Wed, 27 June 2018
#171: Your tenant is your customer. I discuss how to attract and retain great tenants. You must think about how your tenant thinks.
The quality of the asset you buy affects the quality of the tenant that you will attract.
Six qualities tenants want are: 1) safety 2) move-in-ready condition 3) short commute distance 4) upgrades 5) neighborhood amenities 6) rent amount.
It’s not about what you would want in a rental unit, it’s about what your tenant wants.
Next, I tell you how to profit from inflation. Debt has a bad name. It shouldn’t. I tell you why you want to consider borrowing massively to profit from inflation.
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Listen to this week’s show and learn:
01:56 The definition of great tenants.
03:11 Avoid “A” and “D” class areas.
04:16 Six ways to attract great tenants.
13:23 How to retain the great tenants you’ve attracted.
20:55 How you can profit from inflation.
21:57 Inflation defined.
24:34 Why make extra mortgage principal payments?
27:28 Robert Kiyosaki.
31:05 The power of smart debt. How you get a “phantom” $40,000 gain per year on $1M debt.
Hey, welcome to GRE. This is Get Rich Education, Episode 171. I’m your host and my name is Keith Weinhold and today we’re talking about how you attract and retain great tenants for your income properties - some of which is just sort of common sense.
Then after that we’re going to discuss a topic that’s definitely not common sense which is where real estate investing intersects with the economy that you live in everyday.
This is really fundamental stuff. Your tenant is your customer. You’ve got to be able to supply a product that they demand and then keep them there.
As any real estate investor knows, your #1 cash flow killer is vacancy and turnover. So let’s dig into the heart of how to reduce that for you here.
So the success or failure of your real estate investments depends on your ability to consistently attract and then retain great tenants.
In the end, it doesn’t matter how great of a deal you got on the property or how strong your projected cash flow and return on investment are. Without great tenants that pay rent on time and take care of your property, the cash flow and returns all just evaporate into thin air.
Great tenants by definition - have a job, clean, pay rent on time, and that they’re law-abiding. And yes, I do mean that they have a job.
Here at GRE we talk about “Don’t Follow Money, Make Money Follow You”, well your tenant doesn’t think that way. By and large, they move to where the job is. They make a central part of their life following money around rather than following their heart or following their passion or chasing their dream.
They follow a job. As I’ve often said, you want to think about how your tenant is thinking. Your tenant is just not as aspirational as you - the GRE listener is - and that’s OK - I’m glad that they’re there for us and that there’s a steady supply of soul sellers - yes, people selling their soul.
So the question that naturally follows is: How do you find great tenants for your investment property?
The answer is so simple, yet so impactful.
The quality of the asset you buy determines the quality of the tenant you are likely to get.
You can’t change a property’s location.
Now, understand that you don’t want actually want an amazing A-class location. Those high-end properties aren’t profitable for long-term rentals, anyway.
OK, you’re not looking for a single-family rental home with great, sweeping panoramic views of a pristine, sparkling lake that’s stocked with trout or a home with a 3-car heated garage with a painted floor.
That’s A-class stuff: the best properties.
I’d also advise staying away from the bottom: D-class properties - the worst. The ol’ collecting the rent at knifepoint stuff. That’s not where you want to be either.
If you want to find excellent tenants for your investment-grade property, you should first purchase an investment property with the qualities that attract excellent tenants.
So, really a great question to ponder - if you want to find good tenants - is: then what do good tenants look for in an rental property?
Safety is our most basic human need and a powerful motivator for excellent tenants. One of the main reasons why your prospective tenant decided to spend more to lease a home (as opposed to an apartment) is to provide a safe environment for themselves and their family.
Purchase properties in safe neighborhoods - again, avoiding D-class areas. Good turnkey providers know this & practice this. They have a company reputation to protect. Turnkey providers want referrals from satisfied investors.
2. Move-In Ready Condition
The condition of the property—and more specifically the ability to move right in—is very important to excellent tenants. You could rent out a property that’s not quite move-in ready (requires paint, flooring, cleaning, etc.), but I assure you it won’t be to an excellent tenant.
Your target tenant plans to take care of your property and has high standards of cleanliness and maintenance. If you provide a move-in ready home, you are communicating that you share those same standards.
You know what, the first property manager that I ever hired - I only employed them for a year or a year in a half before I had to get rid of them - is because when I had a vacancy, they just didn’t get the property fresh and clean for the next tenant.
