I was talking to a couple at one of my Friday night open houses that I hold for subscribers to my newsletter and seminar attendees. He was bemoaning the fact that his rentals were not making any money at all after paying for management. He had neither management skills not any desire to manage his properties himself, and was frustrated because he couldn’t get his manager to raise the rents. He could have easily fired the manager, but was afraid he couldn’t replace him with anybody who would be any better.
A major key to landlord profits is to avoid vacancy, turnover, and maintenance. The best way to do this is to motivate tenants to renew year after year. I do this with my non-rent raise letter that is sent out at the time of lease renwal. Here’s how it works.
Once upon a time I was a burned out landlord. I didn’t mind managing properties, and done it successfully for three decades when I realized that I was pinned down to the area where my properties were and was unable to take advantage of the money I’d made in real estate. I had been teaching the only single family management seminar in America for many years, and was wearying of the whole subject of management. About this time David Tilney came along and adapted my management techniques to his own particular style with such great success that I immediately surrendered the management seminer field to him and retreated to the side lines.
Last time I explained how I used sandwich leasing to be able to hold rental houses without having to do the management by turning over my houses to experienced, successful managers who were managing their own portfolios and those of others.
In the world of supply and demand, when demand rises, prices follow suit, and when demand falls, prices fall too. Many products on the market are fungible. By that I mean that, among the same products of the same brand, they are indistinguishable from each other and the consumer doesn’t care much which he buys. One would think that rents would fall into the same category as other products, and be bound by the same market forces, but they aren’t. Just as there are differences in quality among brands, so there can be differences in the quality of a rental property.
What about those who don't live in areas where prices rose very swiftly, and where they are now dropping even faster? No matter where you live, there are going to be people who can't sell houses that they must sell. Although housing is a very narrow, local market, credit is a very broad national market. The effects of the banking crisis can be felt in areas where there hasn't been many foreclosures or much financial distress. Nonetheless, sellers can't find buyers who can get the loans they need to buy houses.
Another benefit of holding houses long term in a market where prices have not historically risen very fast is to be able to have a tenant pay off the loan over time. I bought houses on the Mississippi Gulf coast that I held for 20 years without much appreciation at all. But over that time, they were completely paid off with rents. When I sold them, I netted $330,000 despite the fact that I only saw them three times, and paid retail prices for management and maintenance over the entire two decades. My point is that just three of these deals would have made me a millionaire in the same 20 years that most people struggle to make a living without any savings at all.
If your rentals are losing equity every day and you don't want to sell, at least raise your rents. That's easy to say, but hard to do if you've got sub-standard property that you've been milking for cash flow. On the other hand, why not raise the rents and let the market decide what you should do.
Turn negative cash flow houses into positive cash flow houses by selling them to your tenants. When you have a house that tenants won't buy for cash, or for which they cannot pay higher rents, trade negative cash flow for positive cash flow by selling on time and carrying the Note.