What's the real asset - the house or the tenant?

Question

For those of us involved in rental real estate investment it’s common that we focus on the house as our asset.  I mean, why wouldn’t we?  We spend a considerable amount of time sourcing a house, buying it, fixing it up and marketing it for rent.

A different perspective was presented to me the other day when I sat down with 35 year Atlanta property management veteran Robert Locke.  Like most of us in the Property Management world, he got his start buying and holding rentals.

Now he manages over 1,000 rentals for owners throughout the city.

Not long ago one of his property managers came to him and told him a long-term tenant was moving out of a house they’d lived in a long time.  When Robert asked “How long?” the PM told him 20 years!

Incredible.

Robert told me that got him thinking that the tenant is the real asset to the investor...not the house.  His point was that when a tenant moves out, the cost to the owner to put that house back on the market (turn) is not money that he/she can recoup from another tenant.  It’s sunk cost.

What’s the industry average for a turn?  Is it $3,500?  If the house is older and the tenant rougher, $5,000?

Imagine doing that every year or year and a half....begins to turn your great investment into Tom Hank’s The Money Pit.

So what was his point? It was more like an epiphany than a point.  He came to the conclusion that the tenant is the real asset and that investors and property managers alike need to focus on what he calls ‘celebrating the tenant’.

That simply means making them feel like they’re important and appreciating them in ways that they wouldn’t want to risk having a different landlord.

I’d love to know if you’ve done this with your tenants?  If so, what were some of the things you did to make them feel appreciated??

Steve Vaughan · Answer

My business cards for property management (for my own properties) say "You are our #1 asset" right at the top.   I don't spend lavishly on them or do anything crazy to pander to tenants.  I smile, say their name, their kid's names, etc when I see them. I give them hand-written holiday cards.   I consider them more of a client than a customer.  A customer goes to the grocery store that is closest.  A client chooses my property and chooses me for specific reasons.  It is worth a little effort to make them feel appreciated as your wise PM veteran points out @Spencer Sutton !  Turnover doesn't have to cost thousands, but good tenants are worth their weight in gold!

Peter MacKercher · Answer

It's a good concept, but I think both are valuable. It's that fine line -- you want good people and you want to maximize rental rates. I usually ask long-term tenants if there's anything I can improve, and then I'll put some money in the property every 5 years or so to keep them happy.

If they move out you'll make improvement (new kitchen, new bathroom), so you'll spend some money but you're also probably going to raise rents since they've been there for 20 years, so you'll recoup those costs that way.

To some extent the value of either will depend on the market and the area you're buying in, too.

Nicholas Crum · Answer

They are both but keep in mind that if/when they do move out, the money you are spending on the turn (depending what you do) can appreciate the value of the house as well. This is why in the multi-family arena the average turnover for larger apartment complexes is near 50% per year.

The tenants are important but look at where the rent is currently vs what can you get someone new to pay coming through the door. Right now the average rent for my community is $1000. I can get $1100 for someone new coming through the door because that's what market is going for.

You just have to run the numbers and see what makes sense.

James DeRoest · Answer

No. He's wrong.

The tenant is a customer. The house is an asset. To a property manager, the tenant and owner are both customers. A property manager has no assets directly in the game.

You would not and should not need to spend $3k each time you turn the house. If you have the right tenant, a house turn will require very little work.

The only times you are spending a large amount of money is when the tenant has been there for years, or the tenant trashed the place.

Spencer Sutton · Answer

@Linval T. - Great points!  I think it comes down to treating tenants the way we would want to be treated in the same situation...respect and appreciation are important.

Spencer Sutton · Answer

@James DeRoest

We actually have an extremely disciplined underwriting process...but I appreciate the suggestion.

It's also important to note that in some cases we take over management from another property manager or a house that's been owner managed...so we inherit the tenant.

James DeRoest · Answer

I think you need to revisit your tenant screening to be honest. And why on earth would you ever put carpet in a b c or d propert? In by the foot, out by the pound.

If tenants are regularly doing $1k+ of damage in your properties, then there is something seriously wrong with your screening.

Linval T. · Answer

@Spencer Sutton

Excellent analysis and yes, the tenant is the secondary asset that drives your/our primary asset and financial commitment .

I agree that we should treat performing tenants with respect and appreciation.

The fact of the matter is that the longer they stay, the less money will be spent on repairs to get the place in move in ready condition for the next tenant.

This churn affects the bottom line if there is a revolving door effect.

I personally speak with my tenants in a respectful and not overbearing business like manner.

As a matter of fact I send them a gift card at the end of the year, as my token of appreciation for their subscription to my business success.

Don't misinterpret my kindness for weakness, as the tenants are not my friends, just ancillary business partners.

Spencer Sutton · Answer

@James DeRoest

Good points...I believe in certain circumstances the house will not need much work...but in other cases, it could need things like:

• Paint
• Carpet
• Kitchen/bathroom flooring

Some tenants are harder on houses than other...normal wear and tear without trashing the property.

We deal with a lot of B/C/D property here in Birmingham and so it's rare that a house turns and there's not at least $1,000 worth of work...most of the time it's more.

What's the real asset - the house or the tenant?

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