So therefore, the unit still had knicks in the walls and faded paint and half-busted window blinds - and they considered that ready - they showed that to prospective new tenants.
Well, what a waste. I wouldn’t even want to accept the type of tenant that would accept living in those conditions themselves. Because that type of tenant probably wouldn’t respect the unit either.
So, what you can ask your manager to do - between your first few tenancies - is have them send you a 30 to 60 second walk-through video to verify that it’s acceptable to you.
If it’s acceptable to you, then it’s probably going to be acceptable to a quality tenant - and this is just a good way for you to get an update on how your property is looking across the country anyway. Any good manager will do that for you.
3. Proximity to Employment
Let’s face it, very few people like to commute! So proximity to employment centers is very important to good tenants. You can have a great, move-in ready home zoned to great schools, but it won’t matter if your tenant has to drive an hour to work each day.
As you look at potential properties, think about where your target tenants are likely to work and how close the property is to that area.
Proximity to things that everyone needs - like proximity to a good grocery store or a Walgreens or other drug store - that’s helpful too.
We’re talking about the fundamentals of what your tenant wants today. That’s your customer. The last time Rich Dad Advisor Ken McElroy was here, we discussed what the newer amenities are that tenants want today that they weren’t so much asking for 10-15 years ago like good wifi.
Today we’re just talking more fundamental.
Some inexperienced investors subscribe to the myth that your investment property needs to be good enough for you to want to live in it yourself. I’m telling you - depending upon your standards, that’s flawed. You’re really limiting yourself if you think that way.
I’m telling you, every rental property that I own - I can’t think of an exception to this right now - if I lived there, it would be a substantial downgrade to my quality of life.
Now, on the other side, you might think that that your unit just needs to be “good enough for a rental.” Therefore, you purchase starter homes with cheap finishes and maybe vinyl flooring that’s thin and peeling them at the edges and then you rent them to marginal tenants and get limited results.
That can almost work in some markets but this is likely going to hurt you with tenant retention. When that tenant starts doing just a little better financially, they’re going to move out.
So don’t do that; instead, purchase homes that have strategic upgrades that move the needle with the better calibre of tenants that you want: vinyl plank flooring, even granite countertop in some markets, black or stainless appliances - not so much white ones, covered patios, things like that.
You know how I talk about how it’s not about what you want, it’s about what your tenant wants. It’s about putting your desires aside.
For example - and I know that I’m different here - I’ve never understood people’s desire for hardwood laminate flooring or vinyl plank flooring.
To me personally, carpeting is just so much more comfortable. On top of that, when people move into a place that has the laminate flooring that they desire, what’s the first thing they do?
The first thing they do is find a big area rug to put on top of their laminate or vinyl flooring. Ugggh - I just don’t get it. And then the area rug doesn’t have any padding underneath it so it still isn’t nice & soft.
People say that laminate flooring is easier to clean - not really - not when you’ve put a big area rug in the middle of it - now you’ve got that rug to clean plus you need to use the Swiffer dry on the perimeter where the fake wood is - it just doesn’t make sense to me.
Plus in cold climates, the laminate feels cold on your feet. I’ve just never understood Americans’ desire for these cold, hard surfaces.
But this is where I have to put aside what I want. Most people - tenants included want cold, hard surfaces for whatever reason. I just don’t get it, but I don’t have to - you need to understand what the customer wants and give it to them.
...and I’m happy to give their cold, hard, vinyl plank to them because it’s more efficient for investors in the long run - it rarely has to be replaced.
-We’re talking about how to find and retain great tenants today.
5. Neighborhood Quality
Now, neighborhood quality is kind of different from safety. Neighborhood quality determines the quality of your tenants’ life. Think about the community you live in—the neighborhood amenities probably played a major part in your decision to live there.
Your lifestyle is different in a neighborhood with running and bike trails, community pools, tennis courts, a gym, etc.? Quality tenants care about neighborhood quality. A community doesn’t have to have ALL those amenities, but if it’s got a few, that’s better.
Access to Transport & Basics
Access to modes of transportation and basic necessities like grocery stores, restaurants and shopping is very important because it affects other important factors such as commute to work and lifestyle quality. When you’re looking at investment properties think about: How easy is it to get to the main highway/park and ride/public transportation? Are there basic services within easy reach?
