Wednesday, January 19, 2011

How Important Are Tenants?

For a real estate investor, what is the root of all good?

The short and concise answer is: cash flow.  The more cash flow, the more cash you have to spend or invest.  More cash flow also equates into higher values for your portfolio.   Cash flow is, in my opinion, the best measurement of investment performance.  Capitalization rates (cap rates) measure the effective yield of real estate and are devised from only two numbers - the amount of the investment and (you guessed it) the amount of cash the property kicks off.

While at first blush it might seem as if I am stating the obvious - the advantage of identifying the most fundamental basic factor of success is you can make it your primary focus.   But before I do so, let me ask yet another fundamental question.  Where does cash flow come from?

Yes, Tenants!  Tenants are not a necessary evil that must be dealt with.  Tenants are not highly replaceable.  Tenants are king!  Tenants are at the very base of our "food chain."    Specifically, happy, capable (capable of paying and improving their homes), paying tenants.   The better the tenants, the better the cash flow.   There couldn't be a more direct correlation.

So lets collaborate on the areas we can insure attracting, recruiting and maintaining the very best tenants.

1)  Choosing homes that will retain long term Tenants.  I begin here by asking, where would I want to live?

2)  Choosing the right tenants.   Can they pay us market rents?   Can and will they improve the property making it better for both themselves as well as future tenants?   How long will they stay?

3)  Setting the right tenant expectations and relationship.    Is their mindset that this is their home or is it that it is your home?

4)  Maintaining the right tenant relationship.  What can be done to inspire their very best?

Over the next couple weeks I will be presenting additional articles that delve into these areas.

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