Treat your rentals like a business

The other day I was listening to the Lifestyles Unlimited podcast/radio show and a gentleman called in and talked about his rental and the tenant in that rental. The host, Del Walmsley, talked with him and gave him some advice that I wholly agree with. I will get to that advice in a minute, but first want to lay out the rest of the call.

So the caller first says that he is calling because he has a tenant in his property that isn’t paying the full amount on the rent and wasn’t sure what to do about it. He felt that she was a friend now and he just didn’t have the heart to put her out of the house. So clearly he knew what the answer was, and that is what Del told him to do, he just didn’t want to do it. He went on to say that he had $30k and wondered what he should do with it. In questioning from Del it also came out that he thought he had about $40k in equity in the house this lady was in.

In regards to the tenant, Del said he should get her out of the house. I think everyone should have seen that coming. I agree with that completely! The caller argued that he would be putting financial strain on her if he kicked her out, and he felt like he just couldn’t do that. Del told him that she was taking advantage of him. I feel like the caller was putting himself in a financial strain by keeping that tenant. So he took her money problems and turned them into his own! Don’t do that. If you are a landlord your business model is to provide affordable and clean housing to people that want to pay for it. Provide enough value for someone else to pay for, I has I have talked about previously. The caller said that she was giving him more than the mortgage payment, so he was not suffering financially from this. I disagree with him. She was paying a little more than $200 less than market rent according to the caller. So he is reducing his income by $200 a month just by being a nice guy! What could you do with an extra $200 every month? I could certainly figure out something to do with that!

The other part of the call is that the caller had some money laying around as well as equity in the property and wanted to know what to do with it. He was thinking about refinancing the property, but didn’t want to inconvenience the tenant. Selling was completely out of the question because that is the same as putting her out on the street. Letting this tenant abuse him was not only worth the $200 a month…but it was worth $40k to him! That is some expensive abuse! And yet he claims this woman is his friend. Lifestyles teaches that if you have less than $50k, you should invest in single family dwellings. If you have between $50 and $100K you can think about getting into a multi-family syndication, and if you have more than $100k, you should absolutely be in a syndication. This caller had $30k in cash, and thus would fall under the single family bracket. In this case Del told him to stay away from single family. He should probably stay away from real estate entirely, unless he was going to get into a syndication deal as a passive member and let someone who actually knows the business take care of the tenants directly. This is the part I completely agree with Del on. Run the business correctly in a manner that produces repeatable and consistent profits, whatever business it is, and that is the “secret” to becoming wealthy. Do it wrong like this guy was and you just end up hating your business and wanting out.

In real estate, your property is your product and your renters are your customers. If your product is not producing the income it should be producing then you have to fix whatever the issue is. If the roof of the house has a hole in it, fix it. If the AC is broke, fix it. If however the product is sound but the customer has a problem, then fire the customer. If you are in a bar and you get too drunk and break something, the bar will kick you out and never let you back in. If you go streaking though Wal-mart, they will have you escorted out and you won’t be welcome back. Of course after your picture gets all over the internet. If you are a tenant and you are not paying the rent required, the owner has the legal right to kick you out of the house! In none of these situations is the customer right, and in every one of them the customer is to be fired for the betterment of the business. Remember that your business should have repeatable profits. Doing something intentionally that is damaging your profits is just going backwards.

Until next time, take some action. Feel the fear and do it anyway.