income and the Social Security survivor benefits my children receive. Those will evaporate in a couple of years, right as they are about to start college. My income will plummet as my expenses explode.

    My options were to use the life insurance for college expenses, leaving me with practically nothing once the kids graduated and long time to live on a sharply reduced income. I knew I either had to slash my expenses, increase my income–or both. I took a leap of faith and have chosen to, as cautiously and smartly as possible, invest much of the life insurance in multifamilies. Still, it is a gamble. I have a long plan that involves selling my house, living in one of my units, continuing to work my day job, and adding another one or two multis over the next 24 months to pay for the kids’ college. Once they’ve graduated, if I play my cards right, yes, the passive income will contribute to my financial freedom and wealth–and, utlimately, my childrens’—for years to come. Like many here at BP, I hope to retire early. I would like to leave my children an inheritance when I die.

    In the end, the kids and I will likely come out far ahead of where we would have had my husband not died. It’s somewhat uncomfortable to think about it in that light. But it also feels like I have a moral obligation to make the most of what was left us and that, if there can be a silver lining to the loss our family experienced, this is the path. In the meantime, a lot of moving parts and a lot on the line.

    Anyway, thanks again for acknowledging that there is such a thing as real estate investing with soul.

    • Hey Nancy,

      Thank you for sharing your story indeed. You’ll be just fine!

      I often get very tired of the “buckaroos” running around propagating real estate investing as a sexy glitzy shoot from the hip deal. BP is the best resource online, which is why I am here, but even on BP 90% perceive RE in this way. I am with you – it’s a means to an end, and the reason vast majority fail is because they wouldn’t know an “end” if it hit em in the face! Sad but true…

      Thanks very much for voicing an unpopular view of why we do what we do. Keep in touch Nancy!

      • Thanks for the reassurance, Ben. I appreciate it. I think we will be fine as well. In the meantime, I’m executing the long plan one day recognizing that life serves up surprises, and the key to success is building in enough flexibility to roll with those punches. Best of luck to you, and keep sharing your wisdom with all of us on BP–which, yes, is an invaluable resource!

        Nancy

  4. What an inspiring discussion. Ben, I hope you have a good management company for the times when someone has to physically visit a property. I manage my Condos in Boston from SW Florida. I visit once a year, sometimes meeting a tenant who has been in place for a year, because I have good management and Realtor in place. In addition, I have a general contractor, plumber, and HVAC company. Also, I trust my tenants to buy new appliances when necessary. They just send me the paperwork and deduct the bill from the next rent check.
    Nancy, kudos to you for not falling apart. I’m sure your kids know how fortunate they are to have you for a Mom.

      • Nancy,

        I’m guessing your kids are learning the business with you. It will be valuable in the future – you can pass it on or they can run it as a sideline. I have a self-directed Roth IRA devoted to R.E. investments. My grandchildren are the beneficiaries and I’ve been encouraging them to learn as much as possible to keep it earning long after I’m gone.

    • Hi Susan,

      Thank you for engaging. I do not hire a management company – I own one. Well, not yet but I do have all of the pieces in place and once the CF is large enough, I will begin to hire people full time. I do want to phase myself out, but I plan to do it by hand-picking and training the managers leaving me to manage them. I hope that makes sense cause it’s late now 🙂

      Thanks so much!

  5. Great post Ben. It’s actually two posts in one. 1st why we invest in real estate. 2nd, what kind of properties to buy.

    1st, kudos to you for taking control of your situation. Essentially this is why I’m also pursuing RE investments. For years we pumped money into our 401ks and individual stocks. With all the corruption and double dealing evidenced in our careers we just aren’t interested in gambling in the stock market anymore. It’s sad to say, but I just don’t think there are enough people you can trust in corporate America anymore. At least with real estate, you can put your hands on it. It may go up and down, but if you’re buying right, it should be more stable. It should prove to be a more solid foundation for planning.

    2nd, regarding the headlined point of the article: I agree that you’re wise to keep in mind yourself as the owner, the potential tenants, and future buyers. To some extent they all want the same thing – a well finished, quality home. That is if we’re talking SF homes. … You’re right – 20k words or so would be a good start on that topic.

  6. Very inspiring and down to earth conversation here, I just wanted to thank all of you for sharing for those like me- waiting to get started in REI, not trying to take over the world in glitzy real estate all over the globe, but rather with some good and stable long term investments that hopefully set me up for retirement and hopefully allow me to travel a bit! 🙂

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