Friday, October 26, 2007

Did this Couple Do Everything Wrong or Everything Right?

Two Wise Acres wrote about an older couple who succeeded in the real estate investment rental business by doing "everything wrong" by violating these "rules":

  • 1. "Leverage Your Investments to Maximize Growth" (instead, they paid off a property before they bought another).
  • 2. "Always Make Sure You Have Well-Drafted Leases with Tenants" (instead, they rented month to month with no lease).
  • 3. "Maximize Rental Income" (instead, they charged 30% under conventionally-accepted "market rates").
  • 4. "In Your Lease, Make Sure that You Contain Appropriate Restrictions on Tenant Alterations to the Property" (instead, they allowed renters to paint even the exterior of the building).
However, the couple followed these rules instead:
  • 1.Minimize costs (debt)--and pass the savings to the customer without lowering your profit (low producer costs=low consumer prices).
  • 2.Serve the customer, find a niche, and build loyalty--the biggest cost/effort/risk is spending for the initial setup and then (tick-tock-tick-tock) eating your costs while waiting for a 1st-time customer to "walk in the door" (this why companies spend so much to advertise and to track and profile customers) so the holy grail for renting is "finding your market" (flexible leases) and no vacancies (less turnover, less frictional losses, maximum utilization of your infrastructure, on the edge of your economic "production possibilities curve"), provided by tenants' loyalty and tenant-provided free word-of-mouth advertising/recruiting.
  • 3.Undersell the competition--#1 leads to #2. Low price also increases the landlord's applicant pool so he/she can select and keep the cream of the renter crop.
  • 4.Build/allow customer identity/community with your product--customers will lower your costs by doing free maintenance (paint the rental house) or will create new content or products for you (free R&D). A recent book argued that most innovation comes from the bottom up, from users who invent something new for their own use first (necessity is the mother of invention, and the customer/user knows his/her own needs better than existing companies know his/her needs) and then the big companies mass-produce what the customers invented for them.
Real-life example: Another landlord (not Two Wise Acres' couple) offered low rent with no lease, let a renter nail/drill holes, and even added a major amenity without being asked or raising the rent. The renter returned the favors, paid to fix the apartment's (landlord's) refrigerator without bothering the landlord, and paid professional cleaners to clean the apartment when he moved out.

(I will write more about renter modifications in a future installment of my "Housing Myths" series.)

Did these Landlords Do Everything Wrong or Everything Right?

5 comments:

Moneymonk said...

Very good advice. But most people usually do not take that route

In Recovery said...

I think the real lesson is to treat people with dignity and respect, and they'll pay you back with the same.

J at IHB and HFF said...

MoneyMonk and In Recovery,

Hello. I understand that landlords use restrictions to reduce risk of bad tenants but any business absorbs write-offs and it is interesting to consider if the low cost/low restrictions method is better at maximizing profit.

Thank you for the comments and please visit again.

mapgirl said...

Interesting article. I wonder what their tenant selection process was because it seems to me, they retained good tenants because they were good at picking them in the first place.

J at IHB and HFF said...

Mapgirl,

Hello. You make an interesting point. Does business success depend more on finance skills or people skills?