Friday, January 6, 2012

Incentives...

Everyone has heard the expression "win/win" but how many business people really go out of their way to structure their "deal" so that all the incentives are in place to insure a win/win.

The "standard" way of doing things almost always has misincentives.   Example - a lease with a late fee. Providing a tenant with a negative "slap on the wrist" using this arrangement has almost never worked for me in the long run.  Tenants become resentful and find all kinds of excuses in their mind as to why they were justified in being late.  

Lets look at an alternative.  What do you want as a landlord?  You want tenants that pay on time, stay a long time and take amazing care of your home, yes?

What if instead of a late fee the lease had these provisions:

1)  We'll never give you a rent increase for the next 10 years IF you make all your payments on time and don't default on your lease.

2)  We'll make an annual improvement to your home again SUBJECT TO again the same simple provisions.  It is cheaper to make an annual improvement than turn an apartment every year.  Doing an annual improvement makes financial sense because your incenting them to STAY and you're improving the property while it is financially productive.

3)  We'll give you a DISCOUNT on your rent IF you comply with those provisions and pay us on or before 12:00 noon on the last business day of each month.   We will serve you with a notice at 3:00 that same day if we have not received the rent.

These provisions are much more likely to yield the right results because more of the incentives are lined up than a simple late fee.

Focusing on the long run, it is cheaper to attract and keep a long term tenant than incur vacancies, turning costs, housing court and management issues.

Now couple those provisions with a few questions you might want to ask and VALIDATE before you choose a tenant:

1)  When exactly did you pay your last 3 payments to your previous landlord?   (Let me let you in on a little secret - if they aren't paying their past landlord on time they won't pay you on time.)

2)  How often did you move over the past 5 years?  Tenants that move every year or two are NOT the tenants we are looking for.

3)  And finally a question for YOU the landlord.  Would I EAT in their current home?   If you wouldn't why would you even consider renting to them?  (Oh, you didn't take the time to meet them in their current home?  Why is that?)

For 15 years I studied martial arts and I can't tell you how many times I heard students ask Sifu (teacher) what he would do if they were in a certain situation.   I can't tell you how many times his response was, "well, I wouldn't put myself in that position in the first place."

Tuesday, May 10, 2011

The BEST Tenants

The best tenants want the best product. Everyone says they have the best product but we begin with a very strong emphasis on designer/"wanna stay" features in our homes. And we attract the best tenants with pictures of those features. Ideally our homes are photographed when they are inhabited, furnished, clean and at their very best. High quality images of amazing homes attracts the best. Unfortunately it also attracts a lot of people that would like the best but simply don't qualify to be our tenants.

How do we qualify?

First we get lots of information on an applicant. Much of that information can simply be observed. How do they present themselves? Do they keep their car clean and well maintained? Are their children taught to be respectful, etc. etc. And some of the information is obtained through reports, copies of documents, etc. It is all information until we begin validating it. Saying someone has a job is very different than getting copies of 3 pay stubs, seeing they were deposited into the bank statement copies we obtained, having a letter from their employer and making a call to their boss. In short, we don't rely up on information until we validate that it is real through cross checking it.

Having a list/inventory of all the information that can help you make the best decisions is a great place to start. Making it as easy as posible for the prospective occupant to help you get the information you need is also critical. Having a formal series of questions can also add to the information inventory - especially if you take the time and effort to listen and ask clarifying questions. Forms that can be signed that give you access to the information can help make it easy and make it fast!

After information is gathered and cross checked/validated we use it to assess; financial ability to pay us and the quality of human being that they are. This is as much art as anything - often little interactions are big tip-offs. But having all the questions, answers, insights in one place coupled with the benefit of reviewing all that information with someone who is knowledgeable and not as close to it has always helped us make the best assessments and decisions we can.

Attracting the Best Renters

Our strategy for insuring we attract and retain the very best tenants is to create a "Designer Home" with many "Wanna Stay" features - i.e. features the occupants like a lot and can't find elsewhere. We aspire to the opposite of the "white box" Much value can be added by caring and putting forth effort. Constant engagement in the question, "what would make this a more special home to live in?" Quality of workmanship contributes much to this cause. Constant innovation, shopping for components, finding closeout bargains and an unyielding desire to "notch up" the quality and desirability of each home all contribute to making it happen.

In the spirit of this strategy, our Managing Partners "walk the walk" by:

Always maintain 6 professional grade images for each property of designer/”wanna stay” features that can be used for advertising the rental of the unit in the investments dropbox folder.

Perform at least one annual improvement while the property is occupied that adds a designer/”wanna stay” feature.

Performs at least one formal inspection/renter happiness survey that insures the property is being maintained clean and well and encourages the tenants to provide you with ideas for improvements that will result in that tenant being happier, ideally staying longer, attracting and retaining future tenants.

Is constantly asking everyone (contractors, tenants, designers, business associates, prospective tenants) what would be "cool"? What would make you want to live here? What would make you want to live here for a long time?

In short, creating homes that have the features that attract long term amazing renters is our passion.

Wednesday, February 2, 2011

Partnership Construction

The whole concept of a partnership is that each person brings different knowledge, skill and resources to the venture.

Given that everyone has different knowledge, skills and resources - each partnership should be crafted different to accommodate those differences.

The foundation. Without certain critical key foundation attributes, I don't think you can construct a viable partnership. Honesty, integrity, and competence are some of those foundational/critical qualities. Many of those qualities can't get assessed without spending time developing the relationship. So the first stage of constructing a partnership should be spending time, discussing and debating the venture and giving each other opportunities to do any necessary due diligence on each other.

