Landlording: What Are You In It For?
Property investors are all in it for the money. After all, why take such an enormous gamble with your finances if you didn’t stand to gain something substantial from it? The multifamily market in Chicago surged even as the residential and remaining portions of the commercial markets tumbled over the past several years. The Marcus & Millichap 2012 National Apartment Report (registration required to view) predicts continued rent growth through this year, although they do foresee sale prices easing off.
Even so, once you’re in the game a more subtle choice awaits in determining your motivation and business model going forward. I’ve observed landlords for several years and suggest that there are three main priorities you can have as a landlord, but only one will succeed in the long run for maximizing cash flow, occupancy rates AND resale value.
Option 1: In it for the Money.
The worst reputation you can get as a landlord is that you’re a “slumlord.” There is no way to recover from this kind of slur. The quickest way to get this kind of reputation is to carry on with your wallet as your only factor in making decisions about your investment. If you always choose the cheapest options – in maintenance, labor, background checking and promotion – you will get what you pay for. I have seen many portfolios unintentionally block themselves from reaching their full potential by following this route. Deferred maintenance piles up, tenant complaints go unanswered, and fixtures fall apart far too quickly.
In this modern era when tenants can voice their complaints on sites like Yelp and ApartmentRatings.com, you need to make sure your tenants are reasonably happy. Now, very few landlords will gain the elusive 5 star ratings, mostly because tenants only think of their landlord as a business worthy of reviewing when they are angry. However, even if your tenants aren’t complaining online, your building stands as a visible demonstration of your talent as a landlord. It’s very easy when walking through a neighborhood to spot which buildings are suffering from neglect. Don’t be the one that stands out in a tenant’s mind for the wrong reasons.
Option 2: In it for the Tenants.
It doesn’t take a genius to figure out why this one is not in the pole position. While many initially choose to invest their money in apartment buildings in order to provide good and stable housing for the general public – a goal that is to be applauded, by the way – this cannot be the central priority of your business. Staying in the business to make your tenants happy is an invitation to have the worst of the tenant pool cause trouble for not only you but your entire neighborhood.
Everyone is entitled to a good place to live, provided they are willing to work for it. However, not everyone is entitled to luxury and perpetual enjoyment of their living quarters. If you bend over backwards to make sure every single tenant is happy, you will wind up spending far more than you need to and always failing to achieve your goal of pleasing all of the people all of the time.
Besides, as I mentioned above, tenants will not think of what you do as a business unless they are unhappy. Your efforts towards excellent customer service in the sphere of apartment rentals will mostly go unnoticed across the bulk of the population. Why spend the excess time and money on tenants that will inevitably move out of your property and never look back? Why aim for 100% occupancy when its a goal that can actually harm your chances of reselling?
Option 3: In it for the Property Itself.
This is, I believe, the middle ground and your best option to use as your driving force. When you buy a property, you temporarily adopt its tenants and are taking a risk that there will be future profit, but what you obtain – what you actually own – is the property. You cannot control profit. You cannot control what your tenants do. You can control what happens to the property itself, by a combination of proactive preventive maintenance and solid contingency planning.
If the property is good, solid and adaptable to many uses, you will please most of your prospective tenants. If you make purchases and upgrades to the property with the goal of keeping the property relevant, you will keep occupancy high, avoid getting a reputation for stinginess, and have the best chance of maximizing cash flow even in worst-case scenarios.
When you keep the property as your priority, you will be able to say no matter what happens that you have done everything you could to ensure the value of the property is as high as possible.