Charlotte Property Management Weekly: Maybe You Shouldn’t Fix Up your Rental Home?

The “Golden Rule” was an excellent idea as soon as Jesus said it; our lives would be so much better if we followed it all the time. But it’s not such a smart philosophy to follow it with rental homes. Let me explain.




There are many well-intentioned investors who believe that the “Golden Rule” should apply to their rental properties. “Do unto others as you would have them do unto you.” Through the years, I’ve heard:



1. “I like granite countertops. I imagine that tenants would also like to have them in my $75K townhouse that rents for $550 monthly.

2. “Once the tenant moves out, get started on the new paint and carpet please. I would want everything spotless and new.”

3. “Should we include all utilities in the rental price?”



Americans don’t want average homes for themselves; they want distinguished trophy homes without any flaws. Unfortunately, trophy rental homes with bells and whistles don’t make money; average homes do. So the key is to keep your rental home average and undifferentiated? That doesn’t sound like good marketing, does it?



Don’t get me wrong, these would be very nice improvements that would make the rental move faster. My issue lies with 2 things:

1. The ROI

2. The way to effectively market the increased value in the internet age



The question should not be “Would the tenant like these improvements?” Of course they would! Who wouldn’t?



Rather, the questions should be:

“Will the tenant pay for these improvements with increased rent?

“Will the market allow us to raise rents to cover and profit from these expenses?

“Can we effectively communicate this increased value in our marketing?”



The first problem is the ROI. In short, if you pay $2K to install granite countertops, how much extra rent can you charge? The answer is between slim and none. And slim just left the building. The reason? If your home is priced out of the market, no one will go look at it. And if they don’t go look at it, they can’t see how awesome your improvements are. Pictures only go so far.



The second reason is that it is too hard to effectively communicate extra value in rental homes; attention spans are too short. People look for rental homes on the internet and are clicking between hundreds of them. The main things people are looking at are price, number of bedrooms and bathrooms, and the areas in which the homes are located in.



So as potential renters are clicking expediently through homes, they notice your home is listed at $1,500 and another similar rental is listed at $1,350. Guess which one they click on? Yes, the cheaper one.



"But I have electricity, lawn care and cable included! They would save money ultimately by taking my property instead of the one for $1,350!"  Yeah, that’s probably true. But to learn that, they need to read the house remarks thoroughly and be a math major (and also know the typical bills that utilities in your area run). That’s way too hard.



The “Golden Rule” worked because it was simple to figure out. To move your rental profitably, keep your rental pricing and improvements simple as well!

Charlotte Property Management Weekly: Better to Rent or List Your Home for Sale? 3 Question Litmus Test

This seems to be a FAQ these days. As a property manager in Charlotte, we get many calls from people asking themselves this question.




I didn’t think there was a one-size-fits-all answer to this, but I was corrected. It just seems to come down to who you ask. If you ask:



1. Realtors: “You should definitely put your house on the market! Interest rates are at all-time lows!”

2. Property Managers: “Nothing is selling in this market. You can either eat your mortgage every month as it sits or have a respectful renter pay it for you.”



So which is the right answer?



It really depends on your answers to these 3 questions:



1. If you wanted to live in the area your home is located, would you buy your home at the price it would be listed at? Take an honest look at comparable homes for sale in our area. If “yes”, list. If “no”, rent.

2. Does your house have a differentiator that would make it more appealing than cheaper, comparable houses (aka foreclosures and short sales)? If “yes”, list. If “no”, rent.

3. Can you stomach a possible rogue renter and locking into a negative cash flow for a year or two? If “yes”, rent. If “no”, list.



These questions make it easy and really boil down to a simple question:



Is your home among the best of the best?



If not, it’s like trying to sell your clothes retail when everyone else is having a 50% off sale. If your home is special and you can communicate this effectively in your marketing, then list your home for sale and be confident it will sell. If it is not, then you must rent until banks starting lending to the masses again.



Brett Furniss is the President & Owner of BDF Realty (“Charlotte’s Most Innovative Property Management & Investment Company”), and Rent-To-Sell Realty (“When You Need a New Solution to Sell Your Home”) which specialize in rent-to-own (lease options) and rent-to-sell homes. You can contact him directly at Brett@BDFRealty.com.

