How often have you heard a seller remark, "I haven't raised their rent in 5 years because they are such GOOD Tenants! They always pay their rent on time and never give me any hassle." The tenant version, "The landlord hasn't raised the rent, so we hate to move, but he is never here and never fixes anything (except for sending the nice plumber out 3 times to fix the same leak under the sink (which still leaks)."
There are three stages in the life of an investor- youth, middle age, and past their prime. These stages are psychological, although they play out in the physical appearance of the investor's properties!
In the YOUTH stage, investors are on a steep learning curve. They acquire their first three properties in this stage and quickly learn the challenges of tenant management and contractor management. Their buildings improve in appearance, both in terms of new windows and fresh paint as well as neater overall appearance and fresh landscaping. Rents are increased to market level fairly quickly, which causes some tenants to leave (usually replaced by stronger tenants who take better care of the property (don't forget those credit checks). Investors are enthusiastic, eager to learn and willing to invest extra energy to increase the value of their investment. On the down side, investors can make expensive mistakes during this period due to their lack of experience. For the average investor, this stage lasts about 5 years. For this reason, banks and insurance companies often save their best rates for investors who can demonstrate 5 or more years of owning multi-family property!
ADVICE for YOUTHFUL Investors: Use some of your energy to ask the experts (realtor, other investors whose buildings you admire, attorney & CPA (who have successful experience with multi-family property) and form good business habits which fit your style! Asking questions of the right people will save you hours of time and thousands of dollars!
In MIDDLE AGE, investors are adept at fitting their new building acquisitions (usually 1 or 2 each year) into their management program. To the casual observer, it seems that less than 6 months after they have acquired a new property it looks and feels like their others in terms of condition, landscaping, strong tenants. They practice sound tenant management, with consistent bonuses for referring other good tenants, pay annual security interest payments to tenants as they come due, communicate clearly with tenants and make every unit under their management a little more attractive every year! Rents increase with the market each year (usually by $25 to $50 per month). These increases fund inflationary increases in taxes, insurance and water bills, plus needed capital improvements. Since processes are streamlined, these investors make more $$$ per unit or building with less energy invested. They keep their eyes open for new properties and may consider using 1031 Exchanges to weed out properties with less future potential and purchase those which fit their ideal portfolio better! For a devoted investor, this stage can last 50 years. A casual investor may never make it to this stage, but go straight from YOUTH to PAST PRIME!
ADVICE for MIDDLE AGE Investors: Use your trusted experts to evaluate your assets and fine-tune your portfolio. Just as a strong realtor knows that some clients are too draining to work for, you need to recognize if one or more of your properties is too draining to remain in your portfolio. To make investing fun, you need to work with positive people, and tenants who will work with you. This is a long-term strategy. You can't afford to have any one investment sap your endurance. Began planning in this stage for your next life phase (perhaps a 1031 exchange of 20 3-families for one 20-unit apartment building in a warmer climate?). The current tax code provides great flexibility and excellent tax-deferral potential!!!
The PAST PRIME stage is the one too many investors without a plan fall into. The mortgage may be paid off or almost paid off, so they keep the rents low for tenants (after all, they only have to pay taxes, water and insurance). With low rents, the property will not fund capital improvements. You know what these properties look like... little landscaping, older roofs (with 2-3 layers of shingles), abandoned cars in the back yards, 3 dumpsters of prior-tenants' possessions in the basement, older heating systems, leaking pipes, old wallpaper, at least one unit is behind on the rent or vacant... Strong investors never enter this stage, other investors may be trapped here for a decade...
ADVICE for PAST PRIME investors: You have given 40% of your cashflow to your tenants and will give 30% of what could have been your equity to the new investor in this property. You need to end your pain and stop the decline in your investment's value. Call for FIRST AID!!!
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