6. Rent and Price
Last but not least, your investment is ultimately a business decision for you as well as your prospective tenant. Your tenant will be concerned with the rent, and you will be concerned with the relationship between the rent and the price you pay for the property. Make sure the projected rent isn’t so high that it limits your tenant pool and so low that it lowers the quality.
good tenants pay their rent on time. That’s a baseline. Great tenants go well beyond on-time payments. They treat the property with respect, seeing it as a home versus a rental, and they treat you as the owner and provider of that home with respect also.
So, there I’ve discussed six items that attract excellent tenants to your property.
You know what, if your tenant wants to paint the inside of their property, I say let them. It makes it like home to them, and when it makes it like home to them, you’re going to retain them. They’re also more likely to a pay rent increase. They’ve invested their time in painting the place, plus it feels like home.
Conversely, what if they ask to paint the place and you tell them “no”? How long do you think they’ll feel like staying?
It can be written into the lease that they have to paint it back or whatever. So let them paint it. Let them make it feel like it’s theirs, and they’ll probably take better care of other parts of your property too.
Another way to retain excellent tenants if that you should ask for tenant referrals. Birds of the same feather flock together. You are the average of the five people that you spend the most time with.
If you ask your excellent tenant who their friends are and offer them a $100 gift card or even $200 gift card - that is so worth it for another excellent tenant.
Something else that helps with retention - and this is where the power of hiring out professional management really helps you - is that your manager should respond to maintenance requests promptly.
A good tenant will get sick of dealing with that leaky faucet, with that pilot light that keeps going out in the water heater. If you’re a full-time job worker, it’s a lot easier to defer - to put off - handling that maintenance request if you’re your own manager.
Again, think about how you would want to be treated. Think how your tenant is thinking. If their bathroom door hasn’t closed properly for three weeks after they’ve first told you about it, #1, they won’t be happy and #2, they sure aren’t going to refer their friends.
When it comes to maintenance requests, a 24-hour answering service for your tenants makes them feel better even if your manager doesn’t get to it right way.
Ultimately, what you want are happy tenants. When you have happy tenants, you’re probably meeting that ideal that we talk about here where you’re providing housing that’s - you’ve heard me say it many times - clean, safe, affordable, and functional.
I’m coming right back with more. We’re going to talk about perhaps the most stealth way that real estate investing makes you wealthy. Something that definitely does not qualify as “common sense” at all.
First - and I didn’t know whether I wanted to mention this earlier or not, but, while I’m talking to you my heart is rather heavy today because my Grandma Weinhold - my father’s mother passed away.
I actually tried to do the show here earlier and I wasn’t quite ready, but you know, I found some more strength when I realized that Grandma would have wanted me to do it. You know that I’ve sort of affectionately referred to my Grandma Weinhold as Grandma Yellen on the show before for her loose physical resemblance to Federal Reserve Chairwoman Janet Yellen...so, I thought you just deserved to know.
She was also my last surviving grandparent so from my perspective, I’ve lost an entire generation of my family today.
You know, at best, when something like this happens, I like to think “Don’t be sorry that it’s over. Be glad that it happened.”
Especially when she was 95 years old - just weeks from 96, she still lived in her own home by herself, and I just two days ago I talked to her on the phone as she was in her Lancaster County, Pennsylvania home and, you know, I could talk to her just like I’m talking to you - I never had to slow down my talking or raise my voice. She had a great mind.
Always incredibly loving & welcoming to others, she still hosted the entire extended family at her own Fivepointville, Pennsylvania house this past Christmas. It was her last Christmas.
I’ll be right back. I will always love you and your spirit, Grandma Weinhold.
I’m Keith Weinhold. Welcome back to Get Rich Education.
Before you purchase that clean, safe, affordable, functional property, you’re going to be miles farther ahead if you have a mortgage lender that specializes specifically in income property loans. In fact, ideally, you’ll start there before you select a property.
A company that knows what non-owner-occupant investors need can get you closed faster - and even help ensure that you get closed at all. The company that’s helped more real estate investors realize their dreams of financial freedom than any other mortgage lender in the entire nation - can help you too. That’s Ridge Lending Group.
They’re based in Portland, Oregon but that hardly matters because they specifically focus on originating income property loans and they do it in almost every U.S. state. You can check them out at RidgeLendingGroup.com
Ridge Lending Group’s CEO Caeli Ridge has generously been here on the show with us three times to give you the inside scoop on how to best financially position yourself and about all the changing lending guidelines. She was most recently here on Episode 154.
