Houses Are A Lot Like Race Horses

Topics: Landlording

Which race-horse owner makes the most money? The one with a stable full of mediocre horses contentedly munching hay by the bale while losing races? Or the owner with just one horse that wins over and over again? If your objective is to generate income rather than to have the bragging rights to ownership of a lot of unprofitable rental properties (and wide experience in the martial arts), doesn't it make sense to focus on fewer, better properties than more, worse properties?

If you need income, there's another point about highly leveraged purchases that should be pointed out. If leverage is good in a rising market, it certainly will produce high gains in equity and net worth, but not necessarily in cash flow. The fact that your properties are increasing rapidly in value isn't going to motivate your tenants to increase their rents. Try to 'spend' your equity buying lifestyle and you'll see how little economic reality there is to it. Chuck Considine, a friend and mentor, used to define equity 'as that part of real estate investment that makes you feel better until the day you're forced to sell'. Practically speaking, selling highly leveraged properties is about the only way to get them to produce cash profits. And that presumes that there's a cash sale market out there to sell into. It's been my experience that a person can hold a 'high equity' property for several years without finding a cash buyer.

What about 'borrowing equity out'? There are a couple of problems with this concept. Holding many properties through the use of high leverage is not conducive to being able to borrow against equities to raise cash. A portfolio of debt-laden properties doesn't make a borrower look very attractive to bankers – especially if they produce marginal, or negative, cash-flow. Buying lots of ho-hum rentals more or less just guarantees the owner a fairly low-paying job. Most of these owners would make out better working for someone else; if the risks and rewards of marginal property ownership were compared with those of a salaried manager of a decent apartment property.

On the other hand, suppose you only bought houses that would readily appeal to the growing middle-class-family rental market. That means no condos, no town houses, no duplexes, and no zero-lot line houses. Even if you had to acquire properties much more slowly, you'd be able to keep them filled, longer, with more competitive rents. Your tenants would begin to resemble those of my mother of half a century ago. Rents coming in on time, in the right amount, in checks that don't bounce. People leaving a house cleaned and ready for occupancy, not because of the threat of a withheld deposit so much as because that's the way they found it. Until you've had middle-class tenants, you don't know how good the house business can be.

Can you imagine someone paying $4500 to move in? Whose banker confirmed that he had over $20,000 in his savings account? What about someone, who after having rented for 5 years, had the entire house painted inside simply because, as he said it, 'I want to keep my landlord as a friend after I move out.' All the above happened to me with my middle-class tenants. I'm not alone in these experiences.

Last spring, once warm weather had returned, one of David Tilney's Colorado Springs tenants reported a leak in the sprinkling system. This discrepancy couldn't be discerned under the snow at the time the previous tenant had moved out six months before. The prior tenant volunteered to help dig up the line and repair it for the current tenant. Middle-class values. David teaches the best single family house management course offered anywhere at any price. His documentation is state of the art. If you're interested, you can contact him at (719) 632-7462.

I don't mean to bash all you singles, but I've found that family and job stability mean more than credit checks when it comes to choosing tenants. Even the best tenant won't pay rent if he can't. Some who lose their jobs, or roommate, move out readily, but others don't. Either way it costs the owner money in turn-over time, repairs, advertising, legal fees, vacancy, and lost rents.

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