What Real Estate Investors Can Learn From Mr. Landlord

Most of my articles in this “what real estate investors can learn from” series have focused on massive companies, such as Apple and GE. So this week, I’ll take it down a notch to a business that is much more similar to those of the majority of people on BiggerPockets.

Jeffrey Taylor, or Mr. Landlord as he’s called, owns about 200 houses and apartment units in Virginia, as well as a management consulting company. Unlike most real estate investors (including myself), he has made it is his mission to optimize the management side of the business more so than the acquisition side.

Indeed, Taylor only became a landlord in the first place accidentally. As he put it in an interview, “…we bought a second home and we thought we’d be able to sell the first home. But, as the story goes, we became accidental landlords because we couldn’t sell the property and we needed some money to cover our expenses.”

Taylor’s story then sounds rather familiar to many investors who look back on how they began: “When I first got started as a landlord, my wife and I, we would look at the potential residents and if they looked OK to me and looked OK to her, we would say ‘OK, here’s the keys.'” Even worse, “…back then, I didn’t even have a written agreement.”

I know many investors who started this way, and each of them came to regret it. But Taylor doesn’t just go on to recommend building systems, diligent screening, using a property management software and not listening to every sob story you hear from your tenants. (Although all of those things are very important). Taylor also recommends building a customer service-minded system that actually borrows many ideas from the hotel and hospitality industry.

While Taylor doesn’t use these words, I would refer to it as the difference between treating tenants as tenants and treating them more like clients.

Mr. Landlord’s System

Before I came across Jeffrey Taylor, I saw property management as a straight-forward business. Get the right tenants in the property, make sure you fix anything that breaks, and make sure you collect your rent. In many ways, that is what the business is. But that’s also what the business was 100 years ago. What other industry has been so utterly stagnant?

Related: Investors: Here’s Why “Rental Owner” & “Landlord” Are Two VERY Different Roles

One of the biggest expenses a landlord faces is turnover. So one of the biggest opportunities a landlord has to increase their income is to keep the tenants they currently have (indeed, in business, it is well established that it is five times more expensive to get a new customer than keep a current one). But what’s the main reason tenants leave? Taylor notes in his excellent book, The Landlord’s Survival Guide, that:

“According to a federal government survey, the top reason people switch services (i.e. rental housing) is because they sense indifference on the owner’s part. The reason was given five times more often than ‘dissatisfaction with quality of service,’ which was the second biggest reason. This is good news for landlords. It means even if you can’t provide prompt or superior service, you can always take the time to recognize your residents” (Taylor 167).

This is a critical point. Often when someone is very mad at you, say a tenant who has a maintenance problem you can’t fix immediately, the natural reaction is to try and avoid them or at least to deflect the blame. Yet it is amazing how much someone will calm down when they feel listened to and empathized with. Just talking to them, acknowledging their problem and validating their feelings while guaranteeing that you are trying to solve the problem (even if you’re not sure how long it will take) can go miles with tenant relations and tenant retention.

The 3-Star Resident Program

Furthermore, this whole approach can be systematized, which is Taylor’s genius. He stars off with enrolling them into his “3-Star Resident program.” (Sound a little like a hotel?) Here’s how he describes it:

“After 10 or 11 months, most residents start wondering if they’ll stay another year because they’ve been trained to think in intervals. Average landlords even encourage that kind of thinking by asking residents if they want to renew. I say, don’t let your residents think every year whether or not to stay with you. Instead, get them into a program that encourages them to feel connected to you.

“When residents move in to one of my properties, I welcome them into my 3-Star Resident program. It doesn’t cost them anything and they get perks by being a part of it. Their ‘anniversary’ becomes a time of celebration. Every year, I give them a choice of property upgrades (costing between $25 and $75 each) [With inflation, this is more like $50 to $100] for paying rent on time. Some landlords wonder why I reward people for doing what they’re supposed to do anyway. I regard my residents as business partners and vital member of my success team; giving rewards helps our relationship work. It also encourages them to stay longer than one year. To avoid vacancies, I’m glad to give a property upgrade that costs $75 or less. Too many times, landlords try to be cheap and step over dollars to save nickels. This isn’t rocket science; I’ve proven that people stay longer when I offer upgrades!

“After each of the first three years as a resident, they receive their choice of a property upgrade as part of my 3-Star program” (164).

These upgrades are also improvements to your own house. His upgrades are things such as a ceiling fan, accent wall, storm door, etc.

What about after the first three years? Well:

“…in the third year, I announce a new program: the VIP program. Starting the fourth year, I return $100 of their deposit” (165).

Taylor does regular inspections to make sure they aren’t destroying the place. But regardless, I can tell you from experience that if you can get tenants to stay for four or more years each time, it easily makes up any reduction in the deposit.

The Power of Incentivizing Tenants

Oftentimes when making decisions, people are on the fence and just need something to justify jumping on one side or the other. Even a small bonus like the ones Taylor described above can make up someone’s mind. Similarly, treating that same tenant in a disrespectful or neglectful way could make up their mind in the opposite direction. Taylor notes his tenants (err, client) stay an average of six years, which is substantially better than anywhere else I’ve seen.

Taylor has developed systems and programs like this throughout the property management side of his business, and these have had a major influence on us. For example, one program my brother and our leasing manager put together (inspired by Mr. Landlord) was the “First Choice, Money Back Guarantee.”

Basically, we were having a problem with people not paying application fees because they knew someone else had already applied and so they might lose their application fee even if accepted. So we put in a rule that if they were accepted but the house they applied for was gone by the time of their acceptance, they could either take another house we had or get their money back. All of a sudden, that problem disappeared. It cost a little, sure, but it was pennies to save dollars.

Too many managers see property management as a straight-forward business that is as it was 100 years ago — get a tenant, do the maintenance, collect the rent, repeat. Jeffrey Taylor has taken the concepts that have had so much success in other businesses and brought them into the world of property management to take our industry into the 21st century. Which begs the question — what other areas of property management can be drastically improved by applying these types of concepts?

Do you employ any creative strategies in your landlording business?

Let me know with a comment!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.