Wednesday, January 19, 2011

3 Types of Tenants

There are three levels of tenant contribution to the ultimate goal of durable cash flow.

1) Pays rent and doesn't do any damage to the property. This is, I believe, the level that most landlords/investors aspire to.

2) Pays rent and allows investors to make improvements to the property while living there. The major advantage this type of tenant is offering is providing the landlord/investor with an opportunity to make improvements while the property is cash flowing. This creates a tremendous efficiency. But it also adds another critical benefit - by improving an occupied property the tenants reap the benefits of the improvements and are more likely to stay put and not cause the inefficiency of a "turn". The tenants might also tolerate a future rent increase better than if there were no new improvements.

3) Pays rent and improves the property. This tenant provides all the advantages of the first two levels tenants and contributes to cash flow in three other significant ways:

a) When a tenant makes improvements to their home they tend to both be higher quality improvements than what a typical contractor might provide - i.e. there is more pride of ownership

b) Savings in terms of labor and/or material accrue to the investor/landlord.

c) Vesting in the property. By putting effort into improving the home they are making it both more appealing for them to live (i.e. stay there longer) and creating more of a sense of the home being "theirs."

How do you find the highest level of tenants?

Ask & Measure.

Questions worth asking and factors worth measuring:

How often has the tenant moved in the past 5 years?
What are the tenants long term plans in terms of how long they intend to stay in the property? Will they sign a long term lease?
What tools does a tenant have?
What home improvement skills do they have?
What improvements would they like to see done on the house? Will they do them?
What improvements would make them want to stay longer?

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