The vision. The next critical attribute of a successful partnership is vision. There is no "right" vision. But if the vision for the venture isn't the same, there is definitely a wrong partnership. Our investment goal, for example, is very long term. We wouldn't make a very good partner for someone who was interested in quick flips.

Win/win. Finally the partnership should give each partner the feeling they are getting the "better deal" if it is constructed properly. If one party feels they are not getting a great deal, it is just a matter of time before the partnership is sabotaged.

An example of an amazing partnership...

Micky Stiles is a contractor. He has a crew of three guys that work for him. He is straight and honorable. He is a pro. He tried buying a home for "investment" purposes in the past and it didn't work out for a number of reasons - he bought the wrong house, in the wrong neighborhood and had no tenant management skills or experience. Yet his goal was to in some way develop a net worth and a mean to retire.

After spending time with Micky we found that he had significant extra resources. There were days that his crew had free time. There were leftover materials from other jobs. And there was plenty of excess knowledge. We constructed a partnership with him in which he contributed renovating and maintaining our properties at discounted prices in return for a piece of the ownership in the properties. For our part, we also helped him hold those pieces of ownership in a way that gave him tremendous tax advantages. We got amazing renovations done by a partner who had a vested interest in the appreciation of those properties, at very inexpensive prices. Micky got a percentage ownership in 8 single family homes over time and new knowledge and expertise on how to maximize his retirement savings using sophisticated tax strategies.

Thursday, January 27, 2011

Whooo Ha!!!

Al Pacino, in Scent of a Woman said it. "Whooo haaaaa". We have become a society very dependent on branding to
make our purchasing decisions. When we are traveling we want to eat at certain restaurants "brands" because it we know what we can expect from those brands. When we buy jeans, we do so based on the brand. And with every brand we associate certain qualities. Ford trucks - tough. Porche cars - fast, exclusive and sexy. etc. We all want whooo ha!!!

Ben Vanderwoude recently had the idea of providing a "custom brand" for our rental homes. "Give them a choice of carpet and they feel like the home is theirs." We think Ben's concept is brillant and a major step in the right direction.

How much more does "whooo ha" cost? Well, my parents did a extension of their old home. They put in a bathroom that, to say it was whoo ha would be an understatement. Fancy italian marble, extra special fixtures - in short, whooo ha. I was at Home Depot years ago and I saw a close out on some 12x12 marble tiles that to me looked like the exactly same stuff my parents used.

Finally, people perceive a whooo ha brand is worth more than basic. As soon as the label on the underwear says "Victoria's Secret" it is worth way more anything you could possibly buy at Target - even if they look and feel exactly the same.

My point is, if you are creative and resourceful, whooo ha shouldn't cost anymore than basic and can give you a major competitive profit edge. And I am crystal clear it wouldn't cost anymore to put in the ad for the apartment "Custom/Designer - Ralph Lauren Style Home" as opposed to "Ranch for Rent".

I'd love to hear your specific ideas on whooo ha!

Wednesday, January 26, 2011

Employees Suck

Employees suck. Lets call it like it is. Who would you rather have an employee or a highly specialized, very competent partner. An employee does what they've got to do. A partner does what needs to get done - and then some!

Our partners have had brilliant ideas for making our investment homes the best. Everything from ideas on how to renovate the homes so they are more than "white box" specials to choosing the right tenants to finding bargain homes.


And our partners have executed our collective ideas way beyond ordinary. Just walk into one of our homes and you'll see many many exceptional details.


When do our partnerships work the best? It is simple. Whether our partner is a realtor/rental agent, contractor, property manager or other investor looking to expand their portfolio, and have these qualities:

1) They Care. They want to make it the best it can be. It is a reflection of who they are.

2) Ownership. They like being owners and participating in the upside of the project. They like having the incentives of being an owner.

3) Smart. They understand wealth is built over time by doing it right. They are patient and understand that if the details are nailed the project will create an amazing amount of wealth over time. They get that fee income is great but the second you stop running on the treadmill the income stops. Investment income is durable and replaces our hard efforts over time.

4) Capacity. They make the extra time, energy, intention and capacity to invest in a project, knowing that in the long run their efforts will be returned many fold.

Making Money - No I Mean A Lot of Money


Real estate prices are at major lows.   You don't have to have a PhD in economics to know this is an amazing time to buy.  Actually it is only an amazing time to buy IF you invest in the right buildings and manage them right.   As good as the opportunity is, without those two components, the opportunity would get dissipated.

It is our intention to cherry pick and buy the very best properties and then manage them far better than anyone else in the business.  We're not interested in mediocrity.   To do that we need the best of the best property managers, contractors, investors, realtors and rental agents.    It doesn't cost that much more to get it right - it is mostly about vision, innovation and caring.

All our relationships are built with fair short term compensation and exceptional long term incentives to create the very best and most profitable rental homes in the business.  We're constantly looking for winners.  Whether they be other private investors that would like to expand their portfolio but can't raise the capital, or an exceptionally skilled contractor, rental agent/realtor or property manager that has amazing skills and would like to own a piece of something.

How does it work?  In return for either reducing or eliminating their fees, they get a piece of the ownership in the property.  It is that simple.  And that creates a series of amazing benefits to everyone.   Often it begins by buying the right house, at the right price, doing the renovation the right way and renting to the right tenant.   When that happens the value of the homes is worth considerably more than what is invested and the whole process begins working:
  • The property is already worth more than what we have invested in it.
  • The property will be easy to manage because it is in the best neighborhood, it has been renovated right and we have attracted the best tenant.
  • In time, the property will appreciate.  Given that we're buying many properties for 1/4 of what they sold for at their peak there is a lot of room for appreciation.


And the most important part, our partners participate in all this with us.