Charlotte Property Management Weekly: Importance of Getting Paid from Rentals in the Next 5 Years

“Go to where the money is.” (Business Axiom)




According to an article in Barron’s this month, the future of the real estate market is in rentals for the next five years. Most real estate agents are hoping this news is akin to the Bush White House claiming the existence of Iraqi weapons of mass destruction (WMD); hopefully, it is just another example of faulty American intelligence.



However, the supporting information for a rental uptrend (as well as brokerage to be on a continued, extended downtrend) is pretty compelling; if this is what is going to happen, then anyone in the field of residential real estate needs to start thinking about how they are going to operate in this type of future. And then think about how they are going to operate in a rental-dominated market.



And let me clarify. When I say “how to operate”, I mean “how to make money” and “how to stay employed in the real estate industry.”



With rentals, this means creating:

1. Quantifiable value

2. Your fee structure

3. A narrative to explain why you should earn your fee



So what does this look like? What is the quantifiable value of a rental tenant? What is my fee? What story (narrative) am I telling to back up my fee? An example:



If I bring a tenant paying $2K/month and they sign a 2-year lease, I just created $48K (24 months X $2K/month in rent) in future cash flows for you, Mr. Owner (this is the quantifying the value). What is this worth? 10%. Why? How about because that is what the commercial agents charge for leasing fees (the narrative)? If so, that’s a $4,800 commission to you.



A tried and true business model in any industry is to take a percentage of the money you bring in. It works for hedge funds (they take 20% of the money they earn for their client off the top), real estate firms, and any other commissioned salespeople.



So, to recap:



1. How much money are you bringing in to your client? (total quantified value)

2. What percentage of it is your fee? (your value)

3. Why? (the narrative)



Those that adapt will survive!



Brett Furniss is the President & Owner of BDF Realty (“Charlotte’s Most Innovative Property Management & Investment Company”), and Rent-To-Sell Realty (“When You Need a New Solution to Sell Your Home”) which specialize in rent-to-own (lease options) and rent-to-sell homes. You can contact him directly at Brett@BDFRealty.com.

Charlotte Property Management Weekly: 700+ Credit Score Tenants Not the Best Option for your Rental Home?

I was talking to a prospective Charlotte property management client the other day and he had only one criteria he really cared about. He wanted to make sure that we placed a rental tenant into his home that had 700+ credit scores. That was it.


I told him I didn’t think that was a good idea; it would reject a lot of better suited applicants. He told me I was crazy (in so many words).



Well, let’s do the whole Benjamin Franklin pro’s and con’s thing. Then we can make an educated decision.



First, the overall goal must be established. As a Charlotte property manager, we want to make sure that we maximize our client’s investments. Generally speaking, we define this as providing the most net cash flow to our owner clients. Most clients agree that we should be measured by how much money we put into their pockets.



Now for the pros of a 700+ credit score client. They will almost always:

1. Pay their rent in full and on-time

2. Leave the home in great shape when they move out

These are the two biggest concerns of our clients, so these are very good attributes.



Let’s now look at the cons. I could nitpick, but tenants with 700+ credit scores are pretty good to have. So, I just want to focus on one con:

1. They typically vacate after their initial lease expires



This one con crushes a client’s overall cash flow and ROI.



Most people who have 700+ credit scores buy homes immediately. The ones that don’t usually have a reason like they:

1. Are a mobile professional who will move with their company in 1-2 years

2. Are waiting for the right deal on the house they want (Guess what? The deals are here now!)

3. Just moved to town and will buy once they get to know the area



So a full year’s rent is secure, but then there will usually be a few months of vacancy and holding costs that have to be factored in after the 700+ tenant vacates.



The ROI might be better with a tenant with sub-620 scores (who can’t buy) and a solid landlord history? I’m thinking there is certainly a case to be made.



Tenants who stay for years are almost always a better investment than those that are one year and done. In conclusion, it may be time to rethink the “700+ credit tenant or no deal” strategy.



Brett Furniss is the President & Owner of BDF Realty (“Charlotte’s Most Innovative Property Management & Investment Company”), and Rent-To-Sell Realty (“When You Need a New Solution to Sell Your Home”) which specialize in rent-to-own (lease options) and rent-to-sell homes. You can contact him directly at Brett@BDFRealty.com.