How to be profitable owning/managing metro real estate.
I am often asked how I successfully manage so many properties without the concomitant problems typically associated with such an endeavor. When I hear anecdotes
of thousands of dollars lost in back rent, and intentional vandalism on apartments
I am not only troubled by the lack of integrity and basic moral principles of the tenant
but also at the stupidity of the owner for inviting upon themselves such an avoidable result.
Real estate management has to be approached differently in different areas to be
successful. Unfortunately too many people fell to recognize this fundamental reality
and instead implement an unimaginative approach to property management, all too many
times at their own expense or that of the owners they represent. In this article I
will speak to several areas of great importance in effective real estate investment:
- Neighborhoods
- Tenants
- Advertising
- Customer Service
While this list is not exhaustive, I will present my perspective on each of these critical areas, in the hopes that it will help you further refine your respective investment strategy, or at a
minimum gauge the effectiveness of your current property management company.
Neighborhoods
The choice of neighborhood directly affects an individuals marketing /managing strategy and should be a reflection
of their overall investment strategy.
An example of this is a landlord recently profiled in the Milwaukee Journal Sentinel. This landlord’s strategy consisted of buying homes in declining and undesirable neighborhoods, renting to low income and uneducated tenants, and then putting liens against them when the relationship inevitable failed to work out.
While we could seriously question the ethics of such a strategy, it has obviously worked for him and represents a strategy tailored to the neighborhoods he invests in.
For my personal investments I prefer to invest in locations that have at a minimum the following characteristics:
- Profitability (It is almost impossible to make money at the current prices in certain residential areas)
- Proximity to viable cultural/business destinations
- Strong home ownership rate
- Viable neighborhood associations.
I have tailed my personal investment strategy to reflect these types of neighborhoods.
Ideally one would only purchase/manage properties in neighborhoods that are in line with their own individual investment strategies, however some times this is not possible (i.e., inheritance, foreclosure, management contract, etc). In these situations one must either adapt an appropriate strategy or lose money; it is that simple.
Tenants
An investor mentor of mine once remarked that “landlords should write a book because we see it all”. There can be no questioning that owning properties brings us in to contact with diverse groups of people, which can be a source of both great enjoyment and migraine headaches! The type of tenant one markets to should be consistent with their investment strategy for the particular vacancy they are trying to fill. Generally speaking I categorize tenants in the following categories:
Destructive non payers.
It always amazes me that the city doesn’t even want these people in their properties but wants to fine landlords who are willing to rent to them for not giving them top notch properties to destroy! I try my best to stay away from them and the properties they occupy, though early in my career I gained quite a bit of experience with them.
Unpleasant Payers
This is a group that pays their rent but are either hard to deal with, filthy, or inconsiderate to your other tenants. While I try to avoid them as avidly as the group above, there are times that a particular property dictates a strategy where they are acceptable.
Average
This group pays and is mostly considerate and pleasant to deal with. They will occasional be the source of a problem but will respond to requests to desist for the disruptive behavior. This is the group that will walk by a piece of trash in front of their house for days, rather than picking it up because that’s not their job. I strive to purchases properties that dictate a strategy where this group is as low as I will go.
Enhancers
This group is not only pleasant to deal with, but enhance the property through there initiative or presence. This group will assume a sense of responsibility about where they live and will let you know when others are not.
Stars
This person is typically a long term enhancer who goes above and beyond in their respective interest in where they live. There will actively refer other good people to you and are always willingly to put a little sweat equity in improving the quality and appearance of where they live.
Ideally one would only rent to stars and life would be trouble free (with the exception of an occasional city inspector?) but this is not realistic so one must identify the type of tenant consistent with the strategy dictated by the location of the property and goals of the owner.
Advertising
This is a function of the tenant you are trying to reach. While I will not remark on the effectiveness of a particular approach as each must by judged in the context in which it is used, I will observe that competition for the best tenants is hypercompetitive and you must find a way to reach tenants in a way that is ideal for them. Your marketing strategy should be a reflection of who you want to rent to. Quality tenants require a quality plan. Without a digital presence and an innovative marketing strategy and a convincing message, you will be at a huge competitive disadvantage. In the end if you consistently want quality tenants you will need much more than a for rent sign.
Customer Service
While most other business have caught on to this principle (or at least pay lip service to it) many in the property management business have simple missed the boat. How many landlords actively seek out feedback about their company’s or individual service? Or at a minimum provide a mechanism for a tenant to offer it without fear of retribution? I have made Milwaukee Metro Management customer focused and as a result experience a high degree of lease extensions. An investor mentor once remarked that “the key to successfully dealing with people is to be firm and fair”. While I wholeheartedly agree I would add that listening to feedback doesn’t hurt.
Conclusion
In summary to answer the question what is the most important aspect to real estate investment success, the answer is clarity. One must have a clear set of objectives, and then develop a clear strategy that supports them. The only sure way for failure is to have a strategy inconsistent with your objectives or to have no strategy at all.
Good luck and happy investing.
Joe