So when you get ahold of them at RidgeLendingGroup.com, tell them thanks for coming onto GRE and helping you with your strategy.
You know, with what I’ve discussed on how to attract and retain great tenants in your property, I think that a lot of that is common sense, yet they’re the type of things you might tend to forget about if you aren’t reminded once in a while.
Something that’s not so common sense-ish is how you can profit from inflation - and my first-ever article that I wrote recently for Forbes Magazine covered that topic.
Not just reading the article to you here, but also injecting some more commentary into it for you...this is stealth stuff, so here we go...
As a 15-year real estate investor, author, Rich Dad Advisors writer and long-time real estate investing podcast host, I've found that homeowners and investors alike still champion the largely antiquated ideal of a "paid off" property. Inflation is just one of many reasons to consider maintaining a mortgage.
...and, by the way, leverage and tax benefits are some other big reasons for holding a mortgage - leverage is probably the biggest one - but we’re talking about inflation’s importance in why you should keep your mortgage loan balance high here.
First, What Is Inflation?
Inflation is the rate at which price levels rise. It results in the diminished purchasing power of your dollar, which keeps getting “watered down” over time. It is why your $8 Chipotle burrito will soon cost $9. It is why in 1913, a pack of Wrigley’s gum costing you 4 cents will cost you one dollar today.
You don’t think about inflation as much as you should
Do you know why you don’t think about inflation as much as you should?
because you’ve never seen an “inflation bill” alongside your electric bill, internet bill, credit card bill or Netflix bill. Inflation is insidious — an invisible tax, a stealthy thief.
Your inevitable dollar debasement is precisely why you wouldn’t keep a million dollars in the bank for three decades. In 30 years, a 4% inflation rate would whittle your million bucks down to just $308,000 of purchasing power.
From Ancient Romans crudely clipping the edge of denarius coins to the U.S. Federal Reserve’s Quantitative Easing in the 2000s, governments and central banks feed their inflationary mandate.
Well Now How Exactly Does Inflation Benefit Mortgage Holders?
In 30 years, a 4% inflation rate would whittle your million dollar mortgage down to just $308,000 of inflation-adjusted debt burden.
Yes, so just like inflation harms the saver, it benefits the borrower.
Real estate investors have the ability to borrow with long-term fixed-interest-rate mortgages tethered to an income property — at scale. When you borrow this way, your monthly principal and interest payments are completely outsourced to tenants. Why rush to pay down your loan when both tenants and inflation erode your debt for you?
When you're the beneficiary of this situation, you have to ask why you would make extra mortgage principal payments. When you do, here's what you're saying: "Hey, Mr. Banker, here's an extra $100! Don't pay me any interest on it. If I need it back, I'll pay you fees once again, plus I'll prove to you that I qualify again."
That’s kind of along the lines of my whole “Financially-Free Beats Debt-Free” mantra there.
Rather than using an extra $100 to pay down your mortgage, what if you used it toward investing in more real estate? If you believe that real estate creates wealth, then you want to control more property, not less. You can't shrink your way to wealth.
Take out a million-dollar loan and factor in, say, 10% inflation over a couple years, and you will end up only having to pay it back in nominal (in name only) terms. Your lender is not requiring you to repay in inflation-adjusted dollars. So with that 10% inflation, it becomes just $900,000 that you need to pay back in real terms.
As time passes, an inflating currency supply means that wages escalate, consumer prices climb higher and your properties will command higher rents. This is why it becomes ever-easier to pay back your debt. Inflation-profiting is your quietest wealth center as a real estate investor. It is your “friendly phantom."
If you have, for example, a $1,250 fixed-rate amortizing mortgage payment on a property you lease to others, that won’t rise with inflation either. But your rental income will. This is why your cash flow grows faster than inflation over time. It’s because your biggest expense - your loan repayment amount - is typically fixed.
No loan means no inflation-profiting benefits.
Inflation transfers wealth from lenders to borrowers. Lenders are paid back with diluted dollars. Real estate investors are optimally positioned to take advantage of this.
Remember, if inflation transfers wealth from lenders to borrowers, how many mortgage notes do you really want to hold onto? I know we’ve got some mortgage note investors out there.
