Don't Chase Cashflow, Chase Value!

How many of you have heard of the phrase, “Real Estate is all about numbers”, well there is some truth to that when you look at “all about numbers” in a vacuum. The aspect of real estate that most individuals take for granted is the human aspect of real estate. Real Estate is a people business, we know that fact when it comes to lenders, contractors, agents, and whoever else is part of your team, however, this is where it usually stops. It never truly extends to the tenant. This week I would like to discuss the idea that cashflow is a result of adding value.

Tenants are the asset

As a Buy and Hold investor when we think of an asset, we think of the property that is generating income, increasing in value through appreciation, the loan pay down every month, and more. Although this is true, when we are looking in a vacuum; we never include the tenant in the asset conversation. The tenant is never thought of as an asset but mainly the person who pays the rent every month and leaves us with cash flow. Whether that be positive or negative. On the contrary, the tenant is the primary asset; we know that the number one cashflow killer is a vacant property. A vacant property that sits for too long, will quickly turn into a money pit, which as investors is the last thing you want.

Hence to avoid a money pit, it is imperative that you add value to your tenants. I am not insinuating that you allow your tenants to walk all over you, that is not adding value to anyone. As Brandon Turner mentions in his book “The book On managing rental property”, You have to be Firm but be Fair, we have to be firm with our tenants so that they understand the landlord-tenant relationship and the boundaries that exist in said relationship, that being said we as landlords have to appreciate the human aspect of that relationship and remember that we are providing a service. So how do we add value to our tenants? Well, there are a lot of ways to add value to our tenants but let's talk about a big one, maintenance.

Take care of maintenance issues, Promptly 

I recently acquired a duplex that was being managed by a property manager; when I first walked the property, I saw a lot of deferred maintenance by the PM. When I spoke to the tenants I could tell that there was a lot of bitterness towards the current property manager. A lot of the issues that the tenants mentioned to the property manager were either ignored or simply patched up until the problem returned. Now, this could have been a bad property manager but not taking care of maintenance issues when they first arise does not add value to anyone.

One of the issues that the tenant brought up to me, was the dryer not working properly. The Property manager sent someone to fix it and it worked for a short while until it stopped again. For the amount of money and time spent trying to fix the dryer, why not just buy a new one? This is more cost-effective than constantly patching things up. I’m not implying to simply replace everything that has some issue, some things can be fixed if done correctly but compare the options of repairing vs replacing and factor in the long term variables such as the age of the item, cost of replacing vs repairing, etc. Most importantly, never ignore a maintenance issue, no matter which route you decide to go, always tend to the problem at hand and fix it as soon as possible. I look to tend to maintenance issues as if I was living there, if I was living at the property I would want the issue to get fixed as soon as possible.

Cash Flow is an output of adding value

How long would you like your tenant to stay in your units? Well, ideally you would want them to stay for at least 30 years or the whole term of the financing on your property. The correct answer is forever because, without a tenant in the unit, you lose all of the benefits of investing in real estate. Think of cash flow as a result of adding value to an individual. We are providing a service to our tenant and we want to always keep that customer happy. Why is it that in most fast food or retail places, you hear the motto “The customer is always right”. Now we know logically the customer is not always right, sometimes they make mistakes. They order the wrong item on the menu and then get upset when the wrong thing comes out but yet that customer is always right. Why is a customer like that, always right?

The reason is because those businesses want that customer to come back, again and again, to spend their money with them. The concept is the same here for real estate investors, you want your tenant to always come back month after month to pay the rent. The caveat with that is we have a lease that spells out the responsibilities of the landlord and the tenant and thus if a tenant tries to walk over you, you can reference the lease and stick to that no matter what but on the other side, you want to honor your responsibilities as a landlord promptly.

“People Don't leave bad jobs, they leave bad Bosses” -Unknown, I am not sure exactly who coined this phrase but it is true. We don’t quit jobs, we quit bad managers, I like to relate this to landlords. Tenants don’t necessarily leave units, they leave bad landlords who have failed to treat them as an asset, who have failed to take care of the property correctly, who have failed to realize that cashflow is an output, and the input to get that output is value. Don’t simply focus on cash flow without realizing your focus should be on making sure that your tenant is happy with the service that you are providing them because if you can continue to make sure that your tenants keep coming back month after month, year after year then you won't have to worry about cash flow because it will always be there as the value will be the first thing you are focusing on.