My best rental performance is during this pandemic!

[Shankar Ramani]

I'm a part-time real estate investor for over a decade now with several single-family homes and a couple of duplexes. I got into real estate once my experience with stocks and other vehicles weren't working and I needed a way to save money for retirement. Obviously, these are very different goals compared to full-time real estate investors and those focused on cash flow, but I just witnessed an amazing phenomenon. For the first time in the history of my rental real estate investing, I have reached zero rent pending from my tenants and all within the stipulated payment periods.

Even during the height of the great economy, I always had a couple of tenants who I had to follow up with for delayed and overdue rents. As of yesterday, those tenants have been paying well within time for the last 2 months, thus leaving me with 0% overdue balance for the first time.

The point of this post is to share a highly conservative, risk-averse method of real estate investing. In my view, this strategy should form some part of every real estate investor's portfolio, ranging from say, 10 - 15% for full time investors to 90+% for conservative-minded investors like me.

The strategy is -

- Cash flow is not my criteria for real estate investing - I can afford this and this works for me because of my goal of using real estate investing for retirement funds rather than my active income. That said I do get enough cash flow to get the properties to be maintained on their own without me having to put in additional money after I buy the property.

- I buy only in pristine school districts and this ensures lower downside during crisis times and significantly higher appreciation over the long term. The downside of course is that these properties are more expensive to buy, but since I don't care for cash flow, it works for me.

- I am very selective about tenants - higher-income families, with tenants having stable, longer tenure jobs (Even if they have not so good credit due to a divorce or other reason, which is why they're renting and not buying).

- I give tenants a great living experience and dazzling offers on rent - property is kept up to date, top-notch maintenance service and upgrades. Combined with the good school district and neighborhood, they typically end up staying for years and never moving out unless they really have to. This reduces my loss of rents.

- I don't use property management because I like doing the work, so that saves me that cost too because monthly rents are high for my properties and I would lose a lot of money by applying the 15% - the time I spend on maintaining my properties is equivalent to much less money - I guess that is the problem with percentage-based fees - for larger rents, the fees start looking unrealistic especially for a group of 6-8 homes. As an aside, the real estate industry must consider tiered property management rates with volume discounts. And I'm not into multi-family rentals that at some point will require property management due to the higher number of units. Rather, I have fewer and much higher value properties. I also don't like to deal with tenants who live paycheck to paycheck, that is not a judgment on such people, merely that I can't take the stress of being unsure if I'll receive the next month's rent or not.

- I am net positive on my cash flow, but it isn't much, all if it is put back into the property maintenance and upgrades to keep the properties current. Essentially, I reinvest the cash into the properties doing necessary upgrades regardless of tenants' requests.

During the pandemic, I was afraid that I would take a hit and never expected the opposite. The 2 tenants who were always behind perhaps found that they couldn't anyways take their vacation or go out anywhere and decided to get current with their outstanding rents (typically it was always 2 months outstanding, now it is zero). None of my other 6 tenants had any issues during the pandemic, they have all had stable jobs and in good financial condition.

The cons side of my strategy is obviously that it is too conservative and doesn't get me great cash flow. However, I think we need to look at the Total cost of ownership and Total return over 20-30 years. Over this term, I will have higher returns due to property appreciation, lower rent losses and will be insulated from downside risks during recessions and crisis times.

A couple of years ago, I consulted a real estate investor for optimizing my mortgages and he said that I was too conservative and leaving money on the table. That might be true, but I consider it risk premium and freedom that I get to worry less and use my time for other investments and things in life.

Similar to a stock investing strategy, I would recommend some percentage of such a defensive strategy be part of every real estate investor's portfolio - my personal experience confirms how this strategy works well without flaws and has been tested for a decade now. It's a way of deliberately opting for lower short term returns for bigger long term returns and insulation against other higher risk investment vehicles.