“Cleanliness is next to godliness.”
(attributed to several authors)
“We feed the eagles and starve the turkeys.”
(Heard in several sales job interviews circa 2000)
I have to admit that I’m a fan of the television show, Shark
Tank. For the uninitiated, it’s a
show where entrepreneurs pitch their companies to several accomplished business
people (the “Sharks”) in order to entice them to invest in their fledgling
enterprises. After the entrepreneur’s presentation
pitch, the Sharks begin to pepper the business owner with questions.
One of the main lines of questioning that comes up in the “Shark
Tank” revolves around how the owners calculated the sales prices for their companies. Questions like: How are you computing a $5M valuation
with only $150K in sales this year? Why
are you forecasting such aggressive sales growth? What are you doing to lower your unit cost? How is this going to produce enough free cashflow
so I can get my initial cash investment back in a reasonable amount of time? Why is this a business I should have a multi-year
involvement with? What is the industry
growth forecasted to be?
Even after all these questions, it is tough for anyone (even
experienced Sharks!) to know how well the companies will do in the future and
whether the money they choose to invest will produce dividends. However, the entrepreneurs are sure. They come in loaded with enthusiasm and sell
their companies as the next big thing- they will be successful! But as much as they sell themselves and their
companies, the proof will be in the pudding at a much later date- do they
deliver as promised or not?
It's risky investing in start-up businesses. They are largely unproven and are really just
selling future promise. Statistically,
most will fail. But the allure is, that
if successful, the returns can be more lucrative than investing in established
businesses. The fun part for these
investors is when a start-up does well, matures, and becomes an established,
valuable company. This allows them to ride
its profits for its lifespan.
This reminds me of rental tenant selection in a way. Property
managers look at prospective rental applications, process the information,
and ask follow-up questions in order to pick a winner. The applicants are all very optimistic and
claim they will be great tenants. Property
manager “Sharks” will decide who they want to “invest in” (aka approve the
application and sign a lease), but the ultimate success in the tenant selection
will be discovered down the road.
Successful tenants pay their rent on time, get along with
their neighbors (no drama), and maintain the property. But what tenant characteristic should
landlord Sharks look for that might generate the best future returns? After many years of residential property management,
I’m convinced it is finding and keeping the meticulous ones who keep their rental
homes spotless.
A certain tenant of our comes to mind. When we perform our bi-annual home
inspections, the house is immaculate.
You could make the argument that it barely looks like it has been lived
in, and this is after several years of occupancy. The HVAC air filter is always fresh and the
appliances look to be meticulously maintained.
To re-rent this house, I imagine our fixup would be minimal to
none. What is the dollar value of that?
For example, if we calculate the life of carpet at 7 years,
what is the value if a tenant cares for the home so well it stretches it to 10+
years? Or if we don’t need to paint it
on the next vacancy turn? Or if the HVAC
unit lasts an additional 5 years due to its care? It’s estimated the average house needs to
spend 3-5% of its value in maintenance costs each year. What is the value if that figure is reduced
to 1% due to meticulous care? I don’t
know, but it’s a lot. It’s substantial enough
for us to really want these people to stay!
Like the Sharks, real estate investors want to maximize the
return on their rental homes as well.
When meticulous tenants who love to keep their homes spotless come on board,
smart landlords will look to lock them up and ride the profits (realized and
unrealized) for many merry leases to come.
Have a Merry Christmas & Happy Landlording!
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