I want to mostly get on the debt side instead. When I’m a debtor, now I’ve got inflation helping me, not working against me like it does for mortgage note holders when that person is making a loan to others.
Again, inflation transfers wealth from lenders to borrowers.
What did Robert Kiyosaki say about debt the last time that he was on the show here with us?
So, this Robert Kiyosaki, the author of the book “Rich Dad, Poor Dad” and the greatest personal finance author of all-time, when asked about real estate, debt was the first thing that he brought up! By the way, he was last with us here in Episode 126 if you want to listen back, so...
The rise of globalization and technology might slow inflation’s creep, but I don’t believe that it can reverse it. To create wealth, you need to both think and act differently than the crowd.
Importantly, each debt origination is smartly anchored to an income-producing asset — a property — that’s worth more than the amount of that debt. If your asset value temporarily drops like many experienced in 2007-2010, would you really be concerned if it still produces income for you?
Risk still exists. You must carefully select this cash-flowing asset in a metro area that projects job and population growth so that you have a reasonable expectation that the property will stay occupied with a rent-paying tenant.
Why Does Debt Get A Bad Name?
Debt triggers negative feelings because your first experience with debt likely was when it was tied to something that didn’t produce income. You worked overtime on the weekend in order to make your Honda Civic payment.
You made sacrifices to pay credit card finance charges on a Morton’s Steakhouse dinner that you splurged on six months earlier.
You paid for your Honda Civic -- your Honda Civic never paid you.
But if you use smart debt tied to an income-producing single-family home or eight-plex, now you’re on top of debt — not trapped beneath it.
What’s Your Bottom Line?
You borrow — massively. That’s how you profit from inflation.
If you have substantial equity in only a few properties, make equity transfers via cash-out refinances and 1031 tax-deferred exchanges. This creates smaller equity positions in more properties.
First, this means you'll have more smart debt. Secondly, realize that your equity is not lost -- it is only transferred in order to create greater leverage.
Thirdly, you can better diversify into different geographies, hedging market risk.
Fourthly, with greater projected cash flows, you've taken steps away from debt freedom and toward financial freedom. Finally, you're quietly profiting from inflation.
Your currency will keep losing value. Rather than this causing frustration, now you know how to make inflation profitable. In fact, I’m an inflation cheerleader. Some people have so much bad debt that they can’t sleep. If I didn’t have enough smart debt, I couldn’t sleep.
So, this is why I’m interested in debt. Just think, for every million dollars in real estate debt that you have, if inflation is 4% - and it’s easy to believe that the real rate of inflation could be higher than 4% - and certainly higher than what the government reports…
...but at just a 4% inflation rate, your million dollars of debt that’s outsourced to others means that you’re being enriched an extra $40,000 every year.
$40,000 for you every year - and this is a way that real estate makes you wealthy that most people just never even consider…
...and how many people hold onto $1M of debt for as little as a year. Almost nobody, so over just five years, that’s an extra $200,000 transferred to you. Actually with compounding - it’s more - maybe $220,000 over five years - again, on something that most people don’t even notice.
So, it’s no wonder why real estate investing has made more ordinary people wealthy than anything else.
Gosh, if you’re newer to studying the economy, just read more on Investopedia on what economists think the true rate of inflation is.
We’re just been talking about 4% inflation on your $1M of cash-flowing real estate debt.
What if you’ve got 6% inflation - again, a totally realistic number - 6% on $2M worth of debt? That’s a $120,000 gain that you’re receiving each year. You’re holding properties more than one year.
So over five years, that’s a $600,000 gain for you - maybe $630,000 or something like that with compounding - and this is something going on in the background that most people don’t even consider - with all the other ways that real estate is paying you.
I’ve linked that Forbes article for you in the Show Notes in case you care to read that to help reinforce what you’ve just listened to.
I also discuss the inflation-hedging benefit and the four other ways that real estate investing pays you - yes, you’re paid five ways simultaneously as longtime listeners know. I discuss all this in my quick-read 80-page book and I’m giving away the e-version of that book “7 Money Myths That Are Killing Your Wealth Potential” completely free. I’m not sure how much longer I’m going to to that.
Not just a teaser chapter or two giveaway, but I’m giving away the entire book free at GetRichEducation.com
That ought to give you plenty to think about until next week. I am enthusiastically dedicated to helping you build durable wealth for yourself. That’s why I’ll be back for you next week.
Until then, Don’t Quit Your